Zero-Based Budgeting
While time-consuming, zero-based budgeting is an effective way to manage your personal or family finances. Simply stated, after subtracting your expenses from your income, you should be left with zero dollars each month. Every dollar has a purpose - nothing is left on the table. This budget can go hand-in-hand with the cash system, which requires you to spend what you have in cash on hand.
My wife and I used this budget for our household and it has done wonders for us, both financially and for our marriage. While it was awkward shining a light on our spending habits (turns out all of those off-campus lunches added up), it led to many great conversations about our family's future goals and brought us closer together.
How does it work?
This system encourages you categorize your budget into specific categories, such as eating out, shopping adventures to Target, and rent. If you do well one month and eat out less, you should reallocate those funds towards something else (and ideally more productive), such as retirement. Again, the goal is to use every single dollar in some way. Many successful companies use a corporate version of zero-based budgeting, where each department must create a budget from scratch every year. This encourages proper spending and puts funds where it is most needed. The same thing applies to your household - focus on what matters for you and your family and put the money to work.
Let's take a look at an example. Your household currently brings earns $6,000 per month. With the zero-based budget method, your monthly budget could look something like this:
Mortgage: $1,550
Retirement: $2,000
Emergency Fund: $500
Utilities: $250
Credit card/loan payments: $450
Groceries: $600
Eating Out / Entertainment: $400
Miscellaneous: $250
At the end of the month, your expenses equal your income, leaving you with zero dollars left. To cover those pesky unforeseen expenses, include both an emergency fund and a miscellaneous category. While both categories may seem similar on the surface, they serve two purposes. An emergency fund is money that you've set aside to cover you when the unexpected happens. Think of a pipe bursting which then floods your basement flooding or a car repair because one of your kids decided to go off-roading for the first time…in your Prius. On the other hand, miscellaneous costs will help you save for the less frantic moments in your life, like treating your spouse to a nice meal after she had a rough week at work. Try your best to get as close to zero as possible, but leave room to enjoy yourself and your family. Getting close to zero and unsure what to do with the leftover? I'd recommend investing any funds that are left over each month, whether it's investing in the stock market, starting a side hustle, or investing in yourself by taking a course that will help advance your career. If you only have a few dollars to spare that month, you can still check out companies such as Acorns and Robinhood, both of which allow you to invest in fractional shares of stocks. Every penny counts in the long run.
If you aren't sure exactly how you are spending your money, there's no better time to start keeping track of where your money is going. Break your monthly expenses into different categories to figure out how you are spending your hard-earned cash. Think about how you want to put your money to use. My favorite place to start is the 50/30/20 approach, breaking up your monthly expenses into needs (50%), wants (30%), and savings/debt management (20%). This is just a starting point and something to consider.
Why the zero-based budget?
I love the zero-based budget approach as it forces you to maximize every dollar you earn towards something specific. Whether it's building your emergency fund or saving for that dream vacation to the Bahamas, the zero-based budget is an effective personal finance tool.
Zero-based budgeting can be time-consuming (especially at first), but once you set up a solid plan, it should take a few minutes each month to maintain. Happy saving!
To learn more about budgeting, check out our Parent's Guide to Budgeting or get started budgeting today with our Budget Planner.
