Zero-based budgeting (ZBB) starts at zero each month and assigns a clear purpose to every dollar of your income. The idea is simple: You have a zero balance each month and then divide your income between paying off debt, savings, and other accounts. Your expenses should equal your income so that no money can go unaccounted for. Zero-based budgeting requires you to reevaluate and justify every expense from the beginning, unlike traditional budgeting techniques based on the past few months’ expenses, encouraging wiser spending and saving.
1. Why Does Zero-Based Budgeting Work?
Zero-based budgeting forces you to carefully consider every dollar you spend. This can help you control your finances better by avoiding frivolous spending and focusing your priorities on what matters. Unlike other budgeting methods that allow you to maintain your spending habits from previous months, ZBB requires you to review your spending habits each month so that you have the opportunity to cut back on items you don’t need. It also ensures that every dollar you spend is spent wisely, with all your money going toward paying off debt, bills, or savings.
2. How to Create a Zero-Based Budget
Getting all of your financial data, including income and expenses, is the first step in learning zero-based budgeting. Start by calculating your total monthly income, which is your salary plus any freelance, investment, or other types of income. Next, make a list of your fixed expenses. These monthly bills include things like utilities, car payments, insurance, rent or mortgage, and more. Next, make a list of your variable expenses—the expenses that change from month to month, including groceries, travel, and entertainment. After you’ve recorded all of your expenses, divide each dollar of income into one of these categories so that every penny has a specific purpose.
3. Group Expenses
Categorizing your expenses is a great way to successfully implement zero-based budgeting. If we look at broad categories, housing, transportation, food, entertainment, savings, and debt payments are all likely to go down. If necessary, segment each group further. For example, under “Food,” you might discuss shopping, dining out, and snacks. If you have a lot of different expenses, you can create subcategories to make each dollar more visible. The secret is to make sure that each dollar has a specific purpose and that all of your expenses match your income exactly.
4. Organize Your Expenses First
Zero-based budgeting forces you to prioritize, because not all expenses are created equal. Take care of your most basic needs first: housing, utilities, transportation, food, and health insurance. Once these basic needs are met, you can consider other areas, such as paying off debt, savings, or discretionary spending (like dining out and entertainment). By prioritizing non-negotiable expenses first, you can ensure that your financial foundation is strong before you allow yourself to spend money on less necessary items. By prioritizing your spending, you ensure that your money is focused on the most important events in your life.
5. Adjust Your Budget to Allow for Flexibility
Life is volatile, so your monthly expenses can fluctuate. Zero-based budgeting gives you flexibility. If you find someone who can cover an unexpected medical expense or make a large purchase in one month, you can adjust your categories to accommodate that extra money. For example, if you need to cut back on entertainment or dining out expenses to make room for an emergency, you can quickly rearrange your allocated funds. The secret is to always make sure that your total spending matches your income while still meeting your most important financial needs.
6. Incorporate Savings into Zero-Based Budgeting
A key component of zero-based budgeting is a strong focus on saving. Many people don’t set aside money for savings, treating it as secondary. Savings under zero-based budgeting should be the “fixed” expenses that are entered at the beginning of the month. Whether your savings are for an emergency fund, retirement, a specific goal, or something else, make sure you set aside some money before spending it on other needs. This will ensure that you are creating wealth regularly and will also help you pay for the expenses that you need.
7. Benefits of Zero-Based Budgeting
Zero-based budgeting has many benefits. The most important of these is that it provides a clear picture of your monthly financial status. By allocating every dollar to a specific purpose, you can become more aware of your financial goals and make more informed financial decisions. Zero-based budgeting can also help you reduce impulse purchases by increasing your awareness of your spending so you can focus on what matters. Zero-based budgeting can also help you uncover unnecessary spending patterns and allow you to make changes over time because you are constantly reviewing your spending.
Conclusion
Using a zero-based budget can help you manage your money so that every dollar has a purpose and you can intentionally prioritize your most critical financial needs. While the method may seem daunting at first, it provides a clear framework that can help you achieve your financial goals and avoid unnecessary spending. Zero-based budgeting helps you build financial security and improve your overall financial health by tracking your spending, adjusting your budget as needed, and incorporating debt repayment into your plan. Mastering this budgeting method relies primarily on consistency, adaptability, and thoughtful spending.
FAQs
1. Define zero-based budgeting.
Zero-based budgeting (ZBB) is a technique where you divide each dollar of income into a specific debt payment, savings, or expense so that your income minus expenses equals zero. This allows you to review and defend your monthly spending, rather than simply deferring last month’s budget.
2. What is the difference between zero-based budgeting and traditional budgeting?
Zero-based budgeting starts from scratch each month, while traditional budgeting typically bases future spending on the previous month’s spending habits. ZBB allows you to create your budget from scratch, ensuring that all of your income is used.
3. Do I need to track every expense with zero-based budgeting?
You should track every expense, no matter how small. Zero-based budgeting requires that every dollar has a purpose and that all money is categorized. Keeping track of small expenses helps you live within your means and avoid overspending.
4. How should I prioritize my expenses with zero-based budgeting?
Start by setting aside money to cover your basic needs, namely housing, utilities, transportation, and food. Once your fixed costs are covered, prioritize saving and paying off debt. Once you’ve covered these non-negotiables, you can set aside money for optional uses, such as dining out or entertainment.
5. How should I handle unexpected expenses using zero-based budgeting?
Zero-based budgeting gives you more flexibility, allowing you to adjust your monthly budget if unexpected expenses arise. To pay for emergencies, you can cut back on spending in discretionary categories, including entertainment. Always make sure that your income is sufficient to cover your expenses at the end of the month.
