Budgeting is not an easy thing. Like most people, you want to make managing money an afterthought. You know the amount of money you have, and it can be spent. Making budgets takes time, thinking, and even cutting things you may enjoy.
If budgeting was more straightforward, would you do it? I know I would 100% jump in if it was more manageable, and it became more accessible to me when I discovered zero-based budgeting.
Living paycheck to paycheck causes much stress in your life, but being able to break that cycle can turn things around. This is why I believe in saving more than you spend, but it took work, effort, and realizing a system that could make this all work.
Discovering a zero-based budget solved all those problems. It is about giving every dollar a job. You are no longer guessing how much money is coming in, but you know how much you have and give each dollar a job.
What is Zero-Based Budgeting?
Zero-based budgeting is taking all of your money and putting it towards expenditures, savings, and debt. At the end of the month, your income and expenses should equal out zero.
This is not a budget like Dave Ramsey’s Budget percentages that breaks everything down, and this is a budget that allows you to give your money a job. At the end of the month, everything should equal zero.
Your monthly income is $2200. Now you need to break it down into categories.
This is just an example of what a Zero-based budget can look like. Every month, we know how much money will come in, and then we can set up our budget to spend that amount of money.
It is like the cash envelope system. Where you separate your money into different envelopes, you no longer spend for that category when that money is gone.
How is Zero-Based Budgeting Different From Traditional Budgeting?
One of the most significant differences between Zero-Based Budgeting and Traditional Budgeting is that you live off last month’s income. You know how much money you made last month, and that is the amount of money you have to use for the next month.
Most traditional budgets require you to take how much you make in the current month. The problem with this thinking is that if you lose a job or get a pay cut, you may not know how much you get paid. Most people assume you will get paid the same, and that is how jobs work. You have a salary or an hourly wage, and you spend that amount.
With Zero-based budgeting, you can help to break the cycle of living paycheck to paycheck. Since you are using last month’s pay instead of the current month, you can determine your expenses and allocate funds for certain categories. If need be, you can also cut or even stash more into savings.
This helped to make budgeting easier for me. It took the guesswork out of creating a budget, and I was saving more money and making money to have a particular job. Each month, I could determine how much I could spend on food. If there was leftover money, I could put that towards savings.
The other difference is making sure each dollar has a job. If you budget $350 for food for the month and only spend $300, that leftover $50 needs to do something. It has a job. Traditional budgeting would leave it sitting and waiting. Zero-based budgeting will have it doing something like investing it, sending it to the savings account, or even paying extra on your debt. Each dollar has a job, and we will make it be a tool for us.
How to Make a Zero-Based Budget:
When looking at how to make a zero-based budget, you must do a couple of things to create the best for your circumstances.
1. Track Your Spending
This is something that is often talked about when budgeting. We must track our spendings, and this is a way we can figure out what we are spending money on. All you have to do is write down everything that you spend money on.
After this, you can separate your spendings into separate categories like rent, food, utilities, and healthcare. This way, you can have an accurate picture of what each category consists of.
One of the better ways to track these things is with a simple spreadsheet. You can create a spreadsheet from google sheets so you can load up your spendings even from your phone.
We do not track our spendings for one month; this must be consistent with having a better picture of how costs go up and down throughout the year. You can then make adjustments to your budget.
2. Know Your Monthly Income
Throughout the month, you may be working different side hustles, your main job that is usually 9-5, and possibly bring in other income from passive income streams. You will need to know how much income that you have coming in regularly.
Just like tracking your spending, it is also best to track your income. Knowing the amount of cash flow you have coming into your budget can help you set up your Zero-Based Budget.
Remember that your Zero-Based Budget is derived from the income that is created from the prior month. So if you have an accurate calculation of the income brought in, you can effectively create a zero-based budget that helps you live below your means.
3. Create Budget Categories
It is time to start splitting up your expenses into categories. We know that this budget must end with zero money left over at the end of the month. With knowing our income and spending, we can finally set up what is needed.
First, let's see what we need. If we use the example, I had before. Monthly income is equal to about $2200. Your rent is about $700, your utilities are $150, healthcare is $300, and transportation is $100. Your needs are about $1250. We need to put an item for food, but also don’t go overboard. I had mentioned about $350 in the example, and that is about $1600. Leaving us with about $600 leftover.
With some of this leftover money, we can either use it to buy some meals out, go out and grab some nice clothing, or invest the money. Having money for retirement is very important, so putting money into our retirement funds like our IRAs should be done.
The IRA limit for the year is $6000, so that is about $500 per month. You can max this out and retire a millionaire. Use that leftover money to put it towards some of your goals. If you are saving for a fun trip, put some aside in an account for that trip and some money into investments for your future.
The goal with each category is to put our money to use. Each dollar has a job.
4. Be Flexible With the Budget
This is a budget that can help you do so much. It is time to be flexible. When we are getting our financial state in order, we need to realize that emergencies happen. Other things might just wreck our budget, so being flexible is a characteristic you must possess.
Your budget has to be flexible too. Some months the utilities could be higher due to different weather, and sometimes you will not be making as much income. Being able to plan for these things allows room to breathe and less stress while budgeting.
Zero-Based Budgeting is a newer concept being popularized. YNAB is an app that has made it easy for individuals to have a zero-based budget. It was the first budgeting app that helped me break my paycheck to paycheck lifestyle. Learning the methods of giving each dollar a job has shifted my mind.
It is time to think differently. We know budgets can be tight. As we think about it, a zero-based budget is helping us to accomplish much more than we would expect from a budget. We will be living off last month’s pay, our budgets will be finally balanced, and we could be saving much more money.
If you are struggling with budgeting and have not tried zero-based budgeting, it is time to try something new. Some friends of mine constantly say, “try some junk.” If you never try, you may never know what can work out for you.
What type of budget do you use? Would a zero-based budget work for you?
I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.