Have you ever checked your bank balance and cannot explain where all your money went? Maybe you set aside some money for a certain purpose but ended up using it for other, often unnecessary, expenses.
In case you have found yourself in such a predicament, you know that trying to track your expenditure is frustrating and tedious. To save you a headache, in comes the zero-based budget.
Defining the Zero-Based Budget
This budget helps you track and plan for every coin you make. It motivates you to spend all your monthly income down to the last cent. The zero-based budget leaves no money unaccounted for–it justifies your spending by assigning your entire monthly income to wants, needs, debt clearance, and savings. Simply put, the zero-based budget aims to leave a zero balance, after meeting all your financial obligations.
Distinguishing Traditional Budgeting From the Zero-Based Approach
- Traditional budgeting needs the previous year’s financial records as a reference point while the zero-based budget uses zero as a baseline
- Traditional budgeting follows basic accounting principles while zero-based budgeting relies on data estimation and decision-making
- Traditional budgeting aims to replicate the previous year’s spending level while zero-based budgeting is more concerned with cost-effectiveness
- Traditional budgeting seeks to maintain the status quo while a zero-based budget is more adaptable to changing priorities
How to Make a Zero-Based Budget
Follow these steps to create your own zero-based budget.
- Calculate Your Earnings
Identify how much you make every month after tax, factoring in your salary, side hustles, and any other sources of income. Your previous bank statements should help you confirm whether all your earnings are on the list. You can either write down your earnings or use a budgeting app or spreadsheet.
- Write Down Your Expenditure
List all the expenses to which your income goes. This includes rent, car expenses, loans, entertainment, savings, medical costs, and groceries. It’s best to sub-categorize expenditure items that are not fixed, for example, entertainment. Next, spread your income across the categories to determine what goes into every expense. You can also divide your annual expenses by 12 to get your monthly allocations.
- Deduct the Expenditure From Your Earnings
Allocate your monthly earnings to the listed expenses until you achieve a zero balance.
This ensures all your money goes to necessities, leaving nothing for miscellaneous items. In case of a negative balance or the money doesn’t reach a particular category, review your other allocations and deduct excess funds until all the classes are covered.
- Track the Results
The success of your zero-based budget relies on tracking your expenditure. No matter how insignificant an expense seems, you need to record it to make your budget work. Additionally, adjust your budget to accommodate income and spending changes.
Advantages of the Zero-Based Budget
Helps Track Your Money
You’ll know exactly where every penny goes, taking the guesswork out of financial planning. Rather than trying to figure out how you spent your money, you can use your time to adjust the next month’s budget. Moreover, you’re more likely to make wise money decisions when you track your spending.
An emergency fund cushions you from financial eventualities so you don’t have to rely on high-interest loans. Moreover, you can navigate unexpected events like job loss, health issues, and home and car repairs without disrupting your lifestyle and long-term goals. However, it’s one thing to visualize an emergency fund, but actualizing it is a different story. A zero-based budget automatically sets up your emergency fund, reducing the temptation to delay your contributions.
Better Saving Habits
By creating awareness of your financial tendencies, a zero-based budget makes you accountable for every dollar, helping you cut back on wasteful spending. You can also use it for goal-oriented saving, allocating your income according to the priority of your objectives. When it comes to flexibility, the zero-based budget allows monthly adjustments in line with your changing circumstances.
Disadvantages of the Zero-Based Budget
The zero-based budget requires you to track and justify every expense and review your spending per month. It’s especially stressful for large companies with complex records.
Hard to Implement
As a freelancer or hourly worker with fluctuating incomes, it can be hectic to readjust your budget to match every month’s income. You also encounter budget inconsistencies when you cannot predict your monthly earnings.
Any kind of budget is better than none, but the zero-based budget seals possible loopholes, leaving no room for waste. Used wisely, this method will propel you to greater financial heights by helping you spend only on what matters.
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