Zero-based budgeting is a budgeting method where the budgeter starts with a total income amount and subtracts expenses until there is zero left. The goal of zero-based budgeting is to ensure that every dollar of income is allocated to a specific expense, investment or saving.
Here is how it works:
Identify your income for a specific period of time.
Identify all your expenses for the same period, including fixed expenses (rent, mortgage, etc.) and variable expenses (groceries, entertainment, etc.).
Subtract your expenses from your income to determine your budget balance.
Any remaining income is allocated to savings, investments or debt repayment.
Review and adjust the budget regularly to reflect changes in income or expenses.
The key advantage of zero-based budgeting is that it ensures that every dollar of income is allocated to an expense, investment or savings. It also helps you to identify unnecessary expenses and prioritise your spending.
Zero-based budgeting is a more detailed and time-consuming method than other budgeting methods, but it can be a useful tool for those who want to have a clear view of their financial situation and achieve their financial goals.
Who should try this method?
For individuals who wish to have total financial control, zero-based budgeting is the best option. It enables you to effectively micromanage your finances as you see fit. Every one of your dollars will be spent exactly how you decide.
Considerations
Zero-based budgeting is a detailed and effective budgeting method, but there are some considerations to keep in mind when using this method:
Time-consuming: Zero-based budgeting requires a lot of detail and tracking of expenses, which can be time-consuming. It may not be suitable for those with a busy schedule or who find budgeting overwhelming.
Difficulty in forecasting: Zero-based budgeting can be difficult to maintain, as it requires accurate forecasting of future expenses. Unexpected expenses may disrupt the budget balance, making it hard to stick to the budget.
Flexibility: Zero-based budgeting is a rigid budgeting method, and it can be hard to stick to a budget that is so rigid. It may be difficult to account for unexpected expenses, changes in income, or other unforeseen circumstances.
Requires a lot of discipline: Zero-based budgeting requires a lot of discipline and self-control to stick to the budget. It may not be suitable for those who struggle with impulse spending.
Lack of prioritisation: Zero-based budgeting focuses on ensuring that every dollar of income is allocated to an expense, investment or saving. It may not prioritise essential expenses or savings over non-essential expenses.