Zero-based budgeting for a household is simply a way of budgeting that allocates every penny of income. Nothing is leftover for financial waste in zero-based budgeting.
Is zero-based budgeting right for you?
It may be a better budgeting alternative to try if you can’t keep to a traditional budget.
But before we go too in-depth explaining zero-based budgeting, let’s first talk about traditional budgeting.
A traditional budget is a short-term financial plan to take basic accounting of income and expenses for a short or long-term period. A budget can contain ballpark estimates or exacting calculations, but the more accurate the better.
A budget contains itemization for income, expenses, bills, and any other ancillary expenses. For example, you would record how much you earn in a month, your monthly debts, grocery bill, utilities, entertainment, and so on.
Developing an accurate budget will aid you in finding out how efficiently or irresponsibly you handle your personal finances. You can learn if you save money well or if you waste money frivolously.
Then you can financially course correct accordingly to save money or realize a future financial goal. However, you are just keeping a record of your finances.
If you don’t have the willpower to spend and save according to the budget, then the whole endeavor is a waste.
In the end, a budget is just a piece of paper and you can spend as you please.
A zero-based budget is designed to allocate every penny in your income for the purpose to facilitate future financial plans. You must act to allocate every penny in your budget instead of just recording your income, expenses, and spending habits.
A budget is just a piece of paper or a program on your computer. You can ignore it and spend your money as you please.
With a zero-based budget, each penny of income is allocated towards bills, expenses, food, or a payment. You account for every penny until there is no money left.
Let’s create an example of a zero-based budget for added clarification. Let’s imagine that you make $3,050 monthly and are using a zero-based budget:
- Mortgage – $1,100
- Bills and Utilities – $250
- Debts – $300
- Groceries – $275
- Gasoline – $150
- Entertainment – $150
- Emergency fund – $100
- Savings – $250
- Miscellaneous – $175
- Pocket money – $300
- Total – $3,050
Every penny and dollar is accounted for in zero-based budgeting.
If you automate your bill payments and deposits into a savings account from your salary, you may be able to stick with zero-based budgeting for the long term.
Effectively, what is left over is in your pocket. That’s what you have to spend freely and no more.