A Zero-Based Budget: What and Why
Your biggest wealth-building tool is your income, and the best way to harness the power of your income is the monthly budget. Not investing or saving for college (though those things are important). It’s the budget, because from the budget flows everything else. If you want to invest money in a mutual fund, you make room for that $100 or $500 in the monthly budget. Want to get out of debt? List your debts in your spending plan. You get the idea.
The sad thing is that lots of people rank a budget only slightly higher than the Black Plague. Budgets to them mean no fun, bread and water for every meal, and custom-fitted straitjackets. What they don’t realize is that a spending plan is the fastest way to wherever you want to go, from simply taking control of your money to getting out of debt.
Many people don’t make a budget because they are afraid of what they will find. If someone has overspent to the point that they now face a mountain of debt and little or no savings, they might be shamed into stopping right there. But doing nothing is not a solution. Don’t be paralyzed!
The Goal Is Zero
The point of a zero-based budget is to make income minus the outgo equal zero. If you cover all your expenses during the month and have $500 left over, you aren’t done with the budget yet. You must tell that 500 bucks where to go. If you don’t, you lose the chance to make it work for you in the areas of getting out of debt, saving for an emergency, investing, paying off the house, or growing wealth. Tell every dollar where to go.
Doing so makes a huge difference. According to surveys we’ve conducted in Financial Peace University classes, people who do a zero-based budget (versus those who don’t) pay off 19% more debt and save 18% more money! Just from having a plan! The sooner you make a zero-based budget part of your money-handling strategy, the sooner you’ll start to see your debt go down and your savings go up.
Five Money Gotchas
And as you probably figured, if you are spending more than you make each month, you have to start cutting stuff. Use coupons, sell items that you don’t need or have payments on, and stop going out to eat. Here are some common areas that eat your money up:
- Eating out. Start eating leftovers. Staying away from restaurants can literally save you a couple hundred dollars a month.
- Car payments. You can buy a quality car for $2,000, and it will get you around town just fine. And you won’t miss that $500 payment.
- Groceries. Clipping coupons, waiting for sales, and buying generic brands are huge difference makers in your spending plan.
- Utilities. Shut the lights off when you leave the room. Entertain yourself with a book instead of the TV. Those are just a couple of ways to save, but they are big.
- Clothing. We don’t need new clothes as often as we think we do, and buying from garage sales and consignment stores can save you enough to make your jaw drop.
Learn the what and why behind budgeting with the new free EveryDollar Guide to Budgeting. You'll be a budgeting pro in no time!