Are any of you familiar with the saying “money makes the world go round”? I’m not sure who the originator was, but adulthood has truly been showing me the truth in that statement. With almost EVERYTHING coming at a price these days, money is a necessity for any level of comfort and unfortunately many of us find ourselves in situations where we wish we had more. While some may want more money to buy material things and some may need more for basic needs like shelter and food, one thing for sure is that you must be smart about your money. In my opinion, a major to key to financial success is budgeting. Last month, I introduced you all to the envelope budgeting system (make sure you check that out if you missed it). Today, I’ll be covering the what, why, and how of the zero-based budgeting system.
What is the zero-based budget system?
The basic premise of the zero-based budget is that your income equals your outgo. In other words, every dollar coming in is assigned to a category (bills, investing, savings, etc). This method is often used by organizations, but it can be easily adapted to work for individuals with much less complex finances. Zero-based budgets are based on current need, not on history.
How do I use the zero-based budget system?
The zero-based budget is pretty simple to set up. I read a lot of different ways to do it, but found Dave Ramsey’s way to be the most straight forward. He suggests taking a piece of paper and writing all of your income on one side and ALL of your expenses on the other. Don’t worry if the sums of each side aren’t equal at first. Your next job is to bring one number up, down, or change them both. For example, if your income side is higher than your expense side, maybe you put a little extra in your savings account this month or send extra to your credit card company. The goal is to know where EVERY dollar is going and once you’ve decided this you stick to the plan.
Why should I use (or not use) the zero-based budget system?
Like I said about the envelope budgeting system, there are pros and cons with everything.
|Easy & Simple
All you need is a pen, paper, and to be able to decide how to allocate your money
You’re not supposed to re-arrange the budget to fit new needs, but there also aren’t any mechanisms in place to be sure you spend how you say you will.
| Always Relevant
If you do this for every paycheck, you can make frequent adjustments to account for new expenses.
You know that cute shirt that’s now on sale? The one that would be perfect with basically everything in your closet? You can’t buy it unless you had a shopping section in the budget.
| Everything is Accounted For
Gone are the days of checking your account and wondering what happened to all your money. Now you know where every single dollar is going.
|Creates feelings of living check to check
While you may have funds to cover your bills, savings account, and dining out you may feel that you are living check to check b/c every penny is “spent” until the next payday.
The zero-based budget is so simple to set up, it would be well worth your time to try it. This budget method is extremely effective in helping you learn to spend with a plan and make fewer random impulsive purchases.
Have you ever tried a zero-based budget? Do you think this could work for you?