I had debts. Credit cards, personal loans, and money taken from family. Minimum money balance was also not maintained in any of my bank accounts. It had been going on for the last 5 years. But then one day I decided that I am going to pay my debt first every month, and only after paying that, I will use what remains for my expenses.
I did not know about zero-based budgeting then, but I knew I would not spend a single rupee on anything unplanned. As a salaried person, it is always tough to get through the month, and the worst part is the last few days. But by using this method, I paid off all my debt in 2 years. I maintain a minimum balance in my accounts and do not have any credit cards.
So let’s see what this zero-based budgeting is.
Zero-based budgeting is a method in which you justify every expense each month. You start from zero, and assign every rupee of income to expenses, debt payments, savings, or investments. This means every rupee has a clear purpose from the start of the month.
It is like labelling every rupee you earn. For example, if you earn 50,000 rupees per month, you divide it as follows:
A = Debt Payment = Rs. 7,000
B = Emergency Fund = Rs. 5,000
C = Savings = Rs. 10,000
D = Essential Expenses = Rs. 25,000
E = Discretionary Expenses = Rs. 3,000
Now, Income – (A+B+C+D+E) = Rs. 0
In this way, every rupee is assigned a label at the start of the month. What happened to me is that even at the end of the month, my money allotted for essential expenses is finished, and if I wanted to use the money allotted to savings, I would see it labelled as savings, not as essential expenses.
That label, which I myself gave them, was based on my whole senses and was planned in a way; it came to me when I was under pressure to buy anything that falls under expenses. In that situation, because they showed me that label, it felt like I didn’t have the money for that expense right now. So 9 out of 10 times I accepted, that saving money is not for expenses, and I did not do the purchase, and in this way I saved the money, and also the amount allocated to Debt payment went to their respective creditors without missing a single installment and in this way I save the compounding interest in some loans and saved that money also and paid all my debts.
The next month, the salary is again Rs. 50,000, and the cycle repeats without taking into consideration how much you have in savings now or how much debt you have paid off until you pay them all. It means you cannot skip anything. Everything starts from zero.
I started doing it unintentionally, but when I was reading a few finance articles, this term came up, and I realised I had been doing it for the last 2.5 years and that it is worth doing.
So follow this zero-based budgeting and change your financial status.
