During the beginning steps to financial freedom it can be tough to get a strong grasp of your personal finances. With no all-encompassing “correct” budget, it can be tough to figure out what fits your needs best. Luckily with a little time and attention you can begin to craft a plan that suits your own personal needs.
There are a couple of ways to outline your first budget, but for me effective budgets all share one trait: they have a zero-based budget.
Zero-Based Budgeting in a Nutshell
Zero-based budgeting is a method that gives every dollar you earn a purpose. To start you need two numbers:
- Your total income (the total amount of money you earn)
- Your total expenses (the sum of your spendings, including money that’s been saved)
Lets say you make $2,000 a month. For an effective budget all of that cash needs to be assigned a task or have some sort of goal. Note that for a zero-based budget to work you need to keep proper track of all of your expenses. Rent, groceries, cash purchases, and savings transfers can be tough to keep track of, so I recommend a budgeting tools like Mint or YNAB to help keep track.
Why’s it useful?
Plenty of people maintain a budget without zero-based budgeting, but I find it’s significantly harder to respect your budgets limit when there’s unfocused money. When 100% of income is delegated a task, we become less likely to go over a particular budgeted category. When I created my first preliminary budget I noticed I would frequently overspend in a key categories. Money would continue to pour into concert tickets, alcohol, and entertainment activities even after I hit my limit. Looking back, this happened because I had unfocused money, and knew I could get away with splurging a bit extra.
Zero-based budgeting prevents that extra padding that can serve as an alluring rationale to go over budget. The “leftovers” that were intended for savings can quickly evaporate. I delegate my unbudgeted income towards productive outlets such as IRA’s or mutual fund investments. With it, I noticed I started to consistently hit my budget.
There are studies that show zero-based budgeting can lead to a double whammy of paying off debt faster, and saving more money! I hope these reasons are enough to convince you that creating a zero-based budget goes a long way towards paving a stable financial future.
So now what?
Once you’ve gathered your income from all sources, whether it be from work, gigs, or another business, decide how much you want to spend in different categories. Here’s a sample budget that I used to get started:
- Rent - $1,300
- Transportation - $100
- Utilities - $200
- Food and Dining - $700
- Credit card payments - $200
- Retirement fund - $300
- Family help - $400
- Entertainment and Shopping - $500
Notice how every dollar is delegated a job. Any left overs as small as $10 left over needs to be given a specific purpose. Don’t stress on getting the numbers right the first time, what’s more important is having an outline for a financial game plan. Over time you may find your budget will adapt to your needs. Taking the initial first step is far more important then the accuracy of your budget. As we gather more spending history, our estimations will become more exact.
If you already have a budget in place take some time to give it another look. Are there any gaps? Are there places that need tweaking? If you’re not sure where to place leftover money the job isn’t finished. Some common options are savings accounts, 401k’s, and IRA’s, or building a nest egg.
There’s a big difference between unfocused money and money that goes straight towards savings.
Creating an initial plan for your first budget can feel intimidating, but don’t worry. Improving your budget whenever you go over/under is part of an ongoing process. You’ll come to adapt to common wrenches such as holiday seasons and traveling. One last note to keep in mind is that while budgeting initially feels constricting, it gradually turns into a more liberating feeling. As you progress with your budget you become aware of when it’s okay to splurge money or tighten up the wallet. It allows for the freedom of guilt free spending.
Per usual, thanks for taking the time to read BrunchBucks. If you find a typo just contact me via email! Feel free to leave a comment below or share this with friends.
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