Zero based budgeting is extremely popular today. It can encourage everyone to spend income wisely and be more frugal, not take out earn income credit when it comes to personal finances. Here is how it works.
Everyone needs to establish a monthly budget to improve personal finances and make every dollar work. Are you experiencing temporary money disruptions? You need a budget. Would you like to save more for retirement? Having a budget will help. Are you a billionaire already? Guess what? You still need a monthly budget to keep track of everything.
What Is Zero-Based Budgeting?
Zero sum budget has become widespread among financial experts and consumers recently. Zero budget means you allocate every penny of your regular income towards various spending categories until there is nothing left.
In other words, all of your expenditures, debt payments, and savings should be allocated in such a way that no dollars are left at the end of the month.
A zero-based budget definition doesn’t mean you have zero dollars in your bank account. It just means you don’t go on a shopping spree or waste your income on unnecessary costs while you keep track of all your expenses and know where your money goes.
This scheme is more flexible than the other budgeting types.
Zero-Based Budget vs. Other Budgeting Types
There are other types of budgeting, such as the 50-20-30 rule and envelope budgeting.
The first type is similar to zero-based budgeting as the main idea is to be left with nothing at the end. The main difference between these two budgeting schemes is that the 50-20-30 rule allows you to allocate 20% of your monthly income towards savings and investments.
This div can’t be changed and is less flexible than with the zero balance budget. In this case, on the contrary, you first need to cover all the regular expenses and save whatever is left. This sum is more flexible and may alter from month to month.
Hence, you can adjust your savings on a monthly basis and have a stronger encouragement to save more and more. You may start with having just $50 left for savings at first but as you develop your zero dollar budget system this div will grow. You can either trim other expenses or find a side gig to increase your monthly income. This way you will be able to allocate $100 or $200 towards investments and savings later on.
Envelope budgeting also means allocating your income into several spending categories by putting money into envelopes with each category. Depending on the number of your spending categories you may have a different number of envelopes.
However, you will need to withdraw cash for this scheme and it isn’t suitable for everyone. You can find many zero based budgeting templates and examples on the web and see how this technique works.
5 Steps to Start a Zero Balanced Budget
If you are ready to change the way to spend your money and learn more about your spending habits, here are some easy steps for you to master this useful technique.
- Step 1. Define Your Monthly Budget
The first thing you should do is know exactly how much you earn each month.
Some people have a regular monthly income while others have a few gigs or work as freelancers with fluctuating salary. In any case, you can always take the average amount you earn per month or calculate the average sum for the past 12 months. This is your monthly income.
- Step 2: Calculate Your Expenses
The second step of zero-sum budgeting is evaluating your costs and everything you need to spend money on each month.
You need to remember all of your spending categories during the past several months and write them down. A credit card and banking statements can help you with this task. Certain expenditures may vary but this is why we will establish a new budget each month.
- Step 3: Cover Priority Costs First
Now that you know how much you earn and what your spending categories are, it’s time to assign sums you need to cover priority costs. A zero based budget spreadsheet can help you see the real numbers and check if every category is covered.
So, start by allocating sums to cover such costs as mortgage or rent payments, groceries, and auto/transport expenditures. For instance, if you know you spend $500 on groceries, earmark $500 for this category. Some categories may fluctuate and differ from month to month.
- Step 4: Add Seasonal Costs
Every zero based budget template has this category included as it’s necessary to plan all the expenses for the future. If you know there will be birthday parties, Christmas celebrations, and other holidays in the nearest future, you need to have a separate category for such seasonal expenditures.
This way you will protect yourself from spending sprees and going beyond your means. Also, your upcoming vacation falls into this category.
- Step 5: Concentrate on Debt Repayment
Now that all the above-mentioned categories are covered, there will be some part of your income left for debt repayment as well as savings. It’s important to pay all of the debt off and become financially independent so that you can start saving towards your monetary goals and retirement. You may be left with almost nothing during the first months of 0 based budget. Later, as you repay the loans you will be able to save more and more.
In the end, you should be left with nothing – your income minus your spending should equal zero. If there is some cash left you can assign it to the entertainment category (eating out, cinema, shopping).
Zero Based Budgeting Advantages and Disadvantages
- Pros. This strategy helps consumers to be aware of their finances and spending habits and work their way towards improving them. This technique also helps consumers to avoid spending what they don’t really have.
- Cons. It requires some time and effort to stick to this technique and establish a new budget each month. You need to develop consistency and concentration. Also, certain expenditures may differ and vary from time to time, so you need to have an emergency fund to be able to cover any unforeseen costs as well.
All in all, zero-dollar budgeting is a great option for people who want to have better control over their spending and become financially independent and debt-free.