The following is a contribution from Donny at PersonalIncome.org. If you’d like to contribute to Wise Dollar, please contact us.
You’ve probably heard the term “zero-based budget” thrown around a time or two. Financial guru Dave Ramsey is in favor of the system, stating that “the point of a zero-based budget is to make income minus the outgo equal zero.” Seems simple enough – tell each and every dollar you make where to go.
You’ll probably have a column for housing, utilities, debts, savings, investing, groceries, gas, entertainment and so on and so forth. As an employed individual, it’s not all that hard to determine exactly what you’re budget will be since you know exactly how much money you’ll be making each month. As a self-employed individual, though, it gets a little more involved.
Using a Zero-Based Budget When Self-Employed
You have two different options which we’re going to discuss when getting a zero-based budget to work for you if you’re self-employed. Most people choose the second option, but the first can be incredibly efficient in helping you stay on track with your budget.
Option 1: Transfer from savings at the beginning of the month
Carefully track what you spend for three months and determine a set number that will work for your budget each month. Cut expenses, such as cable, high cell phone bills and gym memberships, so this set monthly number is as small as possible. Then, on the first of every month, transfer that exact amount over from your savings to your checking account. That’s the money you have to work with every month. The money you take in for the month then goes directly into savings. Rinse and repeat.
Let’s look at an example. Say you determine you need $3,500 each month to pay your bills, pay your debt payments, to save for retirement, and to live off of. You transfer that number from savings into checking on the first and you’re set for the month. If you end up making $4,300 that month, you have an additional $800 to put towards your financial goals, whether that’s paying down debt, building a larger emergency fund or investing.
Note that if you are consistently taking in less than you need to survive, you will need to either cut more expenses or find a way to make more money.
Option 2: Assess your budget every time you’re paid
For those that are self-employed, it’s nearly impossible to have a zero-based budget set in stone each month since your income can vary from month to month. If you get paid inconsistently, you’re going to have to be even more in-tune with your finances in order to have the zero-based budget work for you.
So, how do you make it work? For each check that comes in, tell every dollar where to go. That may mean you are assessing your budget multiple times per week. Whether you’re collecting a $250 check or a $5,000 one, you have to tell your money where it needs to go. Pay any upcoming bills, assess your groceries and plan a budget for food, save money, invest money, pay off debt and more.
The end result is to get each check accounted for and to give it a purpose, to have it equal zero. While this can get tedious, especially for those that may have money coming in a few times a week, it’s the only way to have total control over your budget. (Editor’s note: Running a business myself, my wife and I tend towards this approach. We use the free tool at Personal Capital to help us manage our finances and investments.)
Following a zero-based budget prevents you from wondering where all your money went at the end of every month. Whether you choose to plan your month in advance (option 1) or reassess your budget every time you’re paid (option 2), a zero-based budget allows you to get ahold of your finances so you can get ahold of your life.
What are your thoughts? Do you use a zero-based budget in your household? Are you self-employed? Share in the comments below!
Donny Gamble Jr. is founder of Personalincome.org, a published author, and investor. He graduated from The Ohio State University and has a passion for teaching others about alternative investment and retirement strategies. He is a contributor for Huffington Post & AllBusiness.com, along with other personal finance websites.
Photo courtesy of: 401kcalculator.org