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 bills and helps you identify unnecessary expenses that you can either reduce or eliminate. 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.

Con: Time-consuming

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, there may be better choices than a zero-based budget. 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, you can follow these tips:

  • Calculate your monthly income: Calculate 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 allocate more money.
  • Categorize your expenses: Once you organize 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.

Can I still use the zero-based budget if I have irregular income?

A zero-based budget may still be the right approach if your income isn't predictable. Planning is key to managing an irregular income with a zero-based budget. First, identify your fixed expenses — those that remain the same each month, like rent, utilities, and loan payments. Then compare your expected inflow and outflow of money based on past cycles. You can use this information to estimate how much of your income you need each month to cover fixed costs and other expenses such as groceries or entertainment costs.

Finally, create an emergency fund to prepare for times when you might not have enough income. With careful planning and a realistic look at your finances, you can use a zero-based budget even if your income isn't always steady.

Why budgeting is important

Keeping track of your finances can feel daunting, but budgeting is essential to managing your money. By setting strict limits for your spending and focusing on fixed expenses instead of variable ones, you can ensure that you stay within budget and avoid financial trouble. Here are a few more benefits of budgeting:

Helps you achieve financial stability

One of the most important benefits of budgeting is that it can help you achieve financial stability. When you have a clear understanding of your income and expenses, you are better able to make informed decisions about how to allocate your money. This can help you avoid making impulse purchases that you can’t afford and ultimately help you achieve long-term financial goals.

Keeps you motivated

When you see how much money you have available to spend each month, it can be motivating to try reducing your expenses so that you have more money for your goals. A budget can also help keep you on track with your financial goals by providing a clear plan.

Prevents overspending

Having a clear understanding of your expenses can make it easier to stay within your means and avoid unnecessary purchases. Additionally, budgeting can help you track your spending patterns and identify areas where you can cut back.

Helps you save for retirement

Budgeting can also help you save for retirement. Even though retirement may seem a long way off, it’s never too early for you to start saving. By setting aside money each month and investing it wisely, you can ensure you have enough money to cover your costs in retirement.

Is the zero-based budget right for me?

A zero-based budget is all about planning and ensuring that every dollar has a designated purpose. Instead of rolling over one month's surplus to the next, like in a traditional budget, a zero-based budget involves allocating every penny with intention — even going so far as to plan for savings contributions. This can give you greater insight into where your money is going and help you make informed decisions about how it can work best for you and your family.

On the other hand, some may feel overwhelmed by a zero-based budget’s demanding nature, so consider whether it's the right fit for your lifestyle and financial priorities before you commit to it. Ultimately, no matter which type of budgeting system works for you, setting clear goals and understanding where you want your money to go is vital.

Alternatives to zero-based budgeting

If you decide that a zero-based budget isn’t right for your unique situation, consider these alternatives:

50/30/20 budget

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 simply and effectively.

Envelope method

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.

Cash-only budget

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.

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