Hi friends! The question I get asked often as a financial coach is “How does a budget work?” so I thought I would explain how the zero-based budget works and the steps where those new to budgeting often struggle.
First, what is a zero-based budget? It does not mean you have $0 in your checking account; it means your income minus your expenses should be zero. Sounds simple, right? But things can get tricky if you have never done this before.
Step One: Write down all your income. This needs to be any income coming in from paychecks, income from a side-business, refunds, selling items on Facebook, etc.
Step Two: Figure out your expenses for each month. If you are new to budgeting or tracking your expenses this is where a lot of folks have a hard time; you probably do not have a clear picture of how much you spend on food per month. A good place to start would be reviewing or printing out your bank statement for last month and adding up all transactions for groceries, gas, eating out, entertainment, and so on to get a better idea of what you are spending.
A good idea here is to add a miscellaneous category for unplanned expenses each month. There will be something you do not think of, I promise. That is where the miscellaneous category comes in handy.
Step Three: Determine any seasonal expenses you may want to save for. These are also referred to as sinking funds. Take Christmas, for example. If you know you are going to spend $500 dollars on Christmas this year, you will divide that by 12 to derive how much you want to save each month. That would be $41.67 per month you would set aside if you started saving in January. Other examples might be car repairs, insurance that gets paid annually, or a vacation fund.
Step Four: Subtract your income from your expenses and that needs to equal zero. If your expenses are more than your income, you need to find spots in your budget to cut. This could be groceries or eating out, cutting out cable, making coffee at home, etc. Anything you need to do to get it to zero. This is a must; you just cannot spend more than you make and expect to make progress.
Step Five: Track all your expenses throughout the month. In my experience this is the most important part of budgeting and the step that most struggle with or just do not do. I have spoken to many folks who “create a budget” but then are confused why it does not work.
How will you know where you are at with your budget categories if you are not tracking during the month? This will also let you know where to adjust during the month, or for next month’s budget as you fine tune things.
Yes, it is ok to adjust your budget during the month if it still comes out to zero. You are new to this and it is going to happen. Go easy on yourself. My wife and I have been budgeting for over 3 years and sometimes still need to make mid-month adjustments as things come up.
A couple of other things to keep in mind:
Create a new budget each month before the month begins.
If married meet monthly; you and your spouse need to agree on the budget.
A budget is not a dirty word or a prison cell. It is an intentional plan for your money that gives you freedom to spend on purpose.
Have any other questions or want help making your budget work? Book a consultation today.
Thanks,
Malcolm
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