To start budgeting in a way that truly maximizes your money, try out zero-based budgeting.
Its concept is simple: income minus expenses equals zero.
This budgeting method is more than just a way to organize your finances–it challenges you to reassess and justify each of your expenses.
By sticking to it, you can ensure that every penny you get from your income is appropriately allocated and accounted for.
Keep reading this article to learn more about this budgeting method and see if it can work for you.
What is Zero-based Budgeting?
Zero-based budgeting (ZBB) is all about giving every dollar your earn a specific job–whether it’s to pay your bills, build your savings, treat yourself to some self-care or entertainment, or other expenses.
While it seems to be a straightforward method, it demands you to take a really close look at every spending you make–for your needs, wants, savings goals, and debt repayment.
By doing this, you can:
- Take better control of your money.
- Spot and cut out your unnecessary spending.
- Focus on achieving your financial goals.
Overall, ZBB is a proactive way that you can manage your resources more intentionally and make conscious decisions about where it all goes.
How to Start Zero-based Budgeting
Ready to try zero-based budgeting? Here’s how to get started and make sure your plan fits your real-life spending:
- Identify your total monthly income: Add up your paycheck, benefits, and any other monthly income sources to figure out your total financial resources.
- List your expenses: Itemize your monthly spending, covering savings, essentials (food, housing, utilities), insurance, discretionary items, and any event-specific costs.
- Prioritize essential expenses: Starting from scratch, allocate funds to crucial expenses first, like housing, utilities, and groceries. Make sure to keep your budget realistic and achievable. If you set up overly strict limits, you may end up feeling frustrated and unmotivated instead.
- Build emergency funds: The Consumer Financial Protection Bureau’s research shows that almost 24% of consumers lack an emergency savings fund. Yet, you will need these funds when to give you more security especially when you come face to face with unexpected events, like needing a car repair. Setting aside a substantial amount of money for emergencies can greatly enhance financial stability.
- Evaluate your non-essential expenses: After covering your essentials and savings, determine how much to allocate for your wants. Look for areas where you can trim costs to prevent overspending.
- Review and monitor your spending: Check in on your budget consistently. Observe your financial habits and spending trends, and make thoughtful adjustments when necessary.
Pro Tip: Elizabeth Warren from Harvard Law School introduced the 50/30/20 budgeting rule. This strategy advises allocating your income across three categories: 50% for essentials, 30% for personal desires, and 20% for savings and debt repayment. This method offers a balanced approach to managing your finances.
| Needs | Wants | Savings |
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Zero-based Budgeting Example
To illustrate the workings of zero-based budgeting, here is a basic example demonstrating the calculations:
Ideally, after you subtract your expenses from your income, you should break even at zero.
But let’s be real—that’s not always the case.
If you have some extra cash left over, it’s a great chance to invest, pay down debt, or transfer them to your savings.
However, if you’re in the red–or your expenses are more than your income–you could be spending beyond your means.
According to The Currency, nearly 30% of Americans admit they splurge too much on non-essentials.
So, start by cutting back on luxuries you don’t need, and think about ways to bring in extra income.
Zero-based Budgeting vs Traditional Budgeting
Traditional budgeting and zero-based budgeting are two distinct approaches to financial planning, and their differences lie in their methodologies and levels of rigor.
| Traditional Budgeting | Zero-based Budgeting |
| Based on historical spending patterns | Starts from zero (zero-based) |
| Analyzes only new expenditures | Analyzes both new and old recurring expenses |
| Presumes that current allocations and expenditures are still valid | Demands a detailed examination and justification of each line item in the budget |
| Changes are made based on incremental variations or adjustments | Allocates funds based on current needs, irrespective of the previous budget |
| Generally requires less time during the initial budget creation | Involves a more time-consuming and rigorous process during the initial budget creation |
Advantages and Disadvantages of Zero-based Budgeting
Switching to zero-based budgeting in your accounting practices has its perks.
- You become more aware of how much money flows in and out, preventing you from spending what you don’t have.
- You align your spending with your financial goals.
- You cut costs and give less room for impulsive or unnecessary purchases.
But ZBB has its downsides, too.
- It can feel too strict for those who prefer having a more flexible approach to spending.
- It can take lots of time and effort to create a new budget tracker from scratch each time.
Using a ZBB template can make things easier, but remember that ZBB leaves little room for mistakes. This means if you forget to account for a big expense, it could throw off your whole budget.
Frequently Asked Questions (FAQs)
Do zero-based budgets work?
Zero-based budgeting can effectively help you manage your finances, depending on your preference, financial goals, and willingness to follow a structured budgeting approach. Although it may be time-intensive and demanding to keep up with, it can be a powerful tool for achieving financial success if you find that it aligns with your financial objectives and lifestyle.
What is the easiest budgeting method?
The pay-yourself-first method is a straightforward but impactful budgeting strategy. It entails saving a part of your paycheck for savings and debt repayment before other expenditures. You can focus on setting up an emergency fund, or reducing high-interest debts while maintaining the liberty to spend the rest as you wish. This method is ideal for those who dislike tracking every expense yet wish to save a consistent amount monthly.
What weakness does zero-based budgeting overcome?
Zero-based budgeting overcomes the weakness of budgeting methods that lack precision and may lead to oversight or miscalculations. Ensuring that every dollar is allocated purposefully and the budget balances to zero addresses the challenge of potential errors or omissions in budgeting. The strict allocation of funds to specific categories prevents the oversight of significant expenses, promoting a more accurate and controlled financial planning process.
Summary
Zero-based budgeting offers a fresh perspective on your finances, encouraging you to reassess and justify every expense. First, identify your monthly income, list expenses, and prioritize using the 50/30/20 rule. With this technique, you can develop better financial habits and track your expenses more effectively.
