Budgeting is always a good idea if you don't want to go broke or find you in impossible situations financially. It's always best to save the money you work so hard for. There's almost no point working so hard if you're not investing in yourself. Be able to account for every penny you make using the zero based budgeting.
Zero based budgeting definition
Zero-based budgeting is a method by which the budget with zero as the starting point. This means that all your money is allocated to expenses even before the month starts. Zero based budgeting is making sure that your expenses minus your income equal zero. Make sure every penny is accounted for.
Unlike other budgeting approaches, this one does not use the previous year as a starting point. It is a method for reducing your unnecessary costs. In a zero-based budget, each expense and component are examined one by one. It helps you account for every penny.
Traditional budgeting, on the other hand, solely takes into account new expenditures. Zero based budgeting not only allows you plan your money for the future, it helps you see where your money should go. You will allocate your income to things that will really help you, such as investment, savings, student loans and other necessities.
You wouldn't want to plan ahead and allocate all your money into buying clothes or eating out. If you don't plan for such expenses, you are forced to use your money for exactly what it was allocated for. And because you are using your entire income for the zero budget, there's no room for extra expenses. If you make any new purchases, you will be taking our from something else, which is not advised because it disrupts your budgeting.
What you must know before considering the zero based budget
Establishing goals and objectives and developing an operating plan and budget for the coming year. In simple terms, you plan forward. Rather than keeping track of expenses, you plan the expenses. That way you don't go beyond what you have and you end up saving more. This is why we advise getting a budget planner if you don't have one already. It will help you map out each penny, and allocate it accordingly.
Know your income
You need to know exactly how much you make in order to produce the best zero based budget for the coming month. If you have an irregular income, don't worry, you can still benefit from the zero based budget. You just need to do it a little differently. When planning ahead, use your minimum income for the budget planning. Allocate your extra income you may make to something specific; investment, or debt payments.
Categorize your expenses
Before starting a zero based budget, you are expected to keep track of your expenses for at least a month. Make sure you not only keep track, but you also put them in categories, so you know exactly what your money is used for. Categories such as; groceries, school supplies; eating out, hospital bills etc. you can easily use the budget planner for this.
Analyze and cut back unnecessary expenses
When you track your spending it allows you to see where your money goes. Analyze and categorize them. Write down your monthly income and go through your expenses again see if all your spending is within reason. If it is, you can proceed to make a zero based budget using that data. Making sure you allocate savings, and investments as well.
If you realize you spend too much. Identify those expenses to cut down on or find alternative and more efficient ways to get things done, that way you save your money. Learn more about money and wealth here.
Example of zero based budgeting
In order to give you a better understanding of what zero based budgeting is, here is an example. Let’s assume you earn $2,500 monthly. This is an example of a zero based budget with $2,500 monthly income.
|Credit Card Payment||$120|
|Student Loan Payment||$150|
Everything here totals to $2,500. This means every penny is accounted for. This is zero based budgeting in simple terms.
What are five steps to zero-based budgeting?
Here are the five steps to follow when building your zero based budget;
Step 1: keep track of your expenses
The first step in the Budgeting zero-based process is to identify where your money goes. In order to understand what you spend your money on, you need to keep track of it. You can do this using the budget planner. Write down all your expenses
This stage is critical in justifying each expense you will allocate your money.
Step 2: Analyze expenses
After keeping track of your expenses, this is where you analyze to make sure you're not spending your money on things you don't need. You also need to make sure that your expenses is within your budget.
It helps you see if all your income is going right back to the government where it came from. Keep in mind, that the whole point of budgeting is goal-oriented. Know what your financial goals are and write them down. It helps you be ruthless with cutting down things you don't need.
Step 3: Categorize
In the Budgeting zero based method, you need to allocate every penny to a cause. This is the point where you mark out necessities such as rent, bills, and debt. Then you decide how you divide the rest of your money accordingly.
Refer to the previous example of zero based budgeting to understand this point better.
Step 4: Keep track
After making a plan, you need to keep track to make sure you are following the plan. Write down exactly what you spend your money on, nothing is too little.
You can do this in any kind of budget planner. I just personally love using digital planners in general. I use digital planners for everything, it's just easier to navigate. It's mobile, which means I can access it at any time. I never forget a purchase because i put it down then and there on my phone. You can learn all about digital planning here. In-depth guide for beginners.
Step 5: Controlling and assessing
This is the final step in the zero-based budgeting process, in which your budget is continuously monitored and assessed for performance and output. Make sure you are on track with your financial goals. If not, assess and reevaluate.
What are the Advantages of Zero-Based Budgeting
Accuracy: Unlike traditional budgeting approaches, which entail making arbitrary modifications to the previous year’s budget, zero-based budgeting requires you to reexamine every cash flow item and calculate How budget money. This helps with cost reduction because it provides a clear picture of the expenses versus desired performance.
Efficiency: This aids in efficiently allocating resources because it looks at absolute numbers rather than historical numbers. You can't go overboard with what you don't have.
Elimination of unnecessary tasks: Elimination of all unproductive or redundant tasks leads to identifying opportunities and more cost-effective ways of doing things.
Budget inflation: Because each line item must be justified, zero-based budgeting eliminates the problem of budget inflation that incremental budgeting causes.
With traditional budgeting, there's room for going overboard. Zero based budgeting does not allow for that.
My final thoughts on budgeting using the zero based budget
The goal of Budgeting zero based is to reflect the actual costs. Although more demanding, this method of budgeting is more effective and forces you to save exactly as planned. How budget money, is up to you to decide if you want to invest more in a specific aspect than the other. This means if done properly, you could possibly be saving or investing a huge amount of your income rather than spending it.