Budgeting can be a great tool to implement into your monthly financial planning to reach your overarching personal financial goals. With various methods available to use, it can be difficult to decide which tactic works best for your current situation. One of the most popular budgeting methods is the zero-based budgeting rule. The zero-based or zero-sum budgeting rule is widely used because it assigns each dollar with a specific purpose.
Before you start implementing this rule into your monthly financial planning, let’s delve into what zero-based budgeting is, how it works and the benefits compared to the disadvantages.
What Is Zero-Based Budgeting?
The zero-based budgeting method is where your monthly income minus your expenses equal zero. To execute this method properly, you’ll need to align your monthly income with expenses, debt payoff and saving for long-term financial success. Each dollar coming in and going out will be assigned a job with this method.
The zero-based budgeting method doesn’t mean you should be left with $0 in your bank account. It just means your monthly income minus expenses should equal zero.
For example, your monthly income is $4,000. With the zero-based budgeting method, you’ll need to allocate every dollar toward certain expenses.
Using the figure above, here’s a zero-based budgeting example.
| Expense | Monetary Value |
|---|---|
| Monthly Income | $4,000 |
| Rent/Mortgage | $1,500 |
| Groceries | $500 |
| Bills | $350 |
| Transportation | $300 |
| Clothing | $100 |
| Emergency Fund | $250 |
| Retirement | $200 |
| Debt payment | $600 |
| Entertainment | $100 |
| Miscellaneous | $100 |
| Amount remaining | $0 |
The total equals zero, but each dollar for the month was allocated to a specific need or saving for financial goals. Let’s dive deeper and discuss how to create a zero-based budget that works for your current financial situation.
How To Make A Zero-Based Budget
Unlike some other budgeting methods, the zero-based budgeting rule is simple to implement into your monthly planning. However, this method has processes that should be followed. Let’s discuss the zero-based budgeting steps that make this tactic so popular and easy to use.
List your monthly income
First and foremost, you’ll need to list your monthly income. This can be achieved by the old-fashioned pen and paper, an excel spreadsheet or one of the many budgeting apps available on the market.
Income is not limited to your primary income. It can also include secondary and tertiary wages such as side hustles, residual income, child support and small-business income. Essentially, if the money is coming into your bank account, it should be listed as income.
After income is listed, be sure to add it all up. That is considered your monthly income. Then, you’ll do the same with expenses.
List your monthly expenses
Before establishing a budget, you must first understand how much money you spend per month on expenses. Write down every expense such as rent/mortgage, food, transportation, phone bill, debt and everything else you can think of that you spend money on monthly.
The key with any budget method, specifically the zero-based budgeting rule, is to start with the four main categories. These categories include:
- Food
- Shelter
- Utilities
- Transportation
Once the main categories are listed out, you should begin listing the rest of your monthly expenses. That may include entertainment, dining out, saving for retirement or an emergency fund and debt payoff.
However, the monthly budget may change month to month, depending on specific expenses. That’s why it’s important to stick to one budget per month and adjust as necessary.
Additionally, since expenses can unexpectedly happen, it is advantageous to create a miscellaneous section like the one in the example provided above. Although the misc. section is for unexpected expenses, it’s important to not frivolously spend the money in that category on extravagant gifts for yourself.
If there is money left over in the miscellaneous section at the end of the month, tossing it into a savings account or using it to pay off debt may be beneficial to your long-term financial goals.
Get ahead of periodic expenses
Through the zero-based budgeting method, you’ll extrapolate the entire year into individual months. However, it’s important to think about the whole calendar year and specific expenses that will arise. Christmas is a great example of a periodic expense for which you can start budgeting in the summer months.
For example, you plan to spend $1,000 on Christmas expenses. You’ll divide that number by the number of months remaining to know how much you need to save. Let’s say you want to start saving for Christmas in July. You’ll take $1,000/6 for a total of roughly $167 per month you’ll need to save.
You can do the same for expenses such as birthdays, vacations and anniversaries. Additionally, you may have those one-off expenses like homeowners association (HOA) fees, license plate renewal fees, property taxes and more. Be sure to keep those expenses in mind when building out your budget.
Budgeting for periodic events can help you plan accordingly and avoid the frustration of potentially getting caught off guard.
Let’s get to the magic number of zero (Subtract income from expenses)
The purpose of using the zero-based budgeting method is to reach zero for the month. Similar to the example shown in the table above and through the aforementioned steps, you should have your monthly income listed out and all your expenses categorized. After adding the total up, you may realize funds are remaining. No need to worry, it may take some time to get a hang of this method. If any additional funds remain, try allocating them to a savings account or putting more toward any debt you may have.
Track spending through the month
One way to ensure you’re executing the method correctly is to track your spending throughout the month. When you track your spending and give each dollar a purpose, you’ll eventually be able to notice the progress and realize that your goals may be closer than anticipated.
Zero-Based Budgeting Advantages And Disadvantages
The zero-based budgeting method is a great way to track earnings and spending habits. However, this method may not be the best for your current financial situation. Let’s dive deeper into the advantages and disadvantages of the zero-based budgeting method to determine if this rule is suitable for you.
Some advantages of zero-based budgeting include:
- Accurately track finances: A zero-based budget allows you to know exactly where your money is going every month. If you decide to implement this tactic, you’ll see that you spent a given amount on expenses, debt, savings and wants.
- Prohibits overspending: The zero-based budgeting method prevents users from overspending by giving each dollar a job. If you tend to overspend, this may be suitable for you.
- Prioritizes financial goals: You can create a zero-based budget tailored around your unique financial goals. If you want to pay off debt as soon as possible, you can allocate a decent amount of money toward debt per month.
Some of the disadvantages of a zero-based budget include:
- Time-consuming to create: Creating a zero-based budget can take some time since you’ll have to calculate your monthly income, decide how you want to spend it and allocate the funds for a specific category. Doing so monthly may take you a decent amount of time.
- Hard to navigate with unpredictable income: For self-employed individuals, a freelancer, or if you work on commission, the zero-based budget method may not be suitable for you. Creating and sticking to this method revolves around a consistent income. Challenges arise when your income fluctuates month to month.
- May not account for periodic expenses: Inherently, a zero-base budget doesn’t account for irregular or unexpected expenses that may arise from month to month. If you don’t have a specific category for periodic expenses, it may be hard to prepare for them. However, as mentioned above, it’s advantageous to get on top of periodic expenses.
Is The Zero-Based Budget Right For You?
After weighing the pros and cons of zero-based budgeting, you’ll have to decide if it fits within your current financial situation. The zero-based budget strategy is not meant for everyone, but it can help those who tend to overspend.
If you’ve determined that the zero-based budgeting method is unsuitable for you, the 50/30/20 budgeting rule may make more sense.
If you have any questions regarding budgeting or any financial advice, check with the professionals at Arizona Central Credit Union.
We offer a range of financial services. Whether you are in the market for a low-interest rate credit card, mortgage, student loan or have general financial-related inquiries, our financial experts can help. Contact us if you have questions or would like to open a bank account.
