A budget to spend all your money…mindfully
If you’re like most people, then there have probably been moments you’ve wondered: “Where did my salary disappear this month?” or “Why does my salary only last a week or two?”.
These questions may seem impossible to answer, but the truth is, you’re likely not following a monthly budget.
There are various budgeting methods to help you manage your expenses and achieve your financial goals, but in this article, we will focus on a powerful approach called the zero-based budgeting method.
Haven’t heard of it? Keep reading.
First, what is zero-based budgeting?
Zero-based budgeting encourages you to spend every dinar you earn. By this, we don’t mean you should spend all your income on dining out or shopping online. In fact, zero-based budgeting emphasises the importance of saving up, paying off debts, and setting aside funds for future goals, such as fun activities and vacations.
In a nutshell, zero-based budgeting is a method where you allocate your income to cover expenses, regardless of how big or small they are, in a way that when your expenses are subtracted from your salary, the resulting balance is zero. Hence, the name zero-based budgeting!
Zero-based budgeting in companies
Because of its efficiency, zero-based budgeting is also widely used in companies for setting annual budgets instead of the traditional method, which involves adjusting the previous year’s budget to fit the needs of the new year.
In contrast, zero-based budgeting ensures that resources are distributed based on current needs and priorities and acknowledges that budgets can change according to market conditions and external influences. In such cases, using last year’s budget makes no sense.
By starting fresh each year with zero-based budgeting, companies can better adapt to changing circumstances and maintain better control over their financial planning.
How to set a zero-based budget?
Here are the steps you need to get started:
- Calculate your monthly income
Your monthly income refers to what you receive after tax and medical insurance deductions. It also includes any money you earn from other sources of income, such as a side hustle, rental property, or passive income.
Don’t know what passive income is? Read our article “How to make money in your sleep.”
2. Keep track of your monthly expenses
To set a zero-based budget, you need to clearly understand your expenses. Identify your spending categories and estimate the amount you spend on each category.
If you need help and want a more accurate picture of your spending pattern each month, why not take advantage of the spending analysis feature on our mobile banking app?
3. Categorise your expenses
Once you understand your spending habits well, it’s time to categorise your expenses. Consider rent, utility bills, transportation costs, loan instalments, food, clothing, and savings. And, of course, don’t forget to allocate a category for entertainment. You deserve it!
Not sure how much to assign to each category? Use the tag feature on our app to break down your expenses by category, which allows you to know the exact amount to allocate for each.
4. Subtract your expenses from your income
Zero-based budgeting aims to have a zero balance when subtracting expenses from income. If you don’t get a zero on your first try, don’t worry. It’s normal, and we’re here to help you.
If you find you have spare money, congratulations! That means you can start investing to build wealth, pay down your debts, or save for a down payment on a new home.
But if you’re faced with a negative balance, this means that you spend more than you earn and have to reduce the amounts allocated to specific categories, such as the entertainment and dining out categories.
5. Update your budget as needed
Your income, expenses, and priorities may change over time, so it’s important to review your budget regularly. A good rule of thumb is to return to it every 3 months and adjust it according to your needs.
Here’s an example
Let’s say you earn a monthly salary of 1,000 JOD after deductions, and you make an additional 200 JOD from a side hustle and 300 JOD from a tenant. In total, your income amounts to 1,500 JOD.
Now, let’s allocate your income across your monthly expenses:
- Mortgage payment: 500 JOD
- Utility bills: 100 JOD
- Transportation costs: 100 JOD
- Food: 300 JOD
- Savings: 200 JOD
- Entertainment: 200 JOD
- Clothing: 100 JOD
When you add up all these expenses, the total equals your monthly income of 1,500 JOD.
So the equation becomes:
1,500 JOD (your monthly income) — 1,500 JOD (your monthly expenses) = 0.
Simple, isn’t it? Give it a try, and don’t forget to download our mobile banking app to help you.
