What makes a budget a zero-based budget?
Starting a budget can be a bit tricky, especially when you are not sure as to which budgeting tool to use. With so many budgeting methods available, you want to start budgeting, but you don’t know which type of budgeting to use. Well, today we will unpack zero-based budgeting. We will cover what zero-based budgeting is, how to start it, its advantages and its disadvantages. At the end, you will be able to know if a zero-based budget is appropriate for you.
What is Zero-Based Budgeting?
It is a budgeting technique where you get to assign a task to your every single dollar. It simply means income minus expenses is equal to zero. Every single dollar that you earn has its purpose, be it paying your mortgage, saving or investing. Both companies and families can use this technique; for families it is beneficial when the goal is to improve finances, while for companies it is useful when trying to identify and cut overspending. ZBB motivates you to plan a budget that caters to spending and saving. Some expenses, like mortgage, are fixed, while expenses like food bills are variable because they are based on how you think in terms of your needs and wants. ZBB is different from traditional budgeting, which relies on previous spending as a starting ground.
How zero-based budgeting works
Below is an illustration of how zero-based budgeting works. The table seeks to guide you on how you can best plan your budgeting strategy. The table can be modified to suit your own categories.
| Ctergory | amount | left to budget |
| Debt Repayment | $-500 | $4,500 |
| Discretionary | $-900 | $3,600 |
| Groceries | $-600 | $3000 |
| Housing | $-1,500 | $1,500 |
| transport | $-300 | $1,200 |
| Savings | $-1,000 | $200 |
| Utilities | $-200 | $0 |
| total amount | 0 |
Advantages of ZBB
- No dollar goes unaccounted for. Zero-based budgeting is beneficial if you want to relieve yourself from paying debts, and you can allocate a certain portion of your monthly income towards paying debts. Having every dollar accounted for makes youuuu be in total control of our money.
- It empowers you to control your spending habits. Zero-based budgeting allows you to track your spending. It is beneficial because it can help you to make adjustments in your spending.
- Met your goals. Zero-based budgeting is a great tool that acts as a roadmap directing you straight to your long-term and short-term goals. It allows you to make clear decisions as to where you want your money to go.
- Increases accountability. It holds you accountable for your expenditures, and it increases budgeting accuracy.
Disadvantages
However, despite its amazing side, ZBB has its own downfall, which will be discussed below.
It is too structured for dynamic needs. It is frustrating because you get to plan your monthly income before you even have it.
Time-Consuming and Complex: Creating a ZBB from scratch is a significant, labour-intensive undertaking, especially for large organisations.
Resistance to Change: Those accustomed to incremental budgeting may resist this major shift in thinking.
The annual justification process may unintentionally lead managers to prioritise short-term gains over long-term strategic investments.
How to make zero-based budgeting work for you.
These are the steps that you need to consider in order to start with your budgeting.
Calculate your monthly income, understand the types of expenses that occur every month-end like phone bills, rent and insurance, add your savings (thus the money that you set aside), decide on your goal (both short-term and long-term goals) and lastly, start budgeting.
If planning to start budgeting today, zero-based budgeting is a useful tool that can help you live life financially free. However, if this technique doesn’t suit you, you can try other budgeting tools like envelope and 50/30/20 budgeting. Visit this page to learn more about these methods.