Learn how to budget easily with the zero based budgeting system. Save more and pay off debt faster using the free printable by assigning ever dollar a home.
Zero based budgeting is the #1 tool that’s helping us pay down debt and save more money.
It has given us the financial freedom and safety net we needed to build an online business and work from home.
Why Budgeting Gives You Freedom
When was the last time you wanted to buy something and wondered “Can I afford this?”
Or looked at your bank account right after depositing your paycheck and felt like you had plenty of money, only to do some mental math and realize that you barely have enough to cover your bills?
When you budget, you take that guesswork away. Once your budget is complete and your wondering is gone, you’re left knowing exactly how much money you have.
There’s so much freedom in that.
Budgeting puts you in the position of deciding how to spend that money without fear or guilt.
What is Zero-Based Budgeting?
Zero-based budgeting is essentially assigning every single dollar you bring in a new home.
Whether you’re assigning it to your standard monthly expenses, paying off debt, investing, or saving, you have to tell every dollar where it belongs.
If you have “extra” money left over at the end of the month, that means you didn’t finish budgeting. You may have budgeted what you had to budget, but you didn’t budget what you should budget.
For example, if you put together your budget and realize that you have $300 extra every month, keep going with your budget. Assign that $300 to a place that will help you reach your goals.
If you have no savings at all, you could assign that money to your emergency fund and build up your first $1,000 dollars in savings.
If you have an emergency fund, but still have debt, you could assign that money to make a larger payment on your debt that month.
You can use the “extra” money to pay off debt like student loans, to make bigger payments on your mortgage to pay off your house, or to save for a goal.
The concept is that if you treat that money as “extra” you won’t put it to work for you. You’ll likely use it for things that are fun or convenient (like takeout), instead of using it to help you reach your long-term goals (like paying off debt or investing).
What are the Pros and Cons?
The biggest pro of zero-based budgeting is that you’ll be more aware of where every dollar goes. As a result, you’ll be more likely to pay off more debt or invest more.
According to a study by Dave Ramsey’s Financial Peace University, “people who do a zero-based budget (versus those who don’t) pay off 19% more debt and save 18% more money!”
The biggest con of zero-based budgeting is that it will take more time to put together than a traditional monthly budget would.
Depending on how you set your budget up, it may not leave money available for unforeseen expenses.
Ideally, you’ll budget in an emergency fund. By paying that fund first, instead of spending money without a plan, you should have a better safety net if you need it.
While it will take a few more minutes to establish a zero-based budget for the home, the financial gains are more than worth it.
How to Make a Zero Based Budget (Process and Steps)
You can set this budgeting system up in three easy steps.
1) First, tally all of your income for the month.
If some of your income varies by month, you can either:
- Make your best guess about what the income will be.
- Take the average income for that category from the last three months.
- If it’s very variable, like selling on eBay, you can start saving the money until the next month before you count it. That way you will know exactly how much income you’re working with in that category.
2) Second, add up all of your expenses for the month.
The best way to do this is by going through all of your receipts and bank statements for the last three months and finding the average amount you spend per category.
3) Third, assign any leftover money to a goal.
If you don’t have an emergency fund, I’d recommend starting there.
Once you have an emergency fund, you can either use the extra money to pay down debt or save towards another goal.
Common Questions and Problems
1) How do I know how much to budget?
Until you’ve become familiar with your budget, your best course of action is to take the average of your expenses for the last three months.
Don’t worry too much about assigning too much money to a category in the beginning. If there’s money leftover in a particular category, you can always carry it over for the next month.
Eventually, you’ll become so familiar with your budget that you’ll be able to make an accurate educated guess.
2) How do I budget if my expenses are higher than my income?
There are only two options in this scenario.
- Increase your income.
- Decrease your expenses.
3) How do I budget for unexpected expenses?
This is why I recommend putting all of the “leftover” money into an emergency fund first. If you save correctly, you should actually have more money available if you run into unexpected expenses!
Once you’ve established an emergency fund, made progress on your debt, and are familiar with your monthly budget, you may choose to start using some of the “extra” money towards fun goals.
If you have any questions, leave them in the comments below!
If you enjoyed this post or found it helpful, please be sure to share it on Pinterest so that your friends can see it, too!
Learn how to spend with intention using this free zero based budgeting printable!