What is zero-based budgeting?
Zero-based budgeting (ZBB) is a budgeting method where every dollar of income is allocated to a specific expense or savings category, so that the total amount of income minus expenses equals zero. This means that you have to justify every expense in your budget, rather than simply carrying over expenses from the previous budget period.
How to do zero-based budgeting
- Start by listing all of your sources of income for the budget period, such as your salary, freelance income, or rental income.
- Next, list all of your expenses. This includes both fixed expenses (like rent or mortgage payments) and variable expenses (like groceries or entertainment). Be as detailed as possible, and don’t forget to include irregular expenses like car repairs or medical bills.
- Once you have a complete list of your income and expenses, begin assigning every dollar of income to an expense category. Start with your most important expenses, such as housing, food, and transportation, and work your way down the list.
- Make sure that your total expenses add up to your total income. If you have money left over, allocate it to savings or debt repayment.
- Track your actual spending throughout the budget period, and make adjustments as needed to ensure that you’re staying on track with your budget.
Pros and cons of zero-based budgeting
Pros:
- Helps you prioritize your spending: Zero-based budgeting forces you to think carefully about where you want your money to go, and can help you prioritize your most important expenses.
- Eliminates wasteful spending: By requiring you to justify every expense, zero-based budgeting can help you identify and eliminate wasteful spending.
- Encourages financial mindfulness: Zero-based budgeting requires you to be fully engaged with your finances and to make intentional decisions about how you spend your money.
Cons:
- Can be time-consuming: Zero-based budgeting requires you to track every dollar of income and expense, which can be time-consuming and require a lot of effort.
- May not be suitable for everyone: Some people may find zero-based budgeting too restrictive, or may not have the discipline to stick to it over the long term.
- May require adjustments: Zero-based budgeting is not a set-it-and-forget-it approach, and may require adjustments throughout the budget period as circumstances change.
Zero-based budgeting is a method that requires a bit more work upfront, but it can be a great way to make sure every dollar is accounted for and put to good use. By starting from scratch each month, you’ll have a clear understanding of your financial situation and be able to prioritize your spending to match your goals. While it can be more time-consuming, zero-based budgeting can also provide a greater sense of control and help you make more intentional financial decisions.