The approach of a zero-based budget empowers individuals with the financial management tool to have control over their money. Every dollar they earn is used for a meaningful purpose. According to Scott Tominaga, unlike the traditional budgeting method that suggests keeping a close track of leading life within a defined limit, in the zero-based method, all dollars are assigned for making expenses, and savings until it comes to zero.
The technique helps immensely to avoid wasteful spending, give priority to financial goals, and sidestep the habit of living paycheck to paycheck. So, for those who are willing to go with a zero-based budget, here’s a handy step-by-step guide to assistance.
- List Income
To start pursuing a zero-based budget, individuals are recommended to figure out how much money they bring in every month. This means they should include their active source of income such as salaries and wages and then take into account the passive sources of income like freelance work, earning from rentals, etc. Never forget to account for only the net income that is the take-in-home salary (after taxes and other deductions).
- Track Expenses
The next step involves keeping track of the expenses individuals have. This should include all fixed and variable costs incurred by them. While fixed expenses mean rent, mortgage payments, EMIs, and utilities, the variable costs include groceries, dining out, entertainment, etc. Consider each figure carefully based on what is reflected on the bank statement, and credit card statement apart from other financial records for getting an accurate picture of where the money is spent. It’s also vital to categorize all expenses with diligence and jot them down in a worksheet every month:
Housing (rental /mortgage)
Utilities (electricity and water charges, internet)
Transportation (Fuel, car installment, repairing, etc.)
Food (groceries, dining out)
Debt payments (credit card and other loans)
Savings and investments (emergency fund, retirement,)
Be honest while considering all expenses, without ignoring even the small ones, as they can add up over time.
- Allocate Funds to Each Category
Once after tracking all the expenses, individuals should allocate their income into each category. First, make sure to pen down the essential categories, which are integral for people to sustain in their lives. These are the ones that include expenses for housing, utility bills, transport, and paying debts or EMIS. Then, have a look at things that come under the headline of ‘wants’ or discretionary spending, such as shopping, dining out, entertainment, etc. According to Scott Tominaga, people should cut back their spending on discretionary categories as necessary to make sure they can cover essential expenses while the remaining funds can be used for variable expenses and prioritize savings, repaying debts, and continuing investments.
- Track and Adjust Budget
Simply setting is budget cannot help unless the expenses are monitored throughout the month. Also, individuals should ensure that they are sticking to the mapped budgeting, and if any adjustment is required that should be done right away. Also, check the areas where money is overspent which can help to trim them and use them for savings. Review the budget at the end of every month to ensure it works well. If does not, make sure to consult with specialized financial advisors like Scott Tominaga.
Setting a zero-based budget is a continual task to make it work and leverage its benefits to achieve financial stability, and build wealth over time. It needs close and continual attention and needs amendments based on one’s changing financial situation.