When you create a budget that works for you, you gain a sense of peace and freedom that comes with taking responsibility for your finances. While there are many approaches to budgeting, certain systems prove to be more effective than others. Zero-based budgeting is an easy and reliable way to meet your financial goals. The concept of zero-based budgeting is simple: when you create your budget, you assign a role to each and every dollar of your income.
By knowing exactly where your hard-earned money is going, zero-based budgeting removes uncertainty and increases confidence in your financial decisions. Could a zero-sum approach to budgeting be key to regaining your financial freedom? We'll walk you through the ins and outs of this detail-oriented budgeting method so you can decide if it's the right choice for your situation.
What is zero-based budgeting?
In short, with zero-based budgeting, every dollar earned is allocated so that your income minus your expenses is zero. If you earn $ 3,000 a month, the entire $ 3,000 is booked into a zero-based budget. The goal is to avoid having extra cash available at the end of the month so you can make smart spending decisions.
Your budget should allow you to spend money on monthly expenses such as groceries and utilities, as well as "fun money". Instead of waiting to see what's left after taking care of bills and other essentials, a zero-based budget forces you to make financial decisions in advance. If you really want to align your actions with your financial goals, you will find that every penny needs a purpose to get the most of it.
By forcing you to decide how much of your income will go towards goals like paying off debt or saving for a home before you even get your check, zero-based budgeting encourages you to stick to your goals.
Is Zero-Based Budgeting Right For You?
Zero-based budgeting can be for everyone. A harmful myth of budgeting is that only people who lack discipline can hold themselves accountable. No matter how hard you are struggling or financially successful, you can benefit from having control of your money with a zero-based budget. If you're still skeptical about zero-based budgeting, check out how it compares to the four other popular budgeting alternatives below, including the 50/30/20 method:
Zero-based budget: Make sure your expenses match your income every month so that your income minus your expenses is zero.
Pay First Budget: Put money into savings and the rest can be spent as you see fit.
Handling budget: Divide cash into physical envelopes that contain the exact amount of money you can spend on that category.
50/30/20 budget: 50% of your income comes from essentials, 30% from personal expenses and 20% from savings.
Value-based budget: Calculate the monthly cost of each need based on your values, then choose how you want to stretch your income to meet those needs.
If you don't know exactly how to split your money each month, you can easily fall into spending traps. Having a zero-based budget with a digital budgeting tool is a great way to prepare for success and stick to your plan.
How to create a zero-based budget
Develop a zero-based budgeting plan by making it as simple as possible. Your main goal is to make sure that your expenses are in line with your income during the month. Don't over-complicate the process by taking care of creating the "perfect" plan. The best part about creating a zero-based budget is that it is easy to adjust from month to month.
1. Track your monthly income and expenses
Write down each individual monthly and seasonal expense to prepare for success. Unless you know where to start, you always need to consider the cost of housing, utilities, transportation, and groceries.
Next, consider the expenses you're saving for like a new car, birthday or anniversary gift, etc. With a little forethought, there shouldn't be any surprises. It is advisable to save cash for unexpected or one-off expenses so that you don't immediately dive into your emergency fund.
2. Adjust your budget until income minus expenses is zero
If you're new to zero budgeting, don't worry if your income and expenses don't balance out at first. It is likely that you will need to reduce recurring costs or increase your income to reach a zero total. Canceling unnecessary subscriptions, packing your own lunch, skipping Starbucks, and starting a passive, income-generating sideline all help.
Using an app with a budget categorization feature is especially useful when you are in the testing and bug phase. Otherwise, it can be tedious and daunting to manually readjust your budgeting strategy.
3. Track and optimize your monthly expenses accordingly
A zero-based budget is rarely flawless the first time. Fortunately, you can optimize your spending by reallocating your funds as often as you need during the month. Make sure you set calendar reminders so that the budget is checked in weekly or biweekly, especially if you are budgeting as a family.
There are tons of ways to increase and decrease your dollar allocations, whichever makes most sense for your circumstances. It often takes three to six months to master zero-based budgeting. Once you get the hang of it, chances are you'll have so much fun harvesting the rewards that you'll wonder why you didn't start earlier.
Advantages and disadvantages of zero-based budgeting
There is no right or wrong answer to how you manage your finances, but the key is taking a systematic approach to managing your money. Budgets are essential to building an emergency fund, saving for retirement, paying back loans, or creating wealth through investments. If you're not sure whether zero-based budgeting is the best strategy for you, we've listed the pros and cons below.
Business management expert Peter Drucker is known for saying, "You can't improve what you can't measure." If you want to make progress towards your financial goals, you need to define and track where your money is going. If you're not convinced that a zero-based budget will work for you, don't force it. You can always try it for a month or two and resort to a different budgeting solution.
In summary …
Zero budgeting is a simple and effective method that can help you make your financial dreams come true. Don't miss out on the chance to get the most out of your money through budgeting. We have summarized our key points below.
Zero-based budgeting is when your total income minus all expenses is zero. Every dollar of your hard earned cash has a specific, purpose-built role.
With a zero-based budget, you can keep increasing your income by proactively spreading your funds across different spending and saving areas.
Using a digital budgeting tool like Mint will help you prepare for success and hold you accountable for your zero-based budgeting goals.