The following is an article “Zero-based Budgeting and Its Benefits” by Marc Primo.
There’s nothing more frustrating than wondering where your monthly salary went when there are still bills left to be settled. Not being able to account for all your monthly expenses can spell disaster for your savings plan. That’s why for some people, planning a zero-based budget is more reasonable than just spending away money without proper auditing.
By definition, a zero-based budget is a financial plan wherein your monthly income should be equal to your monthly expenses. This means that what you earn per month should not exceed your bills, needs, savings, and other expenses, so that you can trace where every penny goes.
Opting for a zero-based budget does not mean that you are left with nothing by the end of the month. More importantly, it does not mean that you won’t be able to save money in the bank. It just means that you should be able to control the money that goes out from your monthly income and arrive with a zero balance after all your expenses have been covered. Say you earn $5,000 per month. The cost of utilities, investments, loan payments, emergency funds or savings must also be equal to $5,000 each month, no more and no less.
In practice, you should first collate what you regularly receive per month. From pay checks, business profits, child support, or any other forms of income you incur. Next, organize your monthly expenses which may include rent, food, utilities, cable service, or phone plans. Do not spare any cent as you sum up both income and expenses.
For seasonal expenses such as birthdays and Christmas gifts, mark your calendars for all your irregular spending so you can save up for them as well while on a zero-based budget.
Next thing you have to do is subtract your total income from your total expenses and make sure that the end balance results to zero. Though it takes a bit of work, you’ll be able to know where your money goes to at the end of each month once you become used to it.
The concept is actually very simple. But what are the benefits of zero-based budgeting?
It’s always important to have a budget plan. You get to save money and achieve your financial goals, while also getting rid of debt. Creating a budget plan also allows you to have a safety net for the future. Even millionaires rely on having a budget to safeguard their money.
In a zero-based budget plan, you can have certain advantages given that you have identified your monthly expenditures and arranged them according to priorities. From there, you can determine necessary budget cuts and decide which investments can earn you more for the long-term.
Once you have applied the necessary steps, you can enjoy the efficient allocation of your money per needs and benefits, improve your budgeting strategies, be prepared for inflation, develop discipline in spending, and come up with better decisions on financial matters.
However, applying a zero-based budget also comes with a few downsides. You should review your financials regularly and this alone can be time-consuming. It will require you to keep a tab on all data and information concerning your budget so that you don’t confuse your figures especially as your money accumulates. You may also have to consult a financial expert in order to easily determine and justify your expenditures and investments.
If you want to save money while knowing where each cent of your monthly income goes, then by all means go with a zero-based budget. Just make sure that you make a thorough accounting of your income and expenses to stay on track of your financial goals.