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The number one way to get control of your finances is to budget.
I know it sounds boring, but budgeting can actually grant you more freedom, more choices, and a safety net that does wonders for your peace of mind – and with many different budgeting models available, there is bound to be one out there that works for you.
Zero-based budgeting is one of the most popular kinds of budgeting, and is a method I have sworn by to pay off credit card debt, build healthy sinking funds for my car, gifts, and miscellaneous life events, along with still being able to take trips and treat myself as and when I want to – all it takes is a little preparation and commitment.
Best of all, I find that I now have more fun money thanks to budgeting, than I ever had when I didn’t budget (and tended to reach for my credit card for treats!)
So, what is zero-based budgeting?
Zero-based budgeting (ZBB) means allocating a role or purpose to every single penny you make – from bills, to fun money, to savings and everything in between.
Typically, it means identifying your upcoming expenses for that month, including accounting for your necessities (think rent/mortgage payments, car payments, food shopping), wants, debt payments and savings, and making sure that, when you subtract this all from your income for the month, it comes to zero.
For example, say your take-home wage every month is £1,800. Your zero-based budget might be something along the lines of the following:
|Credit card payment||£100|
|Fun money (incl. £50 buffer)||£250|
Once you have worked out your necessary spending, you can then identify how much you have left to put towards your various savings pots, and how much you can afford to allocate to yourself as fun money.
The great thing about ZBB is that it means really analysing where your money is going – and it will probably encourage you to reassess your priorities and identify ways you might be able to cut back on expenses to send more money to savings, which is only going to ever be a good thing.
So how can you create a zero-based budget this month?
First of all, you need to know what your income is going to be that month. It might be that you make the same wage every month – in which case, this will be super easy for you. Alternatively, it might be variable, which might mean you need to give yourself a little wiggle room here.
You also need to identify what your recurring expenses are and how much they will be (e.g. rent/mortgage, car payments, food shopping), along with any other typical monthly outgoings that you need to account for. Ideally, you’ll know what this will be down to the penny by looking through past bank statements, which you can then factor in to your zero-based budget.
Now is a great time to challenge yourself – looking at these recurring expenses, are there any you can cut down on, or get rid of all together? By really analysing the numbers, you’ll be amazed at what might have previously slipped through the net!
Don’t forget to make sure you’re sending money across to paying down debt and building up savings too! Both are great ways to get your budget down to zero – once you’ve identified where your main expenses lie, and you’ve given yourself a fun money budget, move anything leftover to either debt payments, or savings pots.
Every month is different, so it’s a good idea to get into the habit of analysing your budget just before each payday. Some months you’ll have a holiday looming, or a whole host of birthdays you need to pay for, whilst other months, you’ll have nothing planned and can send much more to savings. Keep on top of your budget, and whatever you have coming up in the month ahead, you’ll be prepared come what may (sinking funds are also a great way to protect yourself from any large expected expenses – more on those below).
Once you’ve created your budget for the upcoming month, taking this all into account, your income minus your expenses (including savings and debt payments) should equal exactly zero.
Zero based budgeting makes you truly assess what bills you’re paying, and can then help you direct your attention to reducing these outgoings. The months you find you come in above budget (and therefore have some cash spare), you can allocate this to savings, debt payments or treats, depending on what you choose.
How can you guarantee success with zero-based budgeting?
Budgeting, when you might not have done it before, can feel daunting and somewhat restrictive, but it doesn’t have to be. Infact, through following the zero-based budgeting method, I find I now have more disposable income, and more savings, than I have ever had before.
To guarantee you have the same level of success, I wanted to share a few things I’ve learnt along the way:
First of all – and perhaps most importantly – you need to be realistic with yourself.
It’s extremely common to embark on a new budget journey and be super motivated to cut back as much as possible, to pay down debt quicker.
The only thing is, if you’re being too restrictive on yourself, you’re setting yourself up for failure.
Instead, be realistic – if you know you’re going to be tempted to pick up a couple of takeaways this month, budget for it. If you have a stressful few days coming up, make sure you have a few (affordable!) treats in store to get you through them.
Sure, challenge yourself and cut back where you can, but if you want this to be a lifestyle change for good, know where your priorities lie.
Build in a buffer
Life happens. You can have all the best intentions in the world, but sometimes something crops up, and you can’t have planned for it. That’s why in my budget, I always like to keep a spare £50 in my current account to fall back on if I need to, and have a miscellaneous sinking fund that I can dip into if I need it.
Allow an extra £50/£100 in to your budget for any last minute occasions you may not have planned for – and fight temptation to spend it on any impulse, unnecessary purchases.
If you still have it left by the end of the month – which, all being well, you should – you can then move it across to your savings.
Pay yourself first
Once you know what you can afford to send to your savings each month, you need to make a habit of moving this money to your savings accounts each payday.
If you don’t, the temptation to dip in and spend it as it lies there in your current account can become too great, and before you know it, the actual amount you end up saving is significantly lower than what you’d originally budgeted for.
Instead, celebrate the fact you’re prioritising your financial stability and pay yourself first. Whatever it is you’re saving for – be it paying down debt, adding to your Emergency Fund, saving for a holiday, or building a deposit for a house – relish the opportunity to grow that pot even more every month, and feel proud of yourself for prioritising your future.
To avoid any temptation of going over my fun money allowance each month, I move the money I’m allowed to spend on treats across to an entirely different account than the one I get paid into.
By keeping the two separate, it means I don’t then accidentally overspend, and end up encroaching on any of the money that is allocated for the numerous Direct Debits and bills I have.
Through giving myself a spending pot for fun money, it means I know what I can spend on treats throughout the month – from takeaways, to Etsy purchases, to spontaneous Kindle books on offer.
With ZBB, whilst you allocate a role to every penny, you can still keep it vague as ‘fun money’, rather than having to be strict with where this fun money goes. This is invaluable in that I can then spend entirely guilt-free on anything I fancy as I go through the month, because, providing it’s within the fun money budget, I’m still well within budget.
If I’ve run out of fun money one month, it then means I have to really think about whether I want an item once payday rolls back round, or look to side hustle my way to top it up.
Set up Direct Debits
Make life as easy as possible for you by setting up Direct Debits for any recurring bills.
This isn’t even a ZBB tip, just a life tip.
If you’ve got any credit cards you’re trying to pay off, set up a Direct Debit for the minimum amount, and then manually top up what you can afford each month to ensure you won’t get any late fees.
Alleviate any ‘did I pay this?? Am I going to get any overdue fees??’ anxiety by automating as many bills as possible.
Try and pay more than the minimum payment
On the subject of credit cards, if it has anything other than a 0% fee, you want to be looking to get this paid off ASAP.
Once you’ve set up a Direct Debit for the minimum payment each month (to ensure you don’t accidentally forget one month, and end up with a late fee), see whether you can move anything else in your budget to paying off the credit card as soon as possible.
If you don’t have a 0% card, can you look to move your credit card debts to a 0% balance transfer card, to ensure any payments you are making are going towards paying off the total in full (rather than paying off any interest?)
Build up Emergency Funds and Sinking Funds
I wrote a whole post on the difference between emergency funds and sinking funds here, but the take home message is you need to have both.
As part of your zero-based budget, and if you haven’t already, look to create a couple of savings pots that will be there to fall back on if you need.
Emergency funds and sinking funds should be something you contribute to on payday (remember, the whole ‘pay yourself first’ thing we spoke about above?) and ideally you want to prioritise building healthy savings funds over pretty much all else.
Personally I contribute to my emergency fund every month so it’s there to fall back on in a crisis, and also pay £40 a month into a sinking fund I created for my car, another £40 a month towards gifts (meaning that when I reach a particularly busy month for birthdays/Christmas, it doesn’t wipe out that month’s budget), and £100 a month towards my favourite fund of them all: the Adventure Fund.
Is Zero-Based Budgeting Right For Me?
Zero-based budgeting is great because it works for everyone – regardless of circumstances, and regardless of income.
It requires you to analyse where exactly your money is going, to identify any unnecessary spending, and also encourages you to start building your savings funds..
Without a doubt – at least in my opinion – it is the best way to budget if you’re looking to pay off debt, build up savings, still have fun money, and get control of your finances.
Best of all, zero-based budgeting protects future you in any future predicaments, and that is the most important reason to start today of all.
Don’t have time to read? Pin this post to come back to it another time:
If you’re looking for a few other ways you can increase your income this month, these posts might be of interest: