Zero-based budgeting is a less-common approach to budgeting that can benefit you. In zero-based budgeting, you approve the plans for all of your money ahead of time. You don’t just assume that it’s OK to spend on item X this month because you’ve always spent that amount in the past. Instead, you take a few minutes to think about whether or not item X is really what you want to be spending your money on.
By contrast, many people who budget only plan out their fixed expenditures, leaving the more variable ones to be taken out of the “extra” that’s available each month — assuming there is extra. Many people also tend to forget about savings, or to leave that to last if there’s any money leftover. But savings should be a part of the money you “spend” (allocate) each month.
Advantages of zero-based budgeting
The biggest advantage is that all of your income is accounted for, and all of your spending is planned. There are no surprises. You know exactly what you’re going to be doing with your money, so all that’s left is making it happen.
All that planning may seem like it takes away the ability to be spontaneous or to go out and blow some money on something just for fun, but it’s exactly the opposite. That’s because you can plan for as much spontaneity as you’d like in a zero-based budget. You just decide how much you want to spend or blow ahead of time — and what will happen if you don’t spend as much in that area as you’d thought you might want to. (Will it roll over to the next month? Will it be transferred to a debt or savings? etc.)
Since you do zero-based budgeting on a regular basis (most likely prior to the start of each month), it keeps you aware of where you stand with your finances. It’s easy to tell whether or not you are on track, and to make adjustments as needed to help you reach your financial goals. There are no failures, only adjustments that help you progress.
How to create a zero-based budget
Creating a zero-based budget works much like creating any other type of budget, except that you make sure to re-evaluate it regularly. You don’t take any part of it for granted.
For example, if you sat down to create your budget for next month, you would start by determining what your projected income and expenses are — and what your goals for your money are. Then you’d make a list of each (income by source, expenses by item, and goals) and write down the associated amounts. The important thing is to account for all of your money.
Decide ahead of time how much is going to each bill (such as your housing, car insurance, loans, etc), how much is going to each set of variable expenses (like eating out, fun money, clothing, etc), how much will be invested, how much will be saved for specific goals, how much will go to long-term savings, and how much will be given away.
If you don’t have enough income to cover all of your bills + a little savings, you’ll want to do some adjusting so that you don’t go in the hole. Maybe you need to cut back in certain areas, or maybe you need to take on additional work.
Sticking with it
Once you’ve gotten started with zero-based budgeting (or any type of budgeting), it’s important to stick with it. If you feel like it’s not working for you because you keep overspending, sit down and identify the areas where you’re having trouble sticking to the budget.
It’s common for people to write down what they think they “should” be doing — which can be completely unrealistic — instead of what they’re actually doing. Of course, you may be working on cutting back in certain areas, but be careful not to cut back so much that it’s impossible to succeed. It’s often better to make incremental changes that gradually get you to where you want to be.
Remember that a budget is a fluid thing. It will change over time to better meet your needs. You are in charge of what your money does. Zero-based budgeting can be a great way to make sure your money works for you so that you can be successful.Posted in Budgeting on 09.19.11 with 11 comments.