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How and why we live on last month’s income

Have you ever plugged your income and expense figures into a spreadsheet to forecast your budget, just to find that seven months down the track you’re facing an unavoidable negative? O oh. On top of that, have you truly ever experienced a “normal” month? Not me.

With forecast budgeting it is often difficult to predict the income you will receive in the future (especially if you own your own business) plus there never quite seems to be much leftover that you could be putting towards extra debt repayment.

When you use ‘zero based budgeting’ instead, you give every dollar a purpose and priority which then leaves the maximum amount available towards paying off your debt.

It took us about six months to save enough money for us to live off last months income. Why do we do this? So we know exactly how much money we have to spend… No guess work.

When you own your own business sometimes the ‘low months’ are predictable (ie xmas and new years) and you can prepare for them but occasionally they come as a surprise. You can be 3/4 through a month before you even realise you don’t actually have as much money coming in this month as usual and that you should probably ‘pull in the belt’ to prepare so instead you go reaching for that credit card…

However, if you have saved a month ahead the above scenario would give you five weeks notice instead of just the one that you will probably need to pull in the belt, so the impact is far less severe.

Living off last months income is not just for business owners either. Anyone who is hoping to leave the paycheque to paycheque cycle can use exactly the same method.

Zero based budgeting is primarily about giving you clarity on your priorities.  This is when you ask yourself “What does this money need to do before I get paid again?

Not only have you prepared for your reoccurring and unavoidable living expenses but you have also allocated amounts to those unpredictable but inevitable long term expenses which are usually the ones that catch us out and we end up again reaching for that credit card.

Last week I listed these tricky occasional expenses for you to help ensure you can be ready for them when they “surprise” you.

Keeping the remainder amount of any unused dollars for living expenses in a ‘buffer’ category, means you have a back up for any other ‘nasty surprises’ until the end of the month. Then, you get to see any categories with left overs and add them to the remainder ‘buffer’ amount which use now swaps to the extra debt payment category.

Now you get to make that very satisfying extra payment in lump sum against your debts! It’s an awesome feeling…

If your budgeting software doesn’t currently support zero based budgeting, make the switch! I have fantastic, easy to use cloud based software included with my financial coaching packages, with a phone app for easy input plus tutorials and support from yours truly.

Take charge of where every one of your dollars go today.