After accepting you must change your behavior to get out of debt, you are ready to look at relevant financial engineering tools. Again, I stress that without behavior change, tools and techniques will not improve your financial affairs. You must change your behavior because you choose to spend; money is merely the means to the end.
Zero-based budgeting is an important financial engineering tool for the household, particularly if folks are in debt. Developing and using a zero-based budget will help you sift your expenses. Traditional budgeting starts where you are as a base and then increases current dollar figures. Generally, the focus is on money, not activities, and the process assumes you need the status quo.
On the other hand, zero-based budgeting starts with a clean slate. For a household, it identifies a realistic lifestyle that will lead to minimum expenses in a defined period. It excludes discretionary items, but includes debt repayment plans. Most of all, it does not focus on money but on activities.
A proper zero-based budget for a household should show clear answers in these three areas: goals, plans, and monetary estimates (budget).
- What are the goals for the budget period?
- Is each goal necessary? Why?
- What if you do not do them now?
- Should each needed goal continue the same way?
- Suppose you stopped it?
Here, you are trying to identify your minimum lifestyle level for the period. Will you cut goals and activities so deep that you focus almost entirely on debt reduction? For example, will you eliminate buying clothes, taking vacation, children’s hockey, dance, or other activities?
For an item to qualify as a legitimate goal or activity, you must be satisfied that not doing it will cause major unavoidable disruptions to your lifestyle and household. How important are your daughter’s ice skating lessons?
- Is there a plan for each surviving goal? Is there a plan to control spending on your son’s football activities?
- Should the plan change to require less expenses? Should you carpool to go to your daughter’s soccer games?
- Could you defer the plan and the goal until a greater portion of your debts are repaid?
Monetary Estimate (Budget)
- Notice that financial calculations are just now being discussed, and only in the context of approved goals and plans.
- You will not look at last year’s budget because you will build this budget from scratch, focused on specific needed goals.
- You have to calculate what it will cost you to do each task and activity as if you had never done them before.
- The budget will exclude frills unless they have goals and plans. It will include debt repayment based on your debt repayment schedule.
Zero-based budgeting, done properly, is an effective tool that could benefit households and businesses. However, it is difficult to use because it involves much work. Besides, folks become insecure as it forces them to think unconventionally and creatively, to question the present state, and to embrace change. In short, zero-based budgeting will take you outside your comfort zone.
After doing your zero-based budget, you must get an accountability partner and then set up a reliable review process so you can see quickly effects of your lifestyle choices, compared with the zero-based budget.
I repeat, this is an exceptionally useful tool to help you get out of debt, but first, you must change behaviors that led to your indebtedness.
Copyright © 2012, Michel A. Bell
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