Our very own Marcus Holzberg, CFP® was recently featured in an article from CNBC. In it, he discusses the zero-based budgeting method – a system that ensures every dollar you earn has a purpose, whether for recurring expenses, savings, or discretionary spending.
This approach can help ease some discomfort about allocating every dollar before considering what you want to spend your hard-earned money on. However, it is vital to remember that this method is one of many different budgeting tactics, such as the 50/30/20 rule, envelope budgeting, or the pay-yourself-first method. While zero-based budgeting is a fantastic way to ensure that your money is working for you, be sure you understand how to get started and the potential benefits and challenges. If you feel that it may not be a suitable method for you, check out our blog post, 9 Budgeting Tactics You Can Use to Take Control of Your Spending, where you can explore eight other methods to try out.
How Zero-Based Budgeting Works
Zero-based budgeting means assigning every dollar of your income to a 'job' – be it rent, groceries, savings, or debt repayment. By the end of the month, none of your income should be left without a role. By seeing your income and expenses with such detail, this method equips you with a deep understanding of your spending habits so you can be more intentional with how you allocate your money. Doing so gives you a strong sense of control over your finances and makes it less likely that you will spend impulsively or lose sight of your financial goals.
You do this by taking a spreadsheet, a piece of paper, or a journal and writing your gross salary at the top. Then, below that, you start subtracting every expense you have from that number, including pre-tax company benefits and taxes. The goal is that at the bottom of the page, you should be able to write 'zero.' If you have leftover funds, you could save or spend them. Conversely, if you are left with a negative number, you need to look into where you can cut out unnecessary expenses.
In the article, Marcus highlights the flexibility that zero-based budgeting offers. Instead of starting with your gross salary at the top, you could start at zero, then add your essential expenses first, and work your way down to discretionary spending.
Why It Works So Well
The primary reason zero-based budgeting works for a lot of people is its accountability. By utilizing this technique, you can clearly visualize where every dollar is going and see whether your spending aligns with your goals and values. With time, this will reduce unnecessary spending and direct more money toward savings and investments.
Another key advantage is that it encourages adaptability. Unlike other budgeting methods that might rigidly allocate set amounts to categories, a zero-based budget allows you the freedom to adjust month by month, depending on your income and needs. This flexibility can provide a sense of ease and comfort, knowing that your budget can adapt to your life.
The Challenges of Zero-Based Budgeting
While this method can help you gain control of your finances, some may find it rather laborious. It requires a level of consistency that can lead to burnout. One of the biggest hurdles individuals face when sticking to the zero-based budget is the time commitment. Tracking every dollar spent can feel like micromanagement, and it is easy to get off track if you are not diligent.
Is Zero-Based Budgeting Right for You?
Zero-based budgeting is not one-size-fits-all. If you enjoy structure and are motivated to track your finances closely, it can be an excellent way to ensure that every dollar is put to work. However, it might require more customization to fit your needs if you prefer to be less granular or have a fluctuating income.
Budgeting should be about creating a system that supports your financial goals and lifestyle. As Marcus mentioned in the article, there is no right or wrong way of doing it – just guidelines that can be adjusted to help you succeed.
To learn more about strategies to build wealth and secure your financial future, check out the article here in CNBC featuring Marcus Holzberg, CFP®.
If you have questions about your financial plan and working with a financial advisor, check us out. You can schedule a complimentary, no-obligation call with us here!
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
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