Zero-based budgeting is when you allocate every dollar you earn so that your income minus your expenses equals zero. It’s just one of the many different ways you can budget. Many people swear by zero-based budgeting because it is arguably the budget type that is most efficient with your money. With zero-based budgeting, you are never wasting a single cent.
Every single dollar you make is put toward something with a purpose, and each baby step you take will get you closer to reaching your financial goals. Plus, applying for a financially fair loan can help you further reach your goals and boost your credit in the long run.
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Zero-based budgeting is a form of budgeting where every single dollar is accounted for. In zero-based budgeting, every dollar you make is budgeted for in some way. Let’s learn more about zero-based budgeting so you can see if it’s a tool that can help you be more organized with your personal finances!
Zero-based budgeting sets aside money for every single one of your costs. This is important because it ensures you have enough money to make purchases but it also doesn’t allow you to overspend.
Here’s how to apply zero-based budgeting:
For example, if you have a total of $250 set aside for entertainment purposes and $125 set aside for utilities, you theoretically can’t spend more than $250 for entertainment with zero-based budgeting. If you do, your bank account won’t have enough money for utilities and you will find yourself in some trouble.
There are many benefits to zero-based budgeting as it can help you with your financial goals. However, there are still several components of zero-based budgeting that are worth taking into consideration:
Read more to gain a better understanding of how to implement zero-based budgeting and if it’s right for you.
Still unsure what a zero-based budget looks like? Below is an example to give you a better understanding. In this example budget, let’s say your monthly income is $4,000. Your sample zero-based budget might look like this:
|Car loan payment||$250|
|Student loan payment||$200|
|Personal loan payment||$100|
See how you earned $4,000 and your budget adds up to $4,000? That’s no accident. Every single dollar is used toward something. If you did not have a zero-based budget and you had $200 unaccounted for, you might just be letting it sit there instead of putting it to good use.
Even if you know that $200 is going to be put toward your savings account, keeping it organized and accounted for is beneficial for your long-term money goals.
There are a few key financial items to be aware of before starting a zero-based budget. Making sure you’re fully aware of the factors below will ensure you’re on the right track to be successful in your zero-based budget endeavors.
Knowing what you make is important — take a look at your sources of monthly income such as your paycheck and any other benefits. Keeping track of what you make in something like a spreadsheet can help you stay organized.
Next, become aware of expenses you want to save for, like a trip, a new car, a gift, etc. When you consider these expenses, there is less room for surprises down the road.
Split up your spending habits into categories to get a better understanding of where you’re allocating your expenses. These categories include but are not limited to:
You can also follow the 50/30/20 rule when deciding where to allocate your budget, which is great for evaluating your budget and cost-cutting.
With this rule, you split your earnings into three categories. Half (50%) of your money should be reserved for essentials such as transportation, housing and groceries. Next, 30% of your income is reserved for things you want (not need!), like dining out and entertainment. The final 20% should be reserved for savings and debt payments.
Watch what you spend each month and notice what cost drivers you spend the most money on. This will help you determine which areas of your spending you need to cut down on or prioritize more. Some helpful tips you can follow to monitor your spending include:
Let’s be honest: Taking care of your personal finances can be difficult. There are several types of expenses that you need to be aware of, and it can be hard to stay organized.
Remembering every cost you have, from things like rent, utilities, food and entertainment can be a headache to deal with every month. But if you aren’t on top of your finances, you can become overwhelmed and stressed, and it can in turn affect other areas of your life.
To determine what type of budgeting is right for you, it’s important to distinguish the differences:
Although there are slight differences between these two budgeting methods and many other budgeting processes, all can help you manage your monthly income and expenses.
|Traditional Budgeting||Zero-Based Budgeting|
|Only new expenses are accounted for||Every expense must be accounted for|
|Based on historical data||Based on best practices|
|Based on last year’s budget||Starts from zero|
|Accounting oriented||Decision oriented|
|Simpler strategy||More technical strategy|
There are several different ways to budget, but all of them help you to be more organized and efficient with your finances. Let’s take a look at some of the benefits of budgeting in general:
Most payments might be at the end of the month, but there’s a chance you have multiple payments to make throughout the month. If you make a budget, you can sit down at the beginning of the month and write down everything you will have to pay. When looking at your budget later in the month, you will remember payments you need to make so you never have to worry about missing important ones.
If you make a budget at the beginning of the month, you can set aside money for every cost you are going to have later. This way, when your payments come you will have the money you need to pay the cost successfully. You’ll never need to worry about being short a few bucks when that cost comes up.
Do you have a goal to save up money for a vacation? Or maybe you want to save up for a car or a present for a loved one. Whatever the case, budgeting can help you meet your goals. If you have a goal to save up for a $1,200 vacation over two years, a budget can make sure you are setting aside $50 or so a month. This way, you are putting your best foot forward by saving money so you can make sure your goals become reality.
If you’re not a seasoned zero-based budgeter, it can take some time to get used to the technique as you dive in. Read some of these helpful tips that can help make the process easier.
This is a must — start tracking your expenses right away. Consider using a bill tracking app, building a spreadsheet on your computer or even writing it down in your favorite notebook. This can help you manage your ZBB with ease.
When determining how much you’ll spend on things like groceries and bills, a good rule of thumb is to overestimate the amount. Overestimation will give you more breathing room just in case you’re surprised with a bill that’s higher than expected. Any leftover money can be saved and redistributed to a category that’s more in need.
If the idea of logging each and every expense daily overwhelms you, then opt to do it weekly. Doing this weekly will save you time and take some pressure off of the process. Just be sure to hang onto your receipts — this is also where calendar reminders will become useful.
Sticking to a rigid plan can cause more stress down the road. If your income varies slightly month to month or your lifestyle changes, being flexible with your financial allocation can relieve stress and help you better adapt your expenses. Additionally, practice money affirmations to help you visualize a future of abundance.
You don’t have to face budgeting alone! It can be a tough process, so lean on others for support and help if needed. Whether it’s a family member or a financial planner, take comfort in knowing that you have support as you have those necessary money conversations.
Overall, while zero-based budgets are somewhat difficult to make and have their drawbacks, they are a fantastic tool that help you take control of your personal finances. Using this budget method can help you pay back your loans faster, meet your savings goals and take a great deal of stress off your shoulders. Get started on making a zero-based budgeting plan today and be on your way to successful cost management!