Understanding Zero-Based Budgeting

budgeting

When you think of the word “budget,” it can feel like financial jail. Many people are afraid of getting locked into a money plan that leaves them nothing for anything other than the bare necessities. However, understanding your finances is key to buying your first house and creating a budget is the first step.

The Basics

A zero-based budget is a fancy term for giving every dime of your money a name. When money comes in, be it from a regular paycheck, tax return or windfall inheritance, it is immediately earmarked.

This doesn’t mean that all of it has to go toward paying bills, beefing up your savings account or paying down debts. You may have names or categories for your budget that include eating out, new clothes or even “fun” money that you can spend however and whenever you want. As long as every dollar of your income is categorized, you’ve got a zero-based budget.

Getting Started

Getting started with a zero-based budget is as simple as gathering all of your expenses and income and taking stock of them.

If you use one bank account to pay for everything, it may be easiest to grab a couple of months’ statements to you an honest picture of how you spend your money. Then divide your income into as many categories as you need to get the unallocated money total to zero, and you’re done.

Just like with anything else, you won’t be great at budgeting at first. It may be helpful to use an Excel spreadsheet or a budgeting app like Goodbudget, EveryDollar or YNAB so you can change categories and enter transactions on the fly.

How it Helps

Getting approved for a home loan today is more difficult for most people than it was ten years ago before the housing crash. Lenders are paying much more attention to factors such as credit scores and bank account balances. Creating and following a zero-based budget can help you see where you have extra funds to pay off old debts, increase your credit worthiness and save up for a down payment.

Most importantly, it will force you to take an honest look at where you money is going on a regular basis, so you can make sure every dime is working for you.

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