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The zero-based budgeting method encourages you to use every penny of your monthly income. But that doesn’t mean blowing it on a shopping spree. Important goals such as saving money and paying off debt — as well as spending on fun stuff — are all part of the plan.
The idea behind the zero-based budget, sometimes called the zero-sum budget, is to give every cent a purpose. Here’s how it works.
» MORE:How to choose the right budget system
What is zero-based budgeting?
Zero-based budgeting is a method that has you allocate all of your money to expenses for needs and wants, as well as short- and long-term savings and debt payments. The goal is that your income minus your expenditures equals zero by the end of the month.
The difference between zero-based budgeting and living paycheck to paycheck is that all of your financial goals are met.
You can repeat expense categories and amounts every month or mix it up. If you come in under budget in a certain category at the end of the month, add the remaining amount to next month’s budget or move it to another category, such as your emergency fund. It’s the same concept as the envelope system, which involves distributing money for different expense categories into envelopes.
Let’s say you make $3,000 per month. Your budget might look like this:
Note that once you've budgeted for the essentials, the other spending categories can be for anything else. Want to pay off a credit card in six months? Build it into your budget. Buy a house? Set aside money for the down payment. Big vacation? Pad that travel fund with a few more bucks.
Build your zero-based budget with a budget app — such as You Need a Budget or Goodbudget — or a spreadsheet or pen and paper.
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How to start a zero-based budget
Before implementing this budget, take a few steps to ensure you're realistically planning your spending:
Know your income. Total your paycheck, benefits and other sources of monthly income to find out how much money you have to work with.
Track your expenses for a few months. Knowing what you typically spend — and on what — creates a framework you can use going forward. You’ll spot areas in which you can cut back and in which you want to allocate more.
Categorize your expenses. Identify all of your priorities and expenses, including your needs and wants, emergency fund and other savings goals, plus your debt repayments.
How much should you allocate to each category? NerdWallet recommends the 50/30/20 rule. With this approach, 50% of your income goes to needs, 30% to wants, and 20% toward debt repayment and savings.
The pros and cons of zero-based budgeting
The pros
The zero-based budget keeps you aware of how much money flows in and out. This can prevent you from spending what you don’t have.
“If you haven’t tracked where your money is going or if you feel like you don’t have control of your money or spending, then I think that this is a really good method,” says Catherine Hawley, a certified financial planner in Monterey, California.
This system is also customizable, which can be especially useful if you're new to managing your money.
The cons
Following a zero-based budget eats up quite a bit of time. To hold yourself accountable, you’ll have to closely and consistently monitor your spending. And that’s not the only challenge you may experience.
“I think one thing that can be problematic with it is that there are a lot of variable expenses,” Hawley says. “If you don’t account for your irregular expenses, the zero budget is going to potentially not leave you with enough money on average.”
These variable expenses might include holiday purchases, traveling to a friend’s wedding or replacing a broken phone.
But there’s a way to solve this: Set aside money specifically for these costs. Create a savings fund, separate from your emergency fund and other savings goal funds, and contribute to it each month.
The zero-based budgeting method might also pose a problem if you have an irregular or unpredictable income; say, if you’re a freelancer or an hourly worker whose schedule fluctuates. If you don't always know how much money you’ll have to allocate, consider using the previous month’s income for the current month’s budget. Note that you’ll need to save up a month’s worth of income as a buffer first.
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See if zero-based budgeting is right for you
Now that you know what the zero-based budgeting system is all about, you’re ready to give it a shot. If it doesn’t work for you, try another budgeting method. And if your financial situation is complex, you might benefit from speaking to a financial planner.
Zero-Based Budgeting: Spend Every Penny but Meet Your Financial Goals. In zero-based budgeting, your income minus your expenditures should equal zero. Savings goals, debt paydown and fun are all included. Lauren Schwahn is a writer at NerdWallet who covers debt, budgeting and money-saving strategies.
Needs come first, then savings and debt repayment, then wants. A zero-based budget can help you cut down on impulse purchases and unnecessary spending. You can take the money you would have spent and put it toward basic needs, allocate it to savings, or chip away at credit cards or other kinds of debt.
As an accounting practice, zero-based budgeting offers a number of advantages, including focused operations, lower costs, budget flexibility, and strategic execution. When managers think about how each dollar is spent, the highest revenue-generating operations come into greater focus.
Zero-based budgeting (ZBB) is a budgeting technique in which all expenses must be justified for a new period or year starting from zero, versus starting with the previous budget and adjusting it as needed.
Though you can implement repeatable processes with ZBB, it will most likely be more time-consuming than traditional budgeting. You're also faced with getting other departments to cooperate, and they might not be able to adequately measure their needs for the entire year.
Alignment with strategic goals: When every line item must tie back to three to five strategic goals of an organization, the clarity on what to prioritize can be significant. Better cost control: Unsupported expenditures from prior years are called into question.
Zero-based budgeting is when your income minus your expenses equals zero. Perfect name, right? So, if you make $5,000 a month, everything you give, save or spend should add up to $5,000. Every dollar that comes in has a purpose, a job, a goal.
The foremost theoretical advantage of ZBB is that it offers a rational and comprehensive means to cut the budget. ZBB can be used to make different cuts to different services based on the perceived value to the organization (rational) and all spending is put under scrutiny (comprehensive).
A zero-based budget is when all your income minus all your expenses equals zero. This doesn't mean you have zero dollars in your bank account. (Leave a little buffer in there of $100–300.) It does mean you're giving every single dollar a job.
“This method works well for those who may have tight budgets or really need to cut down on spending because you must keep a close eye on all of your spending,” says Clayborne. Pro: This strategy requires you to be intentional about how you're using your income.
It forces businesses to think about how each and every expense is managed in a specific budgeting period. All expenditures for each new period must be justified. The zero-based budgeting process starts with a “zero”, and each function and department within an organization are carefully analyzed for its needs and costs.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Another common budgeting technique is incremental budgeting, which is the opposite of ZBB. Incremental budgeting is a method of creating a budget based on the previous period's budget, with some adjustments for inflation, growth, or other factors.
a budget could be inflexible, and not allow for unexpected circ*mstances. creating and monitoring a budget can be time consuming. budgeting could create competition and conflict between teams or departments. if targets are unrealistic, employees could become stressed and under pressure.
It has a bad reputation for being a complete cost cutting exercise, but ZBB an help you align spend to more revenue generating opportunities. ZBB offers a number of advantages, including lower costs, budget flexibility, and strategic execution.
Zero-based budgeting effectively creates a new, start-over budget for each accounting period. As the name suggests, each budget begins at zero. A focus like this can keep costs and expenses under a microscope and it can give managers more control.
What is a zero-based budget? Gives every dollar a name on paper, on purpose, before the month begins. This is the best method of budgeting since it ensures that every dollar you make is assigned to a specific purpose.
A budget helps create financial stability. By tracking expenses and following a plan, a budget makes it easier to pay bills on time, build an emergency fund, and save for major expenses such as a car or home.
Introduction: My name is Terrell Hackett, I am a gleaming, brainy, courageous, helpful, healthy, cooperative, graceful person who loves writing and wants to share my knowledge and understanding with you.
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