Budgeting is one of the essential tasks to change our money game and move toward our financial goals. While many traditional budgeting techniques can be daunting and rigid, zero-based budgeting may be what you need. Best known for its spending control and flexibility, zero-based budgeting balances the money that comes in and then goes out to make it net zero every month.
What is Zero Based Budgeting?
Zero-based budgeting is a technique used by companies to budget for future monetary requirements without considering historical data. Businesses use the budgeting technique for cost reduction by justifying each business’s expenses.
Individuals and families use zero-based budgeting to simplify their money management. The budgeting strategy uses the net-zero method, where all the incomes, savings, debt repayment, and expenses equal zero every month.
A zero-based budget is one of the best methods of budgeting because it gives every incoming dollar a purpose. It reduces the possibility of impulse expenses.
Zero-Based Budgeting Example
The following illustration shows a simple example of zero-based budgeting. The column on the left shows the income sources and amount, while the right column indicates the money allocated for each expense category. The net balance for the month is zero.
What Makes a Budget a Zero-Based Budget?
A zero-based budget consists of a net zero balance at the end of every month. The total money earned must be equal to the total expenses, savings, and investments. Zero-based budget requires all the money that comes in as earnings should go out in the form of costs, debt payments, savings for emergencies or retirement, or investing.
The zero-based budgeting process does not mean you’ve to spend all the money you earn. It simply means you assign every penny to a particular task so that you don’t have free cash on hand.
Zero-Based Budgeting Example
You can find many zero-based budgeting examples online in the form of excel templates or google sheets. There are some zero-based budgeting apps or template printables that you can make copies of and start using right away.
Most templates on the internet are free, while some are available for a fee that is easily customizable per your needs. You can download this zero-based budgeting template in google Sheets to get started.
This zero-based budgeting template printable may be your solution if you like working with a physical copy. The zero-based budgeting form is straightforward to fill in the printable and keep track of your expenses.
The versatile zero-based budgeting template excel file might be something you love if you prefer working in MS Excel.
Objectives of Zero-Based Budgeting
Businesses implement zero-based budgeting to take control of their expenses. As someone who’d like to take charge of their finances, you should use this budgeting technique to manage spending. The following key points will explain why zero-based budgeting is essential.
Track Every Dollar
You’re tracking every incoming dollar and outgoing money in zero-based budgeting. It will give you a clear idea of how much you make in a month. At the same time, it also shows your spending pattern in each expense category.
Tracking every dollar is the first step to managing personal finance. It helps to optimize the use of every earned penny.
Control Unconscious Spending
Impulsive and unconscious spending is one of the main ways most people waste their money. These spendings are almost impossible to resist because businesses use marketing tactics to create the artificial necessity to make a purchase. People buy into the services and goods they don’t even need.
Zero-based budgeting can help control unconscious spending. Because you assign your dollar to every task or purchase, you don’t have money for any last-minute impulse purchase. If your budget does not allow it, you can’t spend money.
Zero-based budgeting is planning to manage finances. By listing out the earnings and expenses, you’re planning for the future. You’re building a budget by considering all your incomes and necessities. You also set up all the required accounts you may need in the future and start funding them.
How to Create a Zero-Based Budget?
A zero-based budget is straightforward to create and easy to implement. Unlike other budgeting methods, it is very flexible and works as per your requirements. Follow the steps below to create a zero-based budget.
List Your Income
The first step to zero-based budgeting is to list out all your incomes. You may have one earned income or multiple streams of income. You need to list out each income that brings cash into your account every month.
If you have irregular monthly income, you can still use the zero-based budgeting technique to improve your financial planning. You only distribute the cash in hand into the essential items when the income is tight. During high-income months, you fund all the expense categories.
Detail Out Your Expenses
When we talk about expenses, we only consider the items where we spend money like rent, taxes, insurance, food, bills, etc. The zero-based budgeting expands the expense category-wide to retirements, emergency funds, sinking funds, and many more. It is time to get creative with expense categories.
The plan is not to spend all the income and blow your budget but to cover the basic needs and build additional funds for the future. The expenses for your basic needs like food, shelter, and utilities are essential. Anything surplus should cover your debt and future funds.
Track, Review, and Revise Budget
Once you have your income and expenses listed out, you’ve to ensure that your costs do not exceed your income. The net balance should be zero. If you’ve done all this correctly, you’ll have zero dollars at the end of the money.
But at times, the budget and the actual amount vary. Therefore, you need to track, review and revise your budget for the following month. Tracking is necessary to ensure the expenses do not substantially exceed the budget. Review each expense category to make sure the money spent is justifiable. You’ll find out if you’re overspending on any of the categories. Revise the budget for the following month and repeat the process.
Pros and Cons of Zero-Based Budgeting
Zero-based budgeting has its advantages and disadvantages. As stated above, budgeting helps track every dollar, promote future planning and control unconscious spending. It is one of the easiest methods of budgeting that works by spending every dollar you earn into the expense category that also includes funding accounts for the future. The budgeting technique is highly customizable to fit one’s needs. Since it is reviewed and adjusted every month, you’re in complete control of the budget.
One of the main disadvantages of zero-based budgeting is it is time-consuming. Listing out all the income sources and expenses requires time. Tracking expenses is cumbersome and requires a lot of effort.
It may be challenging to implement zero-based budgeting if your income is highly unpredictable. With fluctuating income, it becomes inconvenient to allocate money for spending.
The Bottom Line
Budgeting is essential to get ahead in life financially. Everyone should explore saving money through budgeting challenges or through famous budgeting methods that enhance financial stability.
Zero-based budgeting can provide a simple and easy solution for anyone who is struggling with budgeting. It does not require complex calculation because all you’ve to make sure is whatever money comes in is distributed among expense categories. Your expense category should also include funds for the future. It is never too late to start budgeting. Give this budgeting technique a try and see if this may be a good fit for your finances.