Benefits of a Zero-Based Budget

A zero-based budget is a method that allocates every pound you bring in each month; distributing it to a combination of expenses and savings. With this budget, you account for every pound you bring in. However, this is not because you went shopping or ate out every day, this is because you have given every penny a ‘job.’

The zero-based budget encourages you to tell every pound you bring in, where to go. It gives you a birds-eye view of your cash flow and enables you to make better spending decisions. If you use a financial coaching service, this is the budget that most professionals suggest because it is the most successful way to achieve your financial goals. 

“How does it work?”

Most importantly, setting up a zero-based budget is simple and easy with these steps.

1. Determine your total monthly income from all sources including side jobs, child support and any other government support.
2. Write down your monthly expenses and if you are unsure, you can pull up your bank statements from the last six to twelve months to inform you whilst you budget.
3. Categorise your expenses according to needs, wants, savings and debt payoff. Create as many categories as you see fit to help you stay within your budget.
4. Allocate your income according to the expenses above and as we mentioned above, give every pound a job! Any money you have left should either go towards an emergency fund, debt payoff, savings or investments.

At the end of each month, your budget should equal £0, because you’ve assigned every pound a responsibility. If you have difficulties working this out, Transformational Financial Coaching can help you with our bespoke financial coaching services. We will help you see where your money is going now and create a plan for where we want it to go next, based on your individual goal.

“What are the benefits for me?”

Although the zero-based budget sounds like a lot of work, it has many benefits. These include the following:

You always know how much money you have. Operating life without a budget is like driving a car without a map. The zero-based budget gives you direction for each expense.

• It is very easy to customise. There aren’t any strict numbers or percentages you must follow with the zero-based budget. You allocate your income as you see fit (within reason). If you want to allocate a certain amount of money for ‘wants,’ you can. However, we suggest you have a good mix of needs, wants, debt pay off (including your mortgage) and savings.
• You can allocate ‘extra’ funds to your emergency fund, investments, or retirement fund. If your budget at the end of the month shows unspent funds, you can easily allocate them to an appropriate area.

You focus on the present and where your money goes rather than looking at your spending after the damage has been done. You are more likely to have better money habits and stop spending money you don’t have when you allocate each pound you bring in.

• You’ll notice areas of your budget that need more attention right away. This includes areas you over estimate. If you have money left over each month, you know you should allocate less money to that expense and instead direct the money to another area, such as saving or investing.

“What else should I know about a zero-based budget?”

Monitor your budget at the beginning of each month. If you live on a variable income or your expenses change often, you’ll need to revisit your budget weekly to make sure you allocate the funds accordingly.

• You must make the distinction between needs and wants according to your standards. For some people, a want may be a need for certain issues. Look closely at your expenses to determine what’s true for you.
• You may need to readjust your budget if your income or expenses change. Don’t just set it and forget it – revisit the budget often and make sure it’s working for you.

The Financial Coaching Favorite!

To conclude, many financial coaches suggest the zero-based budget because it is extremely proactive.

It is a great way to keep yourself accountable and plan for financial freedom if that is one of your goals. If you are having trouble saving for an emergency fund and retirement, the zero-based budget may be what you need to get you back on track.

Use our preferred method to your advantage by downloading our #1 app today! Make a plan and ensure stick to it, everyday. Before you know it, planning your finances will become second nature and you’ll wonder how you ever did without it.