For part two of our budgeting series, we’ll talk about zero-based budgets. This takes a monthly snapshot of your budget and spends down to zero every month. Once you have spent all the money for the month then you are at 0 and have to wait until you get paid again. It would look like this:
The idea is that all of your money is earmarked for specific expenses until you get the zero and you don’t touch the rest. I recommend paying yourself first and starting with savings, investments, rainy day fund, etc. If you don’t have an emergency fund you want to make sure you have that as a line item so you are building up 6-9 months’ worth of expenses just in case something unexpected comes up.
The zero-based budget helps you be realistic with your expenses while justifying the spending. If you don’t ‘need’ $300 a month for entertainment, then put that money somewhere else that will be more beneficial in the long-run. If you put that money in a short-term savings fun bucket for an upcoming vacation, that can work too. You can apply this to any large and upcoming expenses, like vacations, party planning and Christmas shopping.
You don’t ever want to overspend each month. You may a few times each year, but with that you can learn to be more realistic in your monthly expenses. For example, if you bought a new car and need to add in that monthly payment, you’ll need to subtract that expense from another line item. But on the flipside of that coin, if you get a raise, don’t automatically add that money to the ‘fun’ bucket. You can occasionally but we recommend increasing the investment and savings bucket first.
Seem too simple? It almost is. This form of budgeting takes a good amount of discipline to achieve but will likely earn quick results if you stick to your planned budget. And a CERTIFIED FINANCIAL PLANNER™ Professional can help create realistic line-item expenses and check-in to hold you (and ultimately your future) accountable.
Create The Life You Love®
If you have not taken the steps to Create The Life You Love®, or if you would like to review your plan, Jonathan P. Bednar, II, CFP® may be reached at 865-251-0808 or mailto:Jonathan@ParadigmWP.com www.ParadigmWealthPartners.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
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