Many people shy away from budgeting: They view it as a restriction on how they can spend their money. But the truth is that a budget is your biggest asset when it comes to building wealth. When you start controlling where your money goes each month, you maximize your opportunity to obliterate debt and start building serious wealth.
One budgeting tool that works wonders for helping people pay down debt and build wealth more quickly is the zero-based budget. A zero-based budget is, in summary, a budget whereby every dollar of income that comes into your house is given a job. Each dollar is given a “destination” before it even hits the bank account, helping you to minimize money waste and maximize wealth growth.
Also called a zero-sum budget, the zero-based budget will help you determine which expenditures in your life have true value and which are a product of careless spending or a lack of planning. Because all of your expenses are planned before the money arrives, a zero-based budget can help you avoid the budget leaks that can destroy opportunities to achieve financial independence.
In this article, I’ll explain how a zero-based budget works and how you can custom design your own zero-based budget to fit your personal spending and savings goals.
Your Personalized Zero-Based Budget
As I mentioned earlier, one of the great things about a zero-based budget is that it enables you to customize your money management to best suit your individual wants and needs.
The goal of the zero-based budget is to determine how much money you’ll have coming in each month and then to assign a job (or a home) for each of those dollars. After you’ve calculated your expected take-home income for the month, your just figure out what bills and expenses are due for the month and then decide where the put the remaining money.
Financial Goals Come First
Before you determine where your money will go, it’s important to decide what your financial goals are. (If you share income and/or household financial responsibilities with someone else, this should be a joint project.)
Determining your goals helps you find a place for any extra money in your budget. A good way to allocate those extra funds is to pick some short, some medium and long term goals. Here are some examples:
Short-Term Goals (Can Be Achieved in Less Than Six Months)
- Create and stick to a zero-based budget each month
- Increase 401(k) contributions up to 5%
- Increase savings rate to 5% of take-home pay
Notice that your short-term goals can be accomplished quite easily and require little time to implement. Now I’ll share some examples of medium-term goals.
Medium-Term Goals (Can Be Achieved in Six Months to Three Years)
- Save $5,000 for an emergency fund
- Save $4,000 for an international vacation
- Pay off $7,000 credit card balance
Your medium-term goals will require some time and effort but should allow you to see progress relatively quickly. Here are some ideas of long-term goals.
Long-Term Goals (Take Three or More Years to Achieve)
- Save for a 20% down payment on a house
- Pay off all debt
- Save 12 months’ of income in an emergency fund
Once you pin down your financial goals, you can direct the income in your zero-based budget with more precision. Now, let’s make up a sample zero-based budget.
Sample Zero-Based Budget
January 2021 Budget: Income
January 2021 Budget: Expenses
You now have a remaining balance after you’ve added up expenses. The remaining balance after you subtract expenses from income is $455 because $4,000-$3,545 = $455.
Now you’ll create additional lines in your budget to give a home to that $455. Those additional lines will include monies to help you reach your financial goals plus any expenses that might not normally occur during the month. Here’s an example.
|Extra money toward debt||$300|
|Extra money toward savings||$100|
|Money for football game||$55|
|Additional Lines Total||$455|
The goal is to make sure when that every dollar is accounted for and that there’s no money at the end of the month that doesn’t have an assigned job. Take a look:
By using a zero-based budget you can maximize the impact your earning dollars have on the achievement of all of your financial goals.