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.
I couldn’t agree more with the part about making savings a line-item on your budget–I’m always amazed when I hear that it falls off of people’s priority list. I make sure to have everything auto-debited and accounted for in monthly budget spreadsheet in terms of savings (although I do give myself a miscellaneous category, so I’m not exactly using zero-based budgeting).
Oh yeah, it’s always good to make savings a priority!
Thanks for explaining zero-based budgeting!
This is the kind of budgeting I do. I didn’t realize it was called zero-budgeting though. I take into account ALL of my expenses, necessary and frivolous including a portion for savings so that all the income is set aside in categories and there isn’t anything left over by the end of the month. It does take time, and I have to readjust every now and then, but it works for me. Luckily I like crunching numbers!
Yeah, it’s the approving of each item that makes it zero-based budgeting, the making sure all of it is spent/allocated is technically called zero-sum budgeting, although in personal finance they’re often both called zero-based.
We started doing this a year ago and it really changed our way of saving paying off debt. It really is a great way to see where all your money is going.
It’s definitely nice to have your money do what you want it to be doing!
This is the type of budgeting I do, and the best advice I can give for those who want to start is “Don’t forget about cash flow”.
I don’t actually do my budget for the actual month, I do it from the first paycheck of the month until I get the first paycheck of the next month.
I do this because when I first started 0 based budgeting, I did do it for the actual month. The problem was, if I have a bill due on the 3rd of the month, and my first paycheck doesn’t come until the 5th of the month, then I NEED money left over from the previous month.
Good point. Cash flow matters too!
It is always interesting to see the many ways budgeting can really help our finances. I have found in the past that if you open an “account” (I keep track of it on a spreadsheet but some people may need to actually open physical accounts) for each area of spending (leisure, bills, investments, savings, grocery, etc.) and allocate the amount available to each account (making sure you don’t go over on any of your accounts), it really helps you control where your money is going each month. This is just the method I have found that works best for me.
That sounds kind of like a virtual envelope method. Good idea :)