Zero-based budgeting: steps and benefits

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Budgeting gets a bad rap. When you hear the word budget you probably cringe. Until you understand the benefits of a zero-based budgeting plan and what it can do for you, it may seem restrictive. Budgeting means you have a plan for your money. It doesn’t mean you go without or stop living your life.

What is zero-based budgeting

The goal of zero-based budgeting is your income minus your expenses should be equal to zero every month. A zero-based budget makes you think about how every dollar is spent.

Income-Expenses=Zero 

If you have money “left over” after you pay your expenses it should be allocated toward something such as paying off debt, saving or investing. Every dollar has a job and is assigned to do something.

It doesn’t mean your bank account goes to zero every month. You should always leave a cushion in your checking account.

Why zero-based budgeting is more effective

Zero-based budgeting changes your relationship to money. It allows you to analyze your needs and costs and gives you a more focused and clear approach. It aligns your spending with your goals.

Instead of looking at last months numbers as you would with traditional budgeting, zero-based budgeting looks at the month at hand. You effectively create a budget for each month.

There are many benefits to zero-based budgeting

One of the benefits of the zero-based budgeting method is you know what you’re spending every month. Every month will be different so even if you make irregular income you can use this method. It takes the guesswork out, making your finances more accurate and efficient.

A zero-based budget will help you focus on what’s a priority, some months you won’t spend everything. For example, you might have money left over from groceries, gas or miscellaneous. You’ll apply that extra money toward your debt if you’re in debt or toward funding your emergency fund. If both of those are fully funded roll that money over to next month, invest that money or add it to your fun fund to treat yourself.

Zero-based budgeting helps reduce frivolous spending. You won’t have a “rich moment” leading to a weak moment when your paycheck is deposited in your account. When your paycheck is deposited you will know that every penny is going towards something.

How to prepare a zero-based budget
  1. Write down all sources of income. Include your paychecks, child support and any extra income you earn.
  2. Write down your expenses. All of your expenses such as your mortgage/rent, food, car payment, insurance, utilities, etc.
  3. Plan for irregular expenses. Budget for big expenses that only happen once or twice a year such as your car registration, taxes and car insurance. You’ll want to plan for other seasonal expenses that can quickly add up such as birthday gifts and holidays.
  4. Subtract your income minus your expenses. It should equal zero. If it doesn’t see where you can adjust your expenses or allocate additional funds.

The zero-based budgeting method is simple, improves communication between you and your money and makes your financial goals a priority.

Have you ever tried using the zero-based budgeting method? Leave your comments below.

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