Having a handle on your monthly spending can mean the difference between living a rich life and constantly feeling worry about the money you have.
Whether you’re retired or not, building and keeping a simple budget is one of the best ways to manage your money. There are all kinds of different budgets you can follow, but probably the best is the zero-sum budget.
Zero-Sum Budget
Your goal should be: Income – Expenses = 0
Example: If your monthly income is $4,000, after all your expenses are taken care of, you should have $0 left to spend. This does not mean you spend all your income in the traditional sense. If your utilities, housing, transportation, and food account for $3,000 of the $4,000, you need to assign a decent purpose to the remaining $1,000 you are going to spend. E.g.: savings, pay off debt, emergency fund, entertainment, eating out, etc.
The point is you don’t want to have that extra money sitting idle in your bank account without it being dedicated to some named purpose. Otherwise the money will get spent, probably not on something that matters most.
Important: Zero-sum budgets work by using LAST month’s real income to pay for THIS month’s expenses, so you have a savings cushion equal to at least one month’s expenses before you start a zero-sum budget..
Building your first zero-sum budget is easy, simply follow these 5 steps:
1.) Take stock of your expenses
Start with general expenses you have to pay every month, like rent/mortgage, utilities, phone, groceries, etc. Then, think about larger, less frequent expenses like insurance premiums, car registration, Christmas/Birthdays presents, etc. Estimate medical emergencies, car repairs, a new cell phone. At the end consider also any outstanding debts that have to be repaid. Factor in some fun money like social frinks7eating out, sport or hobby. here too.
2.) Determine your monthly income
Figure out how much money is coming in every month. Identify your sources of monthly income and other steady cash flow.
3.) Give every Dollar a purpose for spending
Start assigning every Dollar to your most immediate expenses, like housing, groceries, utilities, etc. Then start assigning dollars to less immediate expenses, like emergency savings, insurance, debts, etc. Whatever you have left should be assigned to a category that matters most to you.
4.) Spend and adjust as necessary
You do not have a crystal ball. The chances of you sticking to your budget exactly how it was laid out are almost zero. This is expected. If you overspend on groceries this month, you can always adjust another spending category. E.g. you could skip a dinner out.
Sticking to your budget is less about sticking to exact figures for each expense and more about sticking to the process and philosophy of making every dollar work for you. The closer you can align your spending with your zero-sum plan, the closer you’ll be reaching your goals.
5: Rinse and Repeat
Repeat step 2-4 every month. It’s up to you to decide how money goes to work for you. Budgeting is not only a tool for people struggling to get by. It’s a tool that helps you organize the money you earn and how to spend it wisely.
Sven Franssen