Understanding the Zero Based Budget

WeMoney

So you want to try the Zero Based budget but you don’t know where to start. Let’s dive into the world of donuts (zero’s) to take a look at how this budgeting tool works, and what the advantages and disadvantages of this budgeting method are.


Zero based budgeting is a handy way to divvy up your income and manage your personal finances. This budgeting tool is based on the premise of ‘Giving every dollar a job.’

Unlike most budgets, the zero based budget has no ‘rollover’ at the end of the month. So, if you have any money left in your account after the month, it cannot be used towards the next month's budget. Instead, this money is allocated to something, or ‘given a job’ and sent on its merry way, not to be included in the next budget. In this way, all of your money is accounted for.

That is, every dollar that you earn as income, is assigned a task that it is dedicated to. 

So, how do you do it?

Step 1: Write down your monthly income.

Income is classified as every dollar and every cent that you have coming in. It may include your wage, child support, centrelink payments, any extra cash you’ve earned from your side hustles like selling things on Facebook marketplace or babysitting. 

If for example, you earn $2,000 a month, then using the Zero based budgeting method means that everything you spend, save, gift or invest for that month should be equal to $2,000. 

Step 2. Write down your monthly expenses

And we really mean every expense. Absolutely every expense that you expect to put your money towards for your upcoming month. Start with the most important things like shelter & food, then work your way through the rest. These may include:

  • Rent and/or mortage repayments
  • Transport
  • Gym membership
  • Daily coffee
  • Entertainment 
  • Charity donations etc
  • Haircut
  • Appliances
  • Spotify subscription
  • Gifts for upcoming events

Be sure to include any debt repayments or amounts you want to chuck into savings accounts too. 

Step 3. Write down your seasonal expenses

The Zero based budget allows you to plan ahead and prepare in advance for any seasonal expenses. These are things like, insurance premiums, your car registration, football memberships, council rates and so on. Seasonal expenses should also include holidays.Say for example you take a holiday at Christmas every year and it costs you $1,000 in total, including accommodation, transport, cheese boards, sunset cocktails, etc. Using the Zero based budgeting tool would require you to break up the $1000 into 12 (representing 12 months) so you know how much money you need to set aside each month, to have the $1,000 ready to go when it’s holiday time. Breaking the savings down into 12 months at $83.33 per month is far more manageable than losing a big $1,000 chunk all in one go when it comes to December.

The goal is to set aside a little bit each month towards these fees so that when they hit you won’t feel the pressure as you’ve been saving all year long for them.

Alternatively, you can just add each of these seasonal expenses in as a new line item in the month that they occur. Then you can pay them off and delete from your budget template when you do the following month's budget when they are no longer relevant.

Step 4. Subtract your income from total expenses to equal zero

At last - where the zero based budget gets its name from. It’s time to equal zero. Now that you’ve compiled all of your income and upcoming expenses, it’s time to make it all balance out. Subtract your income from your total expenses and see where you end up. It’s highly unlikely that it will equal zero on your first try (or even your first 3 tries!). This is an opportunity for you to review your budget and either reign in your spending if you end up in the negative, or allocate and spare $$ elsewhere if you’ve got some left over.

Remember to keep your goals in mind. If you’ve got spare cash, where can you allocate it to help you best achieve your goals? Perhaps you want to allocate extra moolah towards paying off debt or growing your holiday fund.

Step 5. Track your spending

The reap the benefit from the Zero based budgeting tool you must track your spending.

It doesn’t matter how you do it, you may choose to use an app, a spreadsheet, the back of a leaflet passed to you at the train station or write it on your bedroom wall. But it’s crucial that you track your spending. Use this tool to check in and see if your spend aligns with your budgeting plan. You want to see it line up and hit the donuts with a big fat zero.


I receive an irregular income. Will the zero based budgeting method work for me?

This budgeting tool can work for you even if you work casually or receive irregular pay, it just takes some fine tuning. When you set out your budget for the month, use a ‘low income’ figure for step 1. If you earn less, then you will allocate less on frivolous things. 

If you happen to earn more than expected, you can allocate money to your expenses that are necessities and therefore are sitting towards the tail end of the list in steps 2 and 3.

Advantages of the Zero Based Budgeting Method
  • Fantastic way to see where exactly you are spending your money.
  • By allocating money at the start of the each month to different tasks, you can easily achieve your goals.
  • As with any budget, this template is a useful tool on the path to financial wellness.
  • This budget requires accuracy, so you will gain a clear picture of your financial situation.
  • Likely to reduce wasteful spending.
Disadvantages of the Zero Based Budgeting Method
  • While it’s a fantastic tool, setting up your zero based budget can be complicated to start out with.
  • Lot’s of tracking is required. You must track every single thing you spend money on, so if you spend big, this could be time consuming.
  • While it is possible to use the Zero based method if you receive income, it can be difficult to calculate.
  • This tool is very detail oriented. If you lack attention to detail this budget may be frustrating for you to stick to.


Interesting fact:

The idea was coined over 50 years ago by Texas based accounting manager Peter Phyrr. Phyrr invented Zero-Based budgeting in the 1970’s, originally developed to be used for businesses, this budgeting tool also works well for anyone wanting to manage their personal finances too.

Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

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