Zero-Based Budgeting | Everything You Need to Know

Zero-based budgeting has been around for a long time, but it has become increasingly popular in recent years.

The concept is quite simple: every dollar of revenue must be justified by a dollar of expense.

Using this approach can be used in businesses of all sizes, and it can help you find ways to save money and improve your bottom line.

It can also be used for personal finances.

If you are looking to get your finances in order, a zero-based budget can be a helpful tool.

This article will discuss zero-based budgeting, including how it is and how to make one, the pros and cons of this approach, and the bottom line.

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So What is Zero-Based Budgeting?

Zero-based budgeting (ZBB) is an approach to budgeting in which all expenses must be justified for each new period.

In other words, it’s a “fresh start” approach that requires every expense to be approved anew rather than simply carrying over previous budget amounts.

Zero-based budgeting aims to ensure that every dollar in the budget is allocated toward achieving specific objectives.

Implementing this type of budgeting can benefit businesses or organizations seeking to optimize their spending and get the most out of their resources.

If you have a surplus of income, you should have a plan ready for how you will allocate that money.

Let’s illustrate with an example, if your income is $4000 and your expenses are $2000, then you have a surplus of $2000.

You can direct $1000 to your savings account and $1000 to your investment accounts.

The key takeaway is that you have an exact plan for how every single dollar will be used to improve your financial future.

Zero-Based Budget Example

To better understand how zero-based budgeting works, let’s explore an example.

Let’s say you have a monthly budget of $500 for groceries.

In a zero-based budget, you would start with that $500 and allocate every dollar to specific items based on your needs and wants.

So, you might break down your budget like this:

• $200 for essentials like food, toiletries, etc.
• $100 for eating out
• $50 for coffee
• $50 for snacks
• $100 for household supplies.

Here’s what it would look like for a business with a marketing budget of $4500:

• $2000 for website design
• $1000 for print ads
• $500 for online ads
• $250 for signage
• $250 for public relations
• $500 for miscellaneous expenses.

These are just two examples of how a zero-based budget can be applied.

Let’s explore ways to make a zero-based budget and dive deeper into the pros and cons of this budgeting system.

How to Make a Zero-Based Budget

The first step in making a zero-based budget is to track your spending for some time so that you have a clear idea of where your money goes each month.

You can do this by looking at your bank and credit card statements or using a budgeting app like Mint or YNAB.

Once you know your spending patterns, you need to set some goals for your zero-based budget.

Do you want to save more money? Pay off debt? Spend less on non-essentials?

After you’ve set your goals, it’s time to start allocating your income to different categories. Here’s an example:

• Income: $3000/month
• Housing: $800 (rent/mortgage, utilities, insurance)
• Transportation: $200 (car payment, gas, public transportation)
• Food: $500 (groceries, eating out)
• Debt payments: $400 (student loans, credit cards)
• Savings & Investing: $200
• Personal spending: $200 (clothes, entertainment, etc.)

As you can see, in this example, every dollar of the monthly income has been allocated to a specific category. This is what a zero-based budget looks like.

It can be helpful to use a budgeting app or spreadsheet to track your income and expenses to see how much money you have left in each category after you’ve paid your bills. This will help you stay on track with your zero-based budget.

Another important tip to keep in mind is that a zero-based budget is not static. Just like any other type of budget, it will need to be adjusted from time to time as your income and expenses change.

Finally, don’t forget to give yourself some wiggle room in your budget.

No one is perfect, and there will be months when you overspend in one category or another.

Just make sure that you adjust your budget for the following month to stay on track overall.

Pros of Zero-Based Budgeting

There are many benefits to using a zero-based budget.

First, it forces you to think about every expense and whether or not it is vital. This can help you cut down on unnecessary spending and save money.

Second, it helps you align your spending with your goals and priorities. When you know your goals, it is easier to choose where to allocate your resources.

Another benefit of zero-based budgeting is that it can help you pay off debt faster. You can get out of debt sooner by allocating more of your income to debt payments.

This budgeting strategy will also help you build up your savings so that you have a cushion to fall back on in an emergency. By consistently directing money into savings, you can grow your account quickly.

Zero-based budgeting can also help simplify your finances. When everything is mapped out and you have a plan for your money, it is easier to stay on top of your finances and avoid financial stress.

Finally, zero-based budgeting can help you save money by forcing you to plan for future expenses.

When you know exactly what bills are coming up and how much money you need to save, it is easier to stay on track.

By thinking about your future, you are developing delayed gratification. This can be a difficult concept for some people, but it is important if you want to be successful with money.

If you struggle to stick to a budget, zero-based budgeting may be a good option.

It can help you become more mindful of your spending and make better choices about where to allocate your money.

If interested, you can read this other article I made explaining What Financial Minimalism Is and How To Achieve It (14 Tips)

Cons of Zero-Based Budgeting

While there are many advantages to using a zero-based budget, there are also some challenges that you should be aware of.

First, it can be time-consuming to track every single expense and ensure that it is accounted for in your budget. This is especially true with inflation and rising consumer goods costs.

Second, it can be difficult to stick to a zero-based budget if you have irregular income or expenses. This is because a zero-based budget works best when you know how much money you have to work with.

Without this information, it can be easy to overspend or underspend in certain categories.

The cost of groceries may be the same for months, but some economic factors may cause several rising costs over a series of months.

For example, a war may cause gas prices to rise suddenly, or a supply chain issue can increase grocery bills.

If every dollar was assigned to a fixed expense, this could be a problem when unexpected price increases occur.

Another downside to zero-based budgeting is that it can be difficult to stick to in the long run.

This is because it requires a lot of discipline and self-control. If you are not used to tracking your spending, it can be easy to let your budget slip.

Finally, if you are not careful, you may cut out necessary expenses to save money.

Budgeting is essential, but by budgeting too tightly, you risk being rigid and uncreative with wealth-building strategies.

Being disciplined is important, but remember to have some flexibility in your budget.

Zero-based budgeting may not be the best choice for everyone.

But if you are willing to put in the time and effort, it can be a helpful tool for managing your finances.

The Bottom Line

Zero-based budgeting is a powerful tool to help you save money and reach your financial goals.

However, it is important to be aware of the challenges that you may face when using this budgeting method.

If you are willing to put in the time and effort, a zero-based budget can greatly improve your financial situation.

Start by evaluating your spending habits and see where you can cut back.

Then, create a plan for using the extra money in your budget to reach your financial goals.

With careful planning and execution, zero-based budgeting can be a helpful tool on your journey to financial success.

If you struggle to make ends meet or have no idea where your currency is flowing, a zero-based budget will give you a much-needed wake-up call.

Following these steps may be difficult at first, but once you get used to it, zero-based budgeting can help you take control of your finances and reach your financial goals.

If you know anyone struggling with their finances, feel free to share this article with them.

Bookmark this page to refer back to when creating your zero-based budget.

Remember that this website is filled with wealth-building information, so explore other articles for enjoyment and education!

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Disclaimer:

We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!