Every dollar you bring in should have a purpose or a ‘job.’ This is the premise behind the zero-based budgeting model, and it works for millions. It helps you not only pay your bills on time, but also makes sure you save money every month, something many of us plan for the end of the month only to find that our money is gone.
So how do you give every dollar a purpose? Follow these steps.
Know How a Zero-Based Budget Works
First, know the zero-based budget premise. You should have ‘zero dollars’ left at the end of the month if you give every dollar a ‘job.’
The jobs include paying your bills, paying off debt, and saving for financial goals. Every ‘job’ gets a line item in your budget. This ensures you’ll pay it and make your budget work for you.
Determine your Expenses
Next, determine your expenses. Don’t just assume you know how much you spend each month. Pull your bank statements from the last couple of months and categorize your spending. Figure out where you spend money and if you should cut back.
Determine your Income
Do you know how much money you bring home each month or do you just spend it? Knowing how much you make is important. It’s the only way to create your budget.
Realizing how much money you make helps you budget correctly. You may decide you need to cut back on certain expenses or allocate your money differently. It’s eye-opening to see how much you make.
Create your Zero-Based Budget
Once you know your incomings and outgoings, it’s time to make your zero-based budget. Take your income and subtract all bills first. Next, figure out how much of your money you can allocate to debts and savings.
Ideally, 20% of your income should cover your debt payoff and savings. If you aren’t at that point yet, start where you can and work your way up.
What about Debt?
Find a good balance of paying off debt and saving money. Both are important. You shouldn’t live with high-interest debt, but you also need money saved for emergencies, financial goals, and retirement.
Focus on the high-interest debt first as that’s an opportunity cost to any money you could earn from savings. If you have a lot of debt, consider using the debt snowball method to get control of your debt and to know which debts to pay off first.
Giving every dollar a purpose is important. You’ll earn interest on any money you don’t need to pay bills or pay off debt. You’ll also be more focused on where and how you spend your money. Leaving savings and debt payoff to chance only costs you money and decreases the funds you could have for retirement or other financial goals.
Create a budget that works for you, giving every dollar a job, but don’t be afraid to make changes. Reassess how you’re doing and if any changes are necessary so you can reach your financial goals.