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July 14, 2020
Creating and sticking to a budget can be stressful even in the best of circumstances and right now most of us aren’t living in the best circumstances. The effect of COVID-19 on the economy has forced many Americans to take a close look at their budget in order to reassess their spending and make some tough decisions about their monthly spending.
If you have previous experience creating a household budget, this is nothing new to you. But for those of us who are new homeowners, renters, or college students creating their budget for the first time, the added uncertainty of 2020 can seem like a monumental hurdle toward financial security.
The Zero-Based Budget
There are many effective strategies for planning a budget, each of which has its own strength and weakness. However, in times like these, when money can be tight, one of the best methods to ensure that every dollar and cent is accounted for is something called zero-based budgeting.
The goal of a zero-based budget is to make it so the difference between your monthly income and your expenditures each month equals zero. Once you’ve accounted for every dollar, you can choose to maintain the same levels of expense in each category of your budget or change it up from month-to-month as your needs change. Because you have every dollar accounted for, you will know how much you are able to spend each month and won’t overspend a dime.
It’s one thing to explain a zero-based budget, but let’s take a look at an example budget for someone making $3,000 a month.
| Monthly Income | $3,000 |
|---|---|
| Rent | $1,000 |
| Groceries | $375 |
| Eating out | $75 |
| Bills | $250 |
| Insurance | $100 |
| Gas | $250 |
| Clothing | $75 |
| Entertainment | $100 |
| Emergency Fund | $150 |
| Retirement | $175 |
| Credit Card Payments | $125 |
| Student Loan Payments | $125 |
| Travel Fund | $100 |
| Other | $100 |
| Amount Left | $0 |
Starting Your Own Zero-Based Budget
Before you implement a zero-based budgeting plan, you should prepare a few things to ensure you stay realistic with your expectations.
- Know your monthly income. This includes your paycheck, any government benefits you may be receiving, and any other regular sources of income that remain the same from month to month.
- Track and categorize your expenses. Look at your spending from the previous month and come up with a list of categories for each. If you have savings goals, these should be categorized separately.
- Calculate your average expenses. Go back through two or three months of expenses and figure out what your average spending is in each category. Take note if there are any areas where you can cut back on spending.
There are plenty of budgeting apps that can help you categorize and track your monthly spending, including New Tripoli Bank’s mobile app which has a money management tool that automatically categorizes spending from your ATM/debit card into categories and allows you to set monthly targets.
Once you have all of this information prepared, you may be wondering how much to allocate to each category in order to create a “balanced” budget. While every person’s budget is going to be different, a very common rule of thumb to effective budgeting is the 50/30/20 rule.
With this approach, you should take the categories you have previously established and group them into “needs,” “wants,” and “debt/saving.” For example, we all need food to live and we need to pay our rent, so groceries and clothing would go into “needs,” but we also want to keep ourselves entertained and we want to eat out some time, so entertainment and eating out would go into “wants.”
You won’t always be able to follow the 50/30/20 rule, but if you’re unsure where to start with your budget, it’s a good baseline and you can adjust each category up or down depending on your personal needs.
Why Zero-Based Budgeting?
At the top of this article we mentioned the impact of COVID-19 causing many of us to have to re-examine how we spend our money each month. One of the benefits of zero-based budgeting is knowing exactly how much money is flowing in and out of your account each month, which can prevent you from spending money you don’t have.
If sudden unemployment or a reduction in work hours has you feeling like you’ve lost control of your finances, sitting down and organizing a zero-based budget spreadsheet can go a long way toward helping you regain that feeling of control by knowing where your money is going and where you can afford to cut costs.
The downside of zero-based budgeting is the amount of time it can take to maintain. Effective budgeting in this way requires you to hold yourself accountable and consistently monitor your spending so you know when you’re approaching your monthly limits.
Zero-based budgeting can also be hard for those of us with irregular income or variable expenses. If your job requires you to travel during certain times of the year more than others, then certain categories in your budget are going to vary wildly from month to month. If you’re a freelancer or contractor with a fluctuating schedule, you won’t always know how much money you have coming in from month to month which can make it harder to plan in this way.
However, if you have a steady income and can plan a few months in advance for big expenses such as holidays or weddings, then zero-based budgeting is a very useful budgeting tool whether you’re new to managing your money or looking for a strategy to regain control of your finances.