Zero-Based Budgeting | What is Zero-Based Budgeting?
Zero-based budgeting can help you make the most of your hard-earned money. It’s a budgeting strategy that involves assigning every dollar of your income to a job. No matter how much you earn, the zero-based budget can ensure your money goes toward the things that are important to you. Let’s take a closer look at how zero-based budgeting works and how you might benefit from it.
What is zero-based budgeting?
Also known as zero-sum budgeting, zero-based budgeting is where your income minus your expenses equals zero. It allows you to allocate your monthly earnings toward your expenses, debt, and various financial goals. With zero-based budgeting, you’ll know exactly where all your money goes every month.
Pros and cons of zero-based budgeting
Just like any financial strategy, zero-based budgeting comes with benefits and drawbacks:
Pro: Track your expenses
A zero-based budget encourages you to pay close attention to your monthly expenses and helps you identify expenses that you can either reduce or get rid of altogether. For example, if you have a gym membership you rarely use, it may make sense to cancel it.
Pro: Avoid overspending
Since zero-based budgeting involves assigning a purpose to every dollar, you’ll be able to see where you overspend and can avoid doing so. If you tend to spend more than you earn, using the zero-based budget may solve this financial problem.
It takes time to create and manage a zero-based budget. First, you’ll have to calculate how much you make each month. Then, you’ll need to assign each dollar to a certain category, like housing, groceries, debt, and savings. Once you have a budget in place, you’ll need to track where your money goes every month.
Con: Difficult for those with unpredictable income
If you’re self-employed, a sole proprietor, a freelancer, or work a commission-based job that leads to fluctuating income, a zero-based budget might not be the right choice. You may, however, be able to use your previous month’s income to determine how much you have to allocate in the upcoming month.
How to create a zero-based budget
To create a zero-based budget, follow these tips:
- Calculate your monthly income: Add up your monthly income, which may include your wages, salary, tips, commissions, side hustle earnings, child support, and pension.
- Track your expenses: Use your credit card statements and receipts to figure out what you typically spend every month. This can help you determine where you can cut your spending and where you’d like to dedicate more money.
- Categorize your expenses: Once you write down your expenses, place them into categories. These might be housing, dining out, entertainment, and travel. If you’d like to save for retirement, for example, create a retirement fund category.
- Assign each dollar to a category: Lastly, take your monthly income and divvy up every dollar among your budgeting categories. Continue to do so until there’s no money left over.
Alternatives to zero-based budgeting
If you decide that a zero-based budget isn’t right for your unique situation, consider these alternatives:
With the 50/30/20 budget, you’ll put 50% of your after-tax income toward your needs, 30% toward your wants, and 20% toward your savings. This budgeting method can allow you to manage your money in a simple and effective way.
The envelope method involves physically allocating set amounts of cash to spending categories, like groceries and transportation. You can keep the cash in envelopes and once an envelope is empty, you no longer spend in that category for the month.
A cash-only budget is exactly what it sounds like. You use cash, instead of credit cards, debit cards, and checks for all your spending needs. It can be smart to combine this budget with the envelope method.
How to get funds now if you don’t have a budget
If you don’t have a budget and need money now, Advance America can help. From payday loans and installment loans to title loans and lines of credit, we offer personal loans with quick approval decisions and fast funding.
You can fill out a loan application online or in store in just a few minutes. If approved, you may receive the funds you need as quickly as the same day you apply. Visit Advance America today to learn more about the loans we offer.