If you struggle to make sure your bank account balances at the end of the month, it might be time to try out different budgeting techniques. Budgeting is one of the toughest things we can do. How we budget, save, and spend has a lot to do with our thoughts and feelings about money. Using the wrong system makes us more likely to abandon it in frustration and go back to spending without a plan, which more often than not means struggling to put money aside and pay back debt.
Ready to get out of debt? As Licensed Insolvency Trustees, we can help with financial debt counselling. Book a free consultation where you can give us more information about your financial situation. Through debt counselling, we’ll find the best path out of debt for you. It may include insolvency, i.e., bankruptcy or a consumer proposal, or you may be able to use budgeting to repay your debt and start over. It’s a judgement-free environment that focuses on restoring your financial health.
In the meantime, let’s take a look at zero based budgeting and how it can help you take control over your finances.
What Is Zero based Budgeting?
In a zero based budget, you account for every dollar you earn in a month so that in the end, you have a sum of zero. It’s like giving every dollar a job. The formula is simple:
Income – Spending – Debt Repayment – Savings = 0
Here’s a zero based budgeting example. You earn $3,200 a month after taxes. Here’s what your spending looks like:
- $1,400 on rent with utilities included,
- $200 on groceries, the average grocery bill for an individual
- $50 for your phone plan
- $100 for internet
- $150 for gas
- $150 in car insurance
- Another $200 on other spending, like hair cuts, Netflix, or the odd clothing purchase.
When it comes to debt repayments, you owe $150 for your car, and the minimum payment on your credit card is $200.
You still have $600. Where it should go depends on your goals. If you have a $5,000 balance on your credit card, it will take you over 11 years to pay off that debt making minimum payments. If you increase your credit card payments to $500 a month, you can pay it all back in 11 months.
You could use the rest to build up an emergency fund that could pay for sudden expenses such as car repairs. This hypothetical zero based budget would pay off your credit card within a year.
How to Implement Zero Based Budgeting?
The toughest part of zero based budgeting is accurately predicting your costs. If you don’t know how much you’re going to spend in a month, you don’t know how much to put toward debt repayments without overdoing it and potentially being short when you have to pay another bill or when the rent is due.
Start by tracking monthly expenses to get an idea of what your spending is like. Start with a spending journal where you log every purchase you make. There are several ways you can do this:
- Keep track of purchases in the Notes app on your phone.
- Keep all of your receipts and record them on a daily or weekly basis.
- Going over your bills and receipts from previous months to create a big picture of your spending patterns.
You will also want to make sure you take into account seasonal and occasional expenses, such as updating your wardrobe, paying your insurance premiums once a year, or car maintenance like getting your winter tires. One way to account for these costs is taking them and dividing by 12 so that each month you set aside some money dedicated for them.
What Can You Do If Your Spending Is Higher than Income?
When you’re earning more than you spend, getting out of debt and saving money is a lot more feasible. But if you’re subtracting all of your costs and you’re already close to zero or in the negatives before you take into account higher debt repayments or savings, something needs to change.
This is where debt management can help. It’s not always possible to pay back debt in a reasonable period of time. You might just not have enough money to keep up with all of your bills. That’s a problem, but you do have options, such as credit counselling, bankruptcy, or a consumer proposal. Call David Sklar & Associates today and talk about your debt management options.
Credit counselling can also show you how you can adjust your lifestyle to cut down on expenses. We’ll work with you on what can and can’t be changed and propose a solution accordingly.
Budgeting for Your Taxes
Not every job takes your payroll taxes off with each paycheque. If you do freelance or gig economy work, such as teaching music lessons or delivering food for Uber Eats, it’s up to you to collect and remit your taxes to the CRA, including your income taxes.
That adds another complication to your zero based budget, but if you have an estimate of how much you’re going to earn that year, you can still make an educated guess.
With the growth of the gig economy, we’re seeing more and more people come in with CRA debt. One of the most common mistakes people make is not budgeting for taxes and getting a surprise tax bill. When you owe the CRA, it’s imperative that you deal with the debt. The CRA has extensive collection powers, such as:
- Garnishing your wages
- Freezing your bank account
- Withholding tax benefits
If you work independently, you need to treat your job as a small business, which may mean collecting HST from your clients and managing your own payroll taxes. You may even have to pay your taxes quarterly rather than once a year.
How Much Should You Save vs How Much Should You Spend?
How do you know if your zero based budgeting approach is a good one? There are a few general financial rules to which you can compare your zero based budget, such as the 50/30/20 rule. This breaks down your after-tax income into three areas:
50% of your income should be spent on your essentials, i.e., rent and groceries. Spending more than 50% on essentials could be a sign that you’re living beyond your means, but in an expensive place like the Greater Toronto Area, we often see people who have no choice but to overspend on rent.
20% should go toward your savings goals or paying down debt. If you are deeply in debt, this percentage may be higher, but it’s a good rule of thumb in normal circumstances.
30% can go toward wants rather than needs, such as nights out, entertainment, shopping, etc.
Does Zero Based Budgeting Mean No More Spontaneous Decisions?
It can feel tedious deciding what you’re going to do with every dollar every month. It can quickly feel like you’re stuck in a routine, always doing the same thing and carefully controlling your budget.
When you’re deep in debt, financial restraint is important. Zero based budgeting helps you get out of debt faster and save money. It’s a way of building financial stability and comfort. It takes hard work at first, but once you’re out of debt, you’ll suddenly find you have a lot more of your own income that you can do fun things with.
Once you’re not making credit card payments for past expenses, you can devote more of your money to discretionary spending. You can set aside money for things you enjoy, making sure that your happiness is just as important as your other financial goals.
By continuing to use zero based budgeting, you can set aside your “fun money” guilt-free. If you know you can reach your savings goals and still indulge yourself at your favourite restaurant, you won’t feel the same anxiety about the things that give you joy.
The Benefits of Zero Based Budgeting
You have options to erase debts in Canada, but that may not be the path you want to take. Filing bankruptcy or a consumer proposal can set back your credit history and make it harder to qualify for a loan in the future.
A zero-based budgeting approach may be a way to pay down your debts without having to go down the insolvency route. It can put you back in control of your finances and remain a useful tool long after you’re out of debt.
Talk to a Licensed Insolvency Trustee about the best option for you. Book a free consultation, and we’ll find the best path out of debt for you.
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