The Budgeting Equation

Whether you are living beyond your means or looking for ways to save more, getting your monthly cash flow back under control will be your top priority. To do this, you need to balance your expenses, including debt repayment and savings, within your income. This is often called zero-based budgeting.

Simply put, your budgeting equation should look like this:

budgeting-equation

Zero Based Budgeting

Using a concept like zero-based budgeting is the key to creating a proper budget. When you create your budget you simply allocate EVERYTHING you make to some purpose.

That means specifically planning not only your living expenses but making sure that your budget meets your debt repayment and savings goals. If you have money left over, put more towards debt repayment or savings. Not enough, you need to find more ways to save.

You are working to balance your budget to zero. That doesn’t mean you spend everything you make, it means you allocate every dollar you make to some purpose.

So if you take home $2,000 you are going to allocate a total of $2,000 to spending, debt repayment and savings. If you want to pay off your debt sooner, you need to spend less. If you want to save more money, you need to find more cost savings.

Balancing Priorities

The effect of using a zero-based budgeting model is that you will be forced to choose priorities. Do you want to take that vacation or pay off your debt faster? Do you want to buy your lunch every day or would you rather save the money and put it towards an emergency fund?

By balancing your budget you won’t be going in the hole every month. That means no new debt, which is a good start.

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