A Different Approach To Budgeting For The Future
If one of your 2025 goals is to manage your finances, budgeting is the best place to start. It's one of the first steps to financial freedom and greater financial literacy for yourself and your family. While many different budgeting techniques are valid, zero-based budgeting provides a complete picture of your finances every month.
What Is Zero-Based Budgeting?
Zero-based budgeting is a money-management framework that allows you to assign every dollar in your budget a "job." The goal is to reduce your "leftover" money to $0 at the end of every month and encourage you to consider how to make your money go further.
Why Every Month?
Why must you re-examine your finances every month, especially if you're a salaried employee and know your monthly take-home pay? The point of zero-based budgeting is to be intentional with your money. You can consider any new monthly expenses by revisiting your budget every month.
Who Invented It?
Peter Pyhrr, a Texas Instruments accounting manager, invented zero-based budgeting. This method helped the company incorporate strategic budgeting into its finances by assigning every dollar a function. By budgeting this way, Texas Instruments minimized losses, and you can, too.
Tony Webster, CC BY 2.0, Wikimedia Commons
Zero-Based Versus Traditional Budgeting
On a personal level, traditional budgeting works with what you already have on the table, working with existing funds to allocate money for the upcoming month. For example, if you consistently spend between $300 and $400 on groceries, then a traditional budget might allocate $400 for groceries this month. Zero-based budgeting gives every dollar you spend a job and tends to be more flexible than traditional budgets.
Advantages Of Zero-Based Budgeting
Let's review a few advantages of zero-based budgeting compared to traditional budgeting.
Gives Every Dollar A Purpose
One of the main advantages of zero-based budgeting is that it provides every dollar you make with a purpose for that month. Your income, minus your expenses, should total zero at the end of every month. This doesn't mean your bank account is at $0. Keep a buffer in your account to avoid overdraft fees.
Increase Your Financial Awareness
We often spend money without realizing we're doing it. Automated withdrawals for subscriptions we don't remember, the thoughtless Amazon purchases we make on a whim, and so on. By giving every dollar a purpose, you'll pay more attention to where your money goes.
A Monthly Review Of Finances
Zero-based budgeting allows you to review your budget every month to see if anything has changed. If your car insurance has increased, for example, or you've just paid off a credit card debt, that will affect your monthly budget. Unlike traditional budgeting, zero-based budgeting allows you to take those extra dollars and reallocate them elsewhere, rather than getting lost in the confusing ether of money management.
Curbing Impulse Spending
We've all spent impulsively in our lives—sometimes on big purchases, other times, it's that extra-large Starbucks special magic macchiato that gets you. By giving every dollar a purpose, you'll be forced to examine your spending habits and hopefully decrease impulsive spending.
Better Meal Planning
Because you're working with a zero-based budget, you'll need to decide how many meals you eat out this month and how much you will spend on groceries. This will (hopefully) allow you to plan your meals better because you're working with a much stricter grocery budget.
Paying Yourself First
In case you don't own a business, the most important rule is to pay yourself first. Using zero-based budgeting, you'll start thinking about how you'd like to save money at the start of every month, rather than spending first and saving later.
Maximizing Efficiency While Minimizing Waste
By assigning your dollars a function, you're maximizing economic efficiency and minimizing your waste. If a dollar amount doesn't have a purpose at the end of your monthly budget plan, give it one.
Disadvantages Of Zero-Based Budgeting
There are a couple of disadvantages to zero-based budgeting, though. Let's explore them below.
It's Time-Consuming
There are many budgeting apps, but it's still time-consuming to assign every dollar you make a "job". It requires a lot of thinking and planning out every expense. However, the trade-off is that you'll become more financially disciplined and have your money go further than you thought possible.
The Learning Curve Can Be Difficult
It can be difficult to start with a zero-based budget. There is a steep learning curve about intentionality. If you've never done this before, you might be tempted to fall back into traditional budgeting patterns. However, stick with it. We promise that long-term financial freedom will come.
How To Start A Zero-Based Budget
If all of this sounds like a win-win to you and you're ready to start budgeting differently, here are a few steps to follow to get started on your zero-based budget.
Figure Out How Much You Make Every Month
This information is available on your paystub if you're a salaried employee. If you're a freelancer or work for an hourly wage, add up your hours this month (or figure out how many hours you have to work between now and the end of the month), and there's your figure.
Put All The Information Into A Spreadsheet Or App
If you don't have a budgeting app on your phone, put all the information into an Excel or Google Sheets spreadsheet. You could also write it all on paper, but working with your computer will be much more efficient.
Create Line Items
Create your budget line items. This means including all your expenses—gasoline, rent/mortgage payments, groceries, "fun money," and so on. Once this is done, you can begin assigning dollars from your overall monthly income to their categories.
Input Fixed Expenses First
First, include your fixed expenses in the budget. Once these are accounted for, you can work on any discretionary spending. Be sure to include rent/mortgage and any subscriptions that come out automatically. Also include things like electricity, phone, and internet. Any expense that doesn't change from month to month should be included now.
Fluid Expenses
Next, enter your regular but not fixed expenses (where you know what you're paying). Things like gasoline for the car and groceries should be included in this portion.
Input Allocated Funds Until Your Budget Reads $0
Once you've decided where to spend your money, you should enter everything into the spreadsheet or budgeting app until your budget reaches $0. Congratulations! You've just created a zero-based budget.
What If My Budget Is Above Zero?
If you have more money than $0 sitting in your bank account at the end of the zero-based budget creation exercise—congratulations! But we don't advise leaving that money sitting there unaccounted for or without a purpose.
What Are My Options With Extra Money?
Ideally, your zero-based budget has accounted for things like your savings goals—retirement, a planned vacation, a new car, or paying off your mortgage faster. If you've done all that and are satisfied with where those figures are, that's fine! There are a few other options for that extra money to help you reach that zero-dollar figure.
Build Your Emergency Fund
One of the most responsible things you can do is to put any extra money at the end of every month toward either a first emergency fund (of about $1,000) or a long-term emergency fund with three to six months' worth of expenses.
Save For Your Kids' College
If you have kids, you may want to put that extra money into a tax-sheltered college fund, a 529 college savings plan. Your financial institution can help you open an account if you don't already have one.
Put It Into Your Retirement
Pad up that retirement income with any funds, ensuring you don't over-contribute your allotted retirement income for the year. If you've not yet opened a retirement account, get on that ASAP!
Is Zero-Based Budgeting Right For You?
If you've been using traditional budgeting for a long time, try the zero-based budgeting approach for a month or two. See if it makes you more honest about your money, if you save more than you thought, or if you feel better about being more intentional about your finances.
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