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Budgeting

What is zero based budgeting and how to use it

Zero-based budgeting, sometimes abbreviated to ZBB, is a specific method of budgeting that pre-emptively strategizes where each penny of your paycheck will go before it enters your account. It is an exceptionally simple method of budgeting and is often proven to be an incredibly effective way to ensure that all of your finances are put to good use.

Zero-based budgeting was once a popular method of business budgeting in the 1970s, but it is now seeing a revival in the realm of personal finances. In zero-based budgeting, each penny is given a purpose, so that after dividing up your finances you are left with zero remaining. Every expense is justified, leaving less room to spend money that should really be used for another purpose. In order to divide your money up effectively, an accurate budget will need to be created to serve the upcoming period.

The basics

The key to successful zero-based budgeting is the strategy made before any money even enters your account. Your budgeting strategy is devised by gathering money into groups to serve different purposes, based on your regular outgoing and saving goals.

Usually, the most successful zero-based budgeting plans can take months and years to perfect, as it involves a detailed and thorough analysis of previous strategies and their results, what worked and what didn’t, in order to shape the next months of budgeting. However, just because it can be a lengthy process to perfect doesn’t mean that you won’t feel the benefits within your first month.

Problems with traditional budgeting

There are many different budgeting programs and apps designed to help you feel more freedom with your finances, however, for some reason, it is still too easy to go over budget.

There are a range of problems that arise from traditional budgeting, that can be solved and dealt with better with zero-based budgeting.

For instance, traditional budgeting programs have a lack of flexibility. Any financial situation that does not rely on a steady paycheck will struggle to fit into the standard structures of traditional budgeting. The lack of room for flexibility can often be one of the main reasons people struggle to stay within budget.

The benefits of zero-based budgeting

Stop living paycheck to paycheck

Living paycheck to paycheck can be an especially hard financial cycle to break free from, and it causes stress and worry due to the fact that you depend on future paychecks for your bills and unexpected expenses.

If there was to be a sudden change in income, you are left with little security that you will be able to continue paying your bills and living comfortably.

With zero-based budgeting, you start with zero, and look back for your finances instead of depending on the money that you don’t have yet. Bills are paid using the money from last month’s income, so you can reduce the stress in covering for them.

Of course, this kind of security is not instant, but with each month of zero-based budgeting and setting money aside, you will feel more financially free and secure.

Know exactly what you’re spending

Before setting up a zero-based budget, it is usually recommended that you go through all of your expenses for recent months to get a thorough idea of your spending, you may be surprised about where most of your money goes.

For example, you may be spending way more on food than you thought you were budgeting for. This allows you to set up your zero-based budgeting strategy accordingly and realistically, while also encouraging you to consciously cut back in certain areas.

Evolve your relationship with money

One of the biggest advantages people report from their experience with zero-based budgeting is a renewed relationship with money. It allows you to feel more secure with the amount of money you have and stress less. For many people, it is a useful tool for beginning to see a bigger financial picture, approaching their savings accounts and debts with a new focus.

How to begin zero-based budgeting?

With just a few steps, some intricate strategizing and planning, you can begin zero-based budgeting and quickly feel your finances free up. This is intended as a rough intro – for a more detailed description of setting up a zero-based budget, see here.

Track your outgoings

This is always the first step for zero-based budgeting, and depending on how much time you have and how accurate you want your budget to be, it may take a couple of months.

This step is key in understanding how much money you spend, what it is spent on, and where you can cut down. Go through your bank statements to find an accurate record of your transactions, every bill you paid, savings you made, food costs and more. The longer you spend keeping track of your outgoings will allow you a more solid start to zero-based budgeting.

Categorise expenses

Once you are fully aware of where all your money is going, you can start shaping individual budgets for each area of your spending.

Know exactly how much money you need to set aside for paying utilities each month, rent, food, car payments, etc, which should then leave you with a certain amount left over.

With traditional budgeting, this leftover amount would be used on impulse purchases and luxuries, however, the aim of zero-based budgeting is to leave yourself with zero, so planning to utilise the remaining spending money on paying off debt, taxes and savings, and a certain amount for a new outfit or restaurant meals.

If you end up with less income one month, zero-based budgeting makes it easier for you to make cuts on the categories that are less essential, for example, maybe fewer restaurant meals that month.

Ultimately, zero-based budgeting is not a quick fix for financial security because there is no quick fix. However, it makes the process much more simple, methodical and easy to stick to, allowing you to feel much more at ease with your personal finances within just a few months of planning. Make tweaks to your budget and find what works for you, it will be incredibly worthwhile in the long run.