Create your personalized zero-based budget
Setting financial goals is very exciting. You may have decided you want to pay off your debt; or you want to build your savings; or you may simply want to make sure to have some spending money to have fun with. In order to do this you know you want to create a personalized budget, however you are unsure where to start. No matter your financial goal, the zero-based budget is a great place to start.
No matter your financial situation or goals, anything is possible by creating a step by step system for you to follow. A zero-based budget is just that, a step by step system designed to tell your money where to go, before you even have it, to ensure you meet your financial needs and goals. Creating and focusing on good financial systems like the zero-based budget has helped many pay off their debts, build their savings, and plan for future events. Making a plan for your money before receiving it, and following through on that plan once you get paid, will help you achieve any financial goal you set.
The basics
The zero-based budget is a step by step system that dictates where your money should go before you get paid. By creating small changes in the way you manage your money today, you will set yourself up for the future. To create a zero-based budget, your total income must equal your total outcome. This means that when you are planning your budget, every single dollar of your total income must be accounted for. For example, if your income is $2001 a month, you will create a budget that takes into consideration $2001, until every dollar knows where to go.
Income
The first step is to determine your total income. Take in consideration all your paychecks, earnings, etc. Make a list of all your incomes and how much you earn, and add them up to calculate your total income.
Outcome
This is where all the magic happens. Your outcome is split into 4 categories.
Outcomes that are predetermined providing less control
-
- Expenses
- Debts
Outcomes in which you have full control over your decisions
-
- Spending
- Goals
When creating your zero-based budget, starting with outcomes in which you have less control helps you determine how much you have left for Spending and Goals to ensure you do not overspend.
Expenses
This category includes your housing and utilities. These expenses typically occur on a routine basis and must be paid on time. Because you cannot afford to ignore these, it is important to consider them first in your zero-based budget. The following are example of expenses to consider when creating your budget:
- Rent/mortgage
- Power
- Water
- Heating
- Insurance
- Internet
- Telephone
Debt
Your debt includes everything that you owe on credit or that you may owe someone else. Paying off debt is a very good practice, to avoid paying more fees and interest rates. Not paying off your debt can also have negative consequences you need a loan or a credit card. The following are examples of debts you may have a balance on:
- Student Loan
- Line of credit
- Car financing
- Credit card
- Owing someone
Once you have covered your expenses and debts, you will total those amounts and subtract that number from your income. The remainder of your income is what is left over for Spending and Goals. These categories are more interesting because you get to decide what you want to do with your leftover money.
Spending
This category is part of the leftover money you keep on you or in your chequing account. These include items that are nice to have, and you get to decide how you want to allocate your money. The following are examples of spending you will want to consider:
- Groceries
- Gas & car maintenance
- Pets
- Memberships / Subscriptions
- Spending (i.e clothing, coffee, restaurants, etc.)
Goals
You are most likely creating a budget because you have a goal in mind. Therefore, as you decide where you want your money to go in the Spending category, you may want to keep in mind your future goals. Setting extra money aside for your debt or savings is very good practice. If your budget allows for it, place some leftover money in both your debts and savings, to begin building your net worth. The following are examples of goals you may consider:
- Build savings
- Paying off debt
- Planning a vacation
- Training / Career development
- Starting a business
- Etc.
Bringing it all together
When determining the amounts you want for Spending and Goals, you need to avoid overbudgeting. To ensure your zero-based budget accounts for every single dollar of your income, add the totals for Expenses, Debts, Spending and Goals to calculate your total outcome.
- If the total outcome equals your total income, you have yourself a zero-based budget.
- If the total outcome is greater than your income, you will end up spending more than your earning. You need to review your Spending and Goals to see where you can reduce the outcome.
- If the total outcome is less than your income, review your Spending and Goals to see where you could to add more. You want every dollar to know where it should go.
Once you have your zero-based budget, the key is discipline and sticking to it when everything else is trying to tempt you. If you want to pay off your debt, build your savings, plan for vacation, plan for retirement, etc., creating your very own personalized budget will help you reach your goals. Keep in mind those are all good and ambitious goals. It is going to take time and patience to see them all the way through. Once you begin to see your total debt go down and your savings go up, it becomes very fun. If you find yourself unable to stick to your budget, go back and review it. See where you can make some sacrifices. Think of how you can produce numbers that work better for your circumstances. Keep adjusting until it feels right to you.
