At its core, creating a personal budget is telling your money what to do, ideally before the start of the month. How many times have you asked yourself “Where the hell did my money go?”, or think to yourself ” I thought I had more money in my bank account”. Those statements used to run through my mind…often. I thought the answer to this problem was to make more money. I thought that by making more money I wouldn’t have to worry about where my money
Specifically, a zero-based personal budget which is a type of income and expense planning approach that allocates every dollar to an expense so that your income – expense = zero. Now, these expenses can be any category you want: fun money, vacation savings, a new dog, the expense category really doesn’t matter. The core tenant with a zero-based budget is that every dollar is allocated to an expense category. If you want to see examples of a zero-based budget, I’ve published two articles
Although zero-based personal budget planning is a rather mechanical activity where you ‘zero out’ your income against your personal expense categories, there are 4 pillars which serve as the foundation for a zero-based budget. All 4 pillars operate in unison like 4 legs on a chair, take one leg away and what happens to the chair? It collapses. Follow these 4 steps, and you’ll feel like you a got a raise.
Rule 1: Know every expense
It does not matter if you make $1,000 or $100,000, you need to know all of your expenses, yes even the $0.99 Apple iTunes recurring expense. For example, I have $9.93 of
Rule 2: Know the due date of each expense
When I was younger and first started making more than $100k a year, I used alot of ‘mental math’ to manage my money. Not really knowing the exact due dates of individual bills (e.g. utilities, cable) but jusitfying it by knowing that regardless if the bill was due on the 3rd or the 20th, I was reasonably confident that I’d have enough cash in the back to cover it. Although this works for many people, it creates a scenario in which it’s too easy to lose track of expenses while simultaneously encouraging potentially wreckless spending. To avoid this, put each expenses’ due date in the expense line item. This will also ensure you know if it’s a bill you’re paying on with paycheck 1, or paycheck 3. Know the exact date each expense is due.
Rule 3: Every dollar has a budget
Some people call this ‘zero based budgeting’, which is a fancy way of taking every dollar of income and mapping to a expense. If you earn $11,324.56 in one month, then you would have $11,324.56 of expenses, not $10,500 or $11,300. This month, I have $16,636.53 of income, so i’ll have $16,636.53 of expenses. An easy way to manage excess income is to allocate additional earnings to a single discretionary category, in my example, the wedding. Your remaining balance (income – expense) should always equal 0.
Rule 4: Pay your bills with your debit card
Personal finance is 80% personal and 20% finance. I like to think that making the budget is the easiest part. Enforcing the budget, agreeing on expense category budgets with your significant other, figuring out how much money you actually spending eat out every month, that’s the personal part of personal finance. Don’t give up, it took me 3 months to get an accurate picture of how much money I really spent on restaurants and groceries. With my personal finances now under control, the feeling is amazing. It’s like I gave myself a raise – for the fist time in my life, I was telling my money what to do!