1.3 Zero-Based Budgeting
Lesson Objective: Understand what a zero-based budget is and why you should use it.
A Balanced Budget
The goal of the zero-based budget is to balance your income and expenses. Balanced means two things:
- you don't spend more than you make
- every dollar gets assigned to something (bills, food, clothes, whatever you decide) and nothing is left over
You check for a balanced budget with this equation:
Income - Expenses = Zero
As a simple example, let's say you made $1000 last week. You then assign $500 to rent, $200 to utilities, $100 to groceries, and $300 to savings.
You just assigned all of the money to go toward something and there's $0 left over to assign to anything else. At this point, your budget is zero balanced. A positive result means that you still have money left that you can assign to something (underspending). A negative result means that you assigned more expenses than you have income (overspending).
Every dollar gets put toward something
When you assign every single dollar to something useful before you have it, you are creating a plan for how to spend your money. This can help you reduce wasteful spending because when you buy something you will know whether it is part of your budget. It will be clear to see whether or not the purchase will knock you off plan and you will have the power to make an informed decision.