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How to Build a Zero-Based Budget

April 29, 20214 minute read

If you have basic budgeting skills down and you’re ready to try something a little more advanced, zero-based budgeting might be worth looking into.

As the name suggests, zero-based budgeting requires that every dollar of income be allocated somewhere so that, at the end of the month, you’re left with zero dollars. This method is based on the theory that money without a purpose is money that will sit around just asking to be spent.

By assigning a specific job or task to each dollar, you’re forced to think critically about every expense ahead of time and can avoid rash spending decisions. With zero-based budgeting, no dollars go to waste.

To reach your goal, you’ll want to start by tracking your expenses for a few months ahead of time to get an idea of what and how you spend. You’ll then use that knowledge to guide you in creating various spending categories and determining a realistic dollar amount for each.

As with other budgeting methods, you also need to calculate your monthly after-tax income, so you’ll know how large (or small) a pool you’re drawing from. When you’re ready to assign amounts to categories, start with fixed and non-negotiable expenses such as rent, groceries, utilities and loans.

You should also think about how much you want to dedicate to savings or paying down debt. Try to be as specific as possible. For example, if your goal is to save $3,000 by the end of the year, how much will you need to allocate each month?

With needs and savings covered, it’s time to address wants. How much should you set aside for entertainment, dining out, hobbies or a new smartphone? It may be difficult to budget such things in advance, so try to build in some wiggle room — say a $50-$100 contingency bucket — for unexpected overages not covered by your emergency fund. You may also have the option of shifting any leftover funds from another category — as long as the end result remains zero.

While this method of budgeting may seem restrictive and requires more effort than others, by forcing you to think about every dollar you spend, a zero-based budget can help you meet specific goals and avoid overspending. You can take control of your earnings by operating on foresight, not hindsight. You control your money; it doesn’t control you.

This is great if you’re someone who likes to plan ahead and has a predictable monthly income. You can even think of it as a kind of game: Here’s all your money; now find somewhere to spend every dollar. First person to zero wins!

There are other types of budgets out there, including the cash-in-envelope budget, which is essentially zero-based budgeting that uses actual cash in actual envelopes. But even the most restrictive among them should retain a degree of flexibility, especially in the first few months as you figure out what does or doesn’t work.

Once you get your footing, you can even mix and match different methods to suit your specific needs. But no matter which method you choose, as long as you approach it with some kind of plan and remain consistent (and honest) with how you spend, you’ll be one step closer to a more secure and stress-free financial future.

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