Give every dollar you earn a purpose
Do you feel like your money just disappears each month? Without a plan or tracking, it’s easy for that cycle to continue. That’s where zero-based budgeting (ZBB) can help.
How does zero-based budgeting work?
With zero-based budgeting, you give a job to every dollar of your income every month – whether it's paying bills, saving for a vacation, or tackling debt. The key is that your total planned expenses (including savings goals) should equal your income, resulting in "zero" left over. Following a zero-based budget is one way to be intentional with your funds and cut out any unnecessary or impulse spending.
How to create a zero-based budget
Start by adding up all sources of income for the month, including your paycheck and any income from side hustles, investments, and more.
Next, gather bank and credit card statements from the last few months. You’ll use these to understand your monthly spending habits.
Now it’s time to build your zero-based budget sheet. Start with the two major categories for your spending – your needs and your wants.
Your needs
These are the ‘must-haves’ in your life. They include:
- Essential expenses like rent, utilities, and groceries
- Transportation costs like your car payment and gas
- Insurance (car, health, property, etc.)
- Emergency fund savings
- Credit card debt payments
- Student loan payment
Your wants
These are the ‘nice-to-haves’ in your life. They include:
- Restaurants
- Clothing
- Entertainment
- Vacation fund
- Retirement savings
You should also create a category called “miscellaneous.” The money in this category will be designated for unexpected expenses that pop up during the month.
After going through your statements, start assigning a monthly amount to each expense in the Needs and Wants categories. Then, add up all your expenses. Ideally, they should be equal to your monthly income, resulting in a “zero” balance.
If your expenses are more than your monthly income, look for areas where you can reduce your spending and make the adjustment in your zero-based budget sheet. If your income is more than your expenses (yay!) then look for areas where you might want to put a little extra money. Maybe increase the amount you’ve allocated to paying off credit card debt or boost the amount in your vacation fund. Just make sure that when you subtract all your expenses from your income, you end up at zero.
Now that you have a budget sheet prepared, track your expenses during the following month to see how your spending aligns with your current budget projections and where you need to make adjustments moving forward.
Zero-based budgeting gives every dollar a purpose. Removing the guesswork in your financial life helps you develop more control and the confidence to work toward your goals.
For more on managing your money, download our free Mastering Money ebook. As always, if you have any questions, don’t hesitate to reach out to any of our friendly bankers.
