With a zero-based budget, every single dollar that you earn gets assigned a category. In theory, the equation for a zero-based budget is this: Income – Expenses = Zero. In reality, you’re not actually spending every dollar that you earn. That would be silly. Instead, you have funds in your budget that you put money into each month so that every dollar has a specific category on which it will be spent. Let’s look at an example.
Say you earn $3,000 a month. For simplicity, we will say that this is $3,000 of take-home pay (after taxes, deductions, etc.). With a zero-based budget, you take that $3,000 and begin assigning dollar amounts to your different expenses. Let’s say these are your monthly expenses:
- Rent: $750
- Utilities: $250
- Car Payment: $350
- Gas: $200
- Groceries: $400
- Renter’s Insurance: $20
- Phone: $50
These expenses total to be $2,020, which leaves $980 to work with in the budget. What you would do next is begin assigning dollar amounts to non-monthly expenses. These expenses might look something like this:
- Auto Insurance: $125
- Clothing: $50
- Car Maintenance: $50
The non-monthly expense accounts essentially act as miniature savings accounts to ensure that you have enough money set aside to pay for these expenses when they come due. Clothing is unique because it is an irregular expense that is also a necessity, so it is important to have some money set aside to pay for new clothes when you need them. In this example, the non-monthly expense total to be $225. At this point in the budget, you have $3,000 in income, $2,020 in monthly expenses, and $225 in non-monthly expenses leaving $755 to account for and budget. Because you have your essentials budgeted for, the remaining $755 can be budgeted for some fun stuff or it can be set aside to save for large purchases (i.e., a new car, a mortgage down payment, or retirement). The last part of your budget in this scenario might look something like this:
- Miscellaneous Spending: $100
- Dining Out: $150
- Vacation: $100
- Mortgage: $200
- New Car: $100
- Retirement: $105
Notice how retirement has an extra $5 in it. This is because that $5 needed to be accounted for because this is a zero-based budget. At this point, all of the expenses added together total to be $3,000. Remember the equation: Income ($3,000) – Expenses ($3,000) = Zero.
Who Should Use a Zero-Based Budget?
The zero-based budget is my personal favorite. It is the type of budget I have used since I was 16 years old and still use with my husband today. I do, however, recognize that probably not everyone will love a zero-based budget as much as I do. Zero-based budgets are good for people who:
- Want 100% control of their money; to the point of micromanaging it.
- Won’t spend any money unless it is planned and budgeted for.
- Tend to overspend their money.
- Want a highly customized budget.
- Have specific financial goals they want to achieve.
If you want to take complete control over your money and want to micromanage down to the penny where your money is going, then this is a good budget for you. If you can avoid spending any money that is not planned for or in the budget, then this is a good budget for you. If you have a tendency to overspend your money and want to stop doing that, then this is a good budget for you. If you want a highly customized budget that reflects exactly what your financial goals and values are, then this is a good budget for you.
The Down-Side of Zero-Based Budgeting
Even though this is my personal favorite type of budget, there are a few cons to zero-based budgeting that you should know about.
- It can be time consuming to do the budget every month.
- It can be difficult to plan for variable expenses (i.e., gas, utilities, groceries, etc.).
- It can be difficult to budget with an irregular income.
I’m not going to lie, for the first couple years of our marriage my husband and I would spend probably two hours at a time working on the budget. It would take quite a bit of time to add up all of our expenses for the previous month and then something wouldn’t add up correctly, so we would have to start all over. It has gotten easier over the years and now only takes about 30 minutes to complete. Zero-based budgeting can be very time consuming, especially at the start.
Most people’s expenses vary from month to month. We have our fixed expenses (insurance, rent/mortgage, car payments, etc.) and we have our variable expenses (gas, utilities, groceries, etc.). With a zero-based budget, sometimes it is difficult to accurately budget for these variable expenses. For example, you might budget $200 for gas this month, but maybe the gas prices increase or you drive a bit more than normal and you actually end up spending $225 on gas. Or maybe you had to buy a bit more in groceries than you usually do because you were out of things that you don’t buy super regularly such as toilet paper, toothpaste, and shampoo. A zero-based budget is not perfect in this regard.
If you have an irregular income, zero-based budgeting becomes a bit more difficult. It can be difficult to create a budget in which Income – Expenses = Zero when you might not know exactly how much income you will have. Maybe last month you made $6,000 but this month is slower and you are only expecting to make $2,000. This can cause headaches when trying to work a zero-based budget.
Overall, zero-based budgeting can be a fantastic type of budget for you to use if you have a fairly regular income and are willing to dedicate the time it takes to work on the budget. If you have an irregular income or you don’t think that you will be able to willing to dedicate the time that zero-based budgeting requires, perhaps this isn’t the best type of budget for you.
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