A Zero-based budget equates your income and expenses during a period, which means that your income equals your expenses, resulting in a zero. However, this doesn’t mean that the Zero-based budget advocates spending your income completely without saving anything for the future. Instead, the budget is created by deducting all kinds of expenses, savings and debt payments from your income until the income is reduced to zero. In other words, a Zero-based budget assigns a specific job to each dollar of your income by dividing it into spending, debt repayments, and savings. In this article, we explain how you can create a Zero-based budget.
How to create a Zero-based budget?
You can easily create a Zero-based budget by taking the following steps:
1- Calculate your monthly income
If you have multiple sources of income, such as a side-hustle, rental income, or investment income, you should include all these sources for calculating your total monthly income. Accounting for a fixed income in a Zero-based budget is fairly straightforward. However, if you earn variable income from multiple sources, you can take an average figure based on your conservative estimates so that you do not overstate your income for the purpose of creating a budget.
2- Calculate your monthly expenses
The next step in creating a Zero-based budget is calculating your monthly expenses. You can start with your biggest and essential expenses, such as food expenses, utilities, transportation, etc. You can then add monthly recurring expenses, such as your mobile phone, internet, or other subscriptions. Remember to account for unpredictable and seasonal expenses as well so that your budget correctly reflects your current financial situation.
If you have any outstanding debt, you should also include it in your expenses. Similarly, if you have created an emergency fund and a sinking fund or have set a monthly savings target for yourself, you can include your target monthly contribution to your expenses as well.
3- Equate your income and expenses
Now that you have estimated your income and expenses for the month, the next step involves equating your income and expenses until they become equal. If your income exceeds expenses, it would mean that you can still allocate the remaining income to expenses, debt repayment, or savings. In contrast, if your expenses exceed your income, you need to reduce some of your spending, debt repayments, or savings to balance the equation. You can also choose to enhance your income to balance the equation but enhancing income is difficult to achieve.
Your goal should be to make optimal use of your income and not just to reduce your income to zero. For example, if your income exceeds your estimated expenses, including your debt repayments and savings, you can consider allotting the surplus income to your retirement savings or funding a long-term large purchase.
Conclusion
The Zero-based budget is an ingenious way to put each dollar of your income to its best use. It is a detailed budget that gives value to each dollar you earn, which makes it an effective tool for managing your finances. Unlike its fancy name, the budget is easy to create and simple to follow. If you want to make the maximum of your income, you should try creating and following a Zero-based budget.
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