by: holli casto
How to Zero Budget
Zero based budgeting is the most classic form of how to make a budget, accounting for every dollar you spend.
What is Envelope Budgeting?
Envelope budgeting is as straightforward as it gets. At the beginning of your budgeting period, whether it's one month or one pay period, take the amount of cash you have available to spend and divide it into your spending categories.
These categories can be as broad or narrow as you need them to be. Still, if you're getting started with budgeting, we recommend you narrow them down to be pretty specific, like groceries, utilities, entertainment, dining out, coffee, etc. The amount in each envelope is how much you have to spend in each category. Once you run out, you're out.
Why Use the Envelope Method?
Budgeting can be an abstract concept that can be hard to make sense of at times. Keeping track of numbers and going back and forth with your spending electronically and what you have budgeted is a skill you develop over time.
The envelope method is something you might stick with for a long time, but it can also be a great starting point for understanding the basic budgeting principles. Furthermore, if you need to cut back on spending in certain categories, the envelope method will help you get into the habit of cutting back.
The envelope method will also help you avoid overdraft fees. Once you're out of cash, you're out, and you can't spend any more. If you were having issues with overspending while using a card before, you may have been incurring overdraft fees before. Not overspending will help you avoid those.
How to Implement Envelope Budgeting
Ready to give envelope budgeting a whirl? Here’s a step-by-step guide to get you started:
- Calculate Your Net Income: Before you start allocating any funds, you need to determine how much you actually have to work with, this means calculating your take home pay, or net income. Net income is what you take home, and gross income is your income before any deductions like insurance, taxes, and retirement savings.
- List Fixed and Discretionary Expenses: Next, name all of your monthly expenses, including your needs, or fixed expenses, and wants, or discretionary expenses. This is where looking at the last few months' credit card and bank statements will come in handy.
- Allocate Your Budget: Group your expenses into smaller categories, prioritizing your fixed expenses first, like rent or mortgage payments, groceries, gas, loan payments, childcare, and so on. Then, categorize your discretionary expenses, like dining out, coffee, entertainment, subscriptions, and so on. You should also have a goal of saving a portion of your income in this step.
- Label and Fill Your Envelopes: Get as many envelopes as you do categories, and label them based on category. Fill your envelopes with the cash you've allocated toward each area of your budget.
- Spend From Your Budget: Use the money from your envelopes for spending in each category. Once the money from one envelope runs out, you can't spend anything else in that category.
- Decide what to do with leftover money: At the end of the month, you may have cash left over in some envelopes. It's up to you to decide what to do with those funds. If your current goal is to pay down your debt, you may want to put that extra cash toward your loans. If you're trying to save some more, it would be a good goal to put that extra cash in your savings account. Or, you can roll that money in your envelopes into next month's budget.
- Adjust each month: Did you have some areas where you ran out way too quickly or had way too much left over? You can adjust how much you put in each envelope each month to meet your needs. Budgeting isn't a punishment, but a method intended to help you attain financial well-being.
