I’m a fan of zero-based budgeting because of its simplicity: Income – Expenses = 0. This means you account for everything, saving and spending, when setting your budget. As a result, you make sure savings is a key priority for your long-term goals instead of becoming an afterthought.
What goes into a zero-based budget? The first part, income, is fairly straightforward. Estimate how much you’re going to bring in this year after tax (there are plenty of tax calculators online to help you with this). The next part, expenses, starts with your “savings” bucket. If you don’t have a goal in mind, a good rule of thumb is to save at least 15-20% of your net income. Once you’ve set your savings goal, add in the rest of the categories where you’ll spend money this year: housing, food, healthcare, travel, fun & entertainment, household items, etc.
If you’re not sure what to estimate for these categories, try reviewing your past spending first. Credit card and bank statements are very helpful, and if you haven’t done this “spending audit” in a while (or ever), now’s the perfect time. Use past spending to estimate spend in various categories without adjusting anything (even if your budget isn’t balancing to 0 yet).
After your estimates are in, it’s time to compare. If your expenses are currently less than income, I recommend splitting the difference 50/50 between savings and a “fun budget”, increasing those categories accordingly. If your expenses are more than your income, you’ve got 2 options: increase your income, or decrease your expenses. Unless you have an immediate way to increase your income (e.g. take on more shifts), focus on trimming expenses first. Some adjustments are easy (maybe you found a couple subscriptions in your “spending audit” that you don’t actually use, or you’re spending a lot on fancy cooking equipment that’s just collecting dust on the countertop). Other choices require you to really think through where you want to spend your money (maybe you want to keep eating out, so you’ll cut back on your clothing and fun/entertainment budgets to balance the books). Finally, review the entire budget and see if there’s anything you’d want to shift (maybe you want to pay off debt a lot more aggressively this year, so you’re going to temporarily reduce your savings rate and spend on household items in exchange). The end result will be a budget with everything accounted for, income and saving and spending, to keep you on track with the life you want to live within your means.
Andrew Jabara 