What Is Zero-Based Budgeting?
Budgeting is essential to maintaining a healthy financial life and achieving future goals. If you’re just starting out on your own, budgeting can seem complex and overwhelming. However, it can be as simple as keeping track of the money that comes in and the money that’s spent.
If you feel you’re beginning to master the financial world and want to figure out a budgeting system that works for you, there are many techniques you can employ to build your budget. Zero-based budgeting is one technique that you may find helpful for keeping your finances and goals in order.
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What Are Zero-Based Budgets?
With a zero-based budget (ZBB), you’re tasked with identifying where every dollar of income for the month is allocated. This type of budgeting forces you to set an intent for every dollar you earn, which requires you to analyze your needs and ensure your money is being used for necessities or to better your financial future.
A ZBB differs from traditional budgeting because it doesn’t require you to analyze your past spending to predict your future spending. Instead of estimating what you’ll spend and where you’ll spend it, you’re required to create a plan for each dollar you earn. Your money is separated into categories and there’s no room for leftover money at the end of the month. Your money is distributed to expenses, investments, or other intentional categories.
Zero-Based Budgeting Pros
Creating and implementing any type of budget is beneficial for your finances and financial future. A budget allows you to keep better track of how much money comes in and how much goes out. When you can identify where your monthly income is going, you can take control and reallocate it to the categories where it’s needed.
By having a grasp on what you’re making, what you’re spending, and where it’s going, you can prevent overspending on needless items. When you create a solid budget, you can analyze your expenses versus your income. This allows you to determine whether you need to make a move to increase your income now, before you get into financial trouble down the road. It can also help you identify poor financial habits you’re acquiring — such as eating out too many times each month — so you can fix them quickly.
Zero-based budgeting is a strict way to implement a budget by providing you with an accurate snapshot of where your income is going. This budgeting technique also ensures you don’t waste a dollar needlessly and your money is distributed to a category that can help you reach your financial goals.
Zero-Based Budgeting Cons
Planning and implementing a ZBB can be tough because it’s time-consuming. You must monitor your budget closely and consistently so you can record where every dollar is spent. It can be hard to stick with a zero-based budget if you often incur irregular expenses. When an irregular expense comes into play and you don’t have the means to attack it since your money is allocated elsewhere, you can face financial hardship.
Zero-based budgeting is usually only a useful concept if you earn a steady paycheck and have a set monthly income. If you have irregular hours and don’t know the income you’ll earn from month to month, it can be tough to create a ZBB you can stick with.
In these cases, you may need to use the money you earned in the past month to implement your budget for the upcoming month. However, this requires you to earn and save an entire month of income first. It also requires you to create a new zero-based budget at the beginning of every month.
How to Make a Zero-Based Budget
To create a zero-based budget that gets you on track with your spending, follow these steps:
1. Figure out your monthly income.
Add up your paychecks or other income you earn each month and figure out your total income.
2. Establish your monthly expenses.
Jot down all the monthly expenses you’re responsible for. Your monthly expenses may include utility bills, mortgage or rent, car insurance, or other bills you’re required to pay. Your monthly expenses shouldn’t be more than your monthly income when you add them up.
3. Calculate your seasonal expenses.
Seasonal expenses are those you only encounter periodically and not every month. These expenses could include vet visits for your pet, your best friend’s birthday gift, or a summer vacation. By calculating these expenses, you can plan to allocate some of your monthly income to save for them. This prevents seasonal expenses from blindsiding you and throwing off your budget.
4. Zero out your income to expenses.
To create your ZBB, start allocating your income toward your expenses. Create expense categories and distribute your income to these categories as needed, until you zero out your income.
5, Track your progress.
You may not get your zero-based budget right the first time. Analyze your progress and see if your budget is realistic and whether you’re able to stick with it. You may need to change how you’re allocating expenses a bit before you feel you’ve created a sustainable budget. If you find you’re spending more than you make, you’ll need to cut back on expenses before you get into financial trouble. Try cutting out unnecessary items, such as cable or a gym membership. You could also increase your income by taking on another part-time job or selling items around the house.
Zero-based budgeting focuses on making sure every dollar you earn is used wisely. By creating and implementing a strict budget, you can ensure you’re not spending more than you earn and you can save for your future financial goals.
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This post was updated November 7, 2019. It was originally published November 7, 2019.