What is Zero-Based Budgeting? And Should You Try It?
Have you ever heard of zero-based budgeting? While originally conceived of in the 1970s as a management tool for companies and organizations looking to cut back on spending for the sake of more efficient profits, it remains a unique method of budgeting that translates well to personal budgeters or individuals who own a small business.If you are focused on saving as much money as quickly as possible, a budgeting concept with “zero” in its name may sound especially intriguing. In this article, we will go over the basics of what zero-based budgeting entails and take a balanced look at its pros and cons to determine whether it’s the right fit for you.
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What is Zero-Based Budgeting?
At its core, zero-based budgeting states that every dollar spent must be accounted for and must not exceed the budgeter’s monthly earnings.
Every month begins at a base of zero. Funding is then allocated to every function according to needs, regardless of the previous year’s budget.
At the end of the month, the goal is for your income minus your expenditure (including essentials, debt payments, and savings) to not dip below zero.
In short, zero-based budgeting, or ZBB, has one goal: to ensure that you live below your means.
Instead of setting a budget and working from there, ZBB challenges you to think carefully and justify every dollar you spend. While this may seem strict, every dollar counts.
How Does Zero-Based Budgeting Work?To best incorporate ZBB into your budgeting cycle, you will want to track all of your expenses throughout the month and then add them up at the end of the month.
This includes fixed expenses (such as rent, minimum debt payments, mortgage payments, or internet and phone bills) and expenses that naturally carry more fluctuation (such as hydro, gas, and grocery bills, and leisurely spending). You will then subtract this spending from your after-tax income. Whichever amount remains should then be allocated to debt or savings.
By tracking every dollar that you spend, you may find that you are cutting costs more easily. One reason for this is that ZBB works in the opposite way of a traditional budget.
Instead of planning your spending out ahead of time — which could result in you accounting for and spending more than what is necessary — you instead spend conservatively and spend special care to make sure that your budget does not dip under zero.
If this sounds like it could be a challenging lifestyle to follow, you’re not exactly wrong. ZBB is a budgeting process that takes a considerable amount of self-discipline and commitment.
However, when implemented correctly, zero-based budgeting can be a very rewarding form of cost reduction. To better help you determine if ZBB is for you, we will now take an honest look at its advantages as well as disadvantages.
Steps to Creating a Zero-Based Budget
The concept of a zero-based budget can seem more complicated on the surface than it is. Here is a step-by-step guide that tells you how you can get started with your ZBB.
1. Start from scratch
Start your budgeting with a blank page that does not consider last year’s budget.
2. Evaluate and estimate
Take a look at your spending habits, and write down your monthly expenses. If these expenses tend to stay the same each month, that’s great! However, suppose they fluctuate, it’s okay to estimate them to the best of your ability.
The important thing is that you are honest with yourself and do not spare the listing of any expense, no matter how small or gratuitous.
Take a look at how your spending is doing and try to determine areas where you can cut down or even eliminate costs.
If possible, automate your monthly expenses so that they will come directly out of your account. This will help you commit to and stay on top of your monthly zero-budgeting goals.
Now is the time to take your zero-based budget and apply it directly to your lifestyle.
Zero-Based Budgetting Rule Pros & Cons
Pros: The Good StuffIf zero-based budgeting is so prosperous, why isn’t everyone doing it?
Like most budgeting systems, zero-based budgeting fits a certain kind of lifestyle and isn’t for everyone.
Here is an overview of what its adopters praise as the biggest advantages of zero-based budgeting.
It’s realistic: ZBB helps budgeters determine which spending is truly essential and which spending is avoidable.
Synchronicity: ZBB requires multi-budget households to coordinate and communicate with one another.
Cost-saving by nature: As ZBB forces individuals to look at their budget under a magnifying glass, the end result is often savings.
Pristine record keeping: Following a ZBB forces individuals to keep clear and precise records.
A sense of control: Following a zero-based budget can help reform over-spenders and chronic money-worriers alike by reassuring them that they know exactly where their hard-earned money is going.
Customizable system: ZBB does not discriminate based on budget — no matter the cash flow you have coming in, you can still practice a zero-budgeting way of life.
Cons: The Not So Good Stuff
There is a chance that zero-based budgeting may not be for you, and that is okay. There is more than one budgeting system out there.If you wonder whether or not zero-based budgeting is a good fit, determine whether or not any of these points hit a nerve.
It’s time-consuming: Although using an app or spreadsheet template can help, the fact of the matter is that drawing up budgets from scratch still requires quite a bit of administrative time.
Stress-inducing: If you are somebody who has a lot of anxiety wrapped up in money, zero-based budgeting can cause a sense of panic, especially if you experience a month in the negatives.
Not friendly to gig workers: If you are somebody who works hourly or freelance, it can be difficult to apply a ZBB to your lifestyle as your income may change depending on the month.
Relatively stringent: If you are somebody who prefers to not feel limited by their budgeting, zero-based budgeting may feel a bit like they are being forced to watch over every single financial move they make, no matter how minute it is.
Whether or not a ZBB is for you, it’s useful to have a working knowledge of the different types of budgeting philosophies that are out there.
After all, the hard part is determining which one best suits you — the only step from there is to live your life and let your budget do the rest.
Frequently Asked Questions
Not exactly. However, zero-based budgeting and the 50/30/20 rule work well together, as the 50/30/20 can help you identify areas in which you are overspending or underspending.
Of course — there is an app for everything! For your convenience, we have compiled a list of the best budgeting apps.
Absolutely. Keeping a zero-based budget can help do a number of things that will affect your credit score in a positive way— such as saving money, paying off debt, and paying your bills on time.