How to Use It and Be Successful
Budgeting means planning how you spend your money each month, and there are various approaches to doing it. One popular budgeting method is called zero-based budgeting. It’s an effective approach because it enables you to dedicate all your income to your full list of financial goals, from taking vacations to saving for the future and paying down debt.
What is zero-based budgeting?
Zero-based budgeting is a way of managing your money where you assign every dollar you earn to specific categories where you “spend” your money. These spending categories include actual expenses related to needs and wants, as well as both short- and long-term savings and debt payments above the minimum required. The goal is to make sure that, by the end of the month, the total amount you earn minus what you spend equals zero.
You can choose to repeat the same spending categories and amounts every month, or you can mix it up. If, by the end of the month, you find you didn’t spend all the money you allocated for a certain category, you can add the remaining amount to the next month’s budget or move it to another category, like your emergency fund or paying down debt. In this way, zero-based budgeting is similar to the envelope system, in which you put money for different spending categories into separate envelopes.
Zero-based budgeting versus traditional budgeting
Zero-based budgeting usually starts new each month, whereas traditional budgeting builds on previous budgets with incremental adjustments. While traditional budgets might assume the continuation of existing expenditures without thoroughly reassessing all of them, zero-based budgeting requires reviewing (and justifying) each expenditure before allocating money to it.
The advantages and disadvantages of zero-based budgeting
One advantage of implementing a zero-based budget is that it heightens your awareness of your financial inflows and outflows, acting as a guardrail against spending beyond your means. It can be especially helpful for people who haven’t closely tracked their finances or feel a lack of control over their spending. The zero-based budget is also customizable, giving you the flexibility to tailor the budget to your unique financial situation and goals.
The downsides to zero-based budgeting include time investment since using it effectively means assessing each month’s expenditures in advance and recreating a budget. Close and consistent monitoring of your spending is also key to success with zero-based budgeting. Other challenges may come when you have variable expenses like holiday purchases or unexpected events. In preparation for those types of situations, you can include your zero-based budget deposits into a savings fund for emergencies or other expenses.
Irregular or unpredictable income can also make this method tricky (such as with small business owners, freelancers, seasonal workers, hourly workers, or workers who work on commission/tips). If that’s your situation, you can prepare by using the previous month’s income for the current month’s budget, though that requires saving a month’s worth of income as a buffer for future expenses.
Zero-based budgeting example
Monthly income: $3,500.00
Left over: $0
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