The topic of debt reduction is multifaceted, but when I think back to what was the most basic concept that served as a foundation for financial health, it has to be the household budget. There are many rules for budgets, and if I go into all of them in this post it will get confusing. So for today, I just want to address the concept of the Zero-Based Budget.
The Zero-Based Budget
In a nutshell, the zero-based budget is a budget that begins with how much money is coming in, and works backwards, paying bills by priority, until we reach zero.
The zero-based budget ensures that every single dollar that comes into the household is put to its best use. Because budgets are highly individualized, I’m going to give you an overly simplistic example to illustrate the basic concept, and then you can tweak it to fit your own household.
Say the Right-Clicks are paid twice a month, $1000 on the first of the month, and $1000 on the 15th of the month. What I am going to do is figure out all of the things we are going to need to spend money on between the time we receive this first check for $1000, and the next one that is due on the 15th of the month. This will be our household budget, December 1-15.
Let’s say our semi-fixed “need” expenses are as follows:
|Expenses||Date Due||Amount Due|
|Car Insurance||December 5||$100|
|Gas Bill||December 10||$40|
|Electric Bill||December 5||$150|
|Groceries||(Enough for 2 weeks)||$200|
|Mortgage*||Due January 1*||$400|
So, after paying all of our required expenses, we’ve got a total of $890, which leaves us $110 to play around with. We can use this money for a variety of things, such as pocket money, savings, gifts, or what have you. This is where your own priorities come in. Do you want to put $110 towards your beginner emergency fund (yes!)? Or will you need some of that for Christmas? (Probably.) What about putting extra money on debt (aka the “debt snowball,” which I will talk about later.) How you make these choices is completely up to you, but as you pay more and more attention to where your money is going, you might just find that you’re making better choices for yourself and your family.
*In this hypothetical, as is probably the case in most real budgets, the mortgage is due at the first of the month, but the amount of the mortgage is large enough that you have to allow for it in both budgets. Here, we’re taking out one half to save for the payment later in the month.