How Zero-Based Budgeting Can Help Increase Your Income

Zero-based budgeting means every pound has a job. You will allocate each pound to a goal, so at the end of the month, your balance is equal to zero. It is a good way to start budgeting for those who are living paycheque to paycheque and unable to salt away money.

List your income and expenses and then break down your expenses into categories, from rent to mortgage, takeaways, coffees, and the like. Bear in mind that zero-based budgeting does not involve any purchase through credit card. All transactions will be made in cash, so you know how much you have already spent and where.

In addition to your recurring monthly expenses, you will need to utilise your dime for an emergency cushion, investments and big savings. You cannot have any pounds unemployed while using this budgeting method.

Zero-based budgeting is particularly useful when you are struggling with being in control of your finances. It will help you know how much money comes in and goes out. Because you will know how much you have already spent, it will keep you from overspending. It is a great method when you do not know where your money is going. However, it comes with lots of challenges. You will have to consistently monitor your spending.

3 fundamentals for zero-based budgeting

Here is how you can make the most of zero-based budgeting:

·       Save up to one month of your income

You cannot straightaway jump to a zero-based budgeting method. Remember that you have to assign a goal to each penny, which you can do only if you have enough savings to cover your full-month expenses. First, you should track all your expenses. Grab your bank statement of the previous six months to see the average total spending. You will understand how much money you pay each month and where.

Your expenses will include rent or mortgage payments, food, takeaways, and other recurring expenses. Once you have got to know about your expenses, the next step is to check how much you spend on essential expenses and how much on discretionary expenses. Cut back on your discretionary expenses if you can. It is particularly important if you are unable to save money every month.

If you are a freelancer or a part-time employee, your income might be irregular. It is possible to stick to a zero-based budget without having the previous month’s income. Since the income of two months cannot be the same, it is vital to stash away a larger chunk of money so you do not struggle to meet your regular expenses.

·       Keep tabs on your monthly expenses

As long as you are able to able to meet all your expenses from your income, you think that you are good to go. Unfortunately, it is not enough. A zero-based budget is aimed at increasing your savings amount, so it will take you nowhere if your savings are not going up despite the fact that your every penny serves a purpose.

You come up with a solid budget when you have an idea of your expenses. Categorise your expenses into essential and discretionary. Now, calculate how many expenses you can cut back on. It is vital to whittle down your expenses so you can increase your savings.

Bear in mind that your monthly expenses will vary, so you should keep tracking them every month. It will help you get more accurate results. You should create a manual spreadsheet. As you will jot down every expense, you will have a better understanding of your expenses. Use a budgeting app. “You Need a Budget” is a great app to track your monthly expenses.

You just need to link your account to it, and it will automatically record all of your expenses in one place. Remember that this is only possible when you use your debit card or make direct payments. If you use cash to make all transactions, you are responsible for recording each transaction. Credit card payments may not be added to your app. Make sure you record them if you make any.

·       Pay attention to your income

Zero-based budgeting cannot help you get out of the cycle of living from paycheque to paycheque because you need to increase your income to pay for it. Cutting back on your expenses can simply help you increase your contribution towards your savings. Chances are your expenses are more than your income. Of course, in that scenario, a zero-based budget cannot help you.

In order to increase your income, you should grab a side gig or a part-time job. Unfortunately, in some cases, it can be difficult to increase income. If you are already a freelancer or your income is irregular, you will suffer from the pain of increasing your income. Fortunately, there is a way.

You should base your average monthly income on the lowest amount you earn in a year. This will prevent you from overspending.

Four steps to get started a zero-based budgeting

It can be overwhelming to create a budget especially when you are to cut back on your spending, but this is the fundamental step that every budget is aimed at. Here is how you can get started with zero-based budgeting:

·       First off, you need a month’s worth of savings so you can cover all your essential expenses. You will have to be ruthless with your spending to ensure that you have savings worth one month of your income.

·       Create a manual spreadsheet in which you will record all your expenses. It is much better than budgeting apps because they record transactions that you make through a card or your bank account.

·       Budgeting will be easier if you earn a fixed sum of money every month, but if your income is irregular, make sure you consider the lowest earnings in a year your income and try to cover all of your expenses from this. The additional money should go toward your savings or use it to pay off very bad credit loans from direct lenders.

A zero-based budget will only help you stick to your savings plan. Once you are in a saddle, you can switch to normal budgeting and include discretionary expenses as well. Bear in mind this kind of budgeting is not a permanent solution to your financial problems.

It cannot help you if you get into debt due to your overspending nature or you struggle with your expenses because of a lack of budget.

The bottom line

A zero-based budget is aimed at helping you to boost your savings and get out of debt. It will help you cover all your expenses from your earnings unless it amounts to zero. It can be quite tricky to use this budgeting for irregular wage earners.

You do not have to stick to this budget anymore once you have built enough savings. However, make sure that you will not relapse into your old spending habits. Otherwise, you will be back to square one.