It’s easy to get a bit swipe-happy with a debit card when payday rolls around. But, if you have long-term financial goals, planning and budgeting effectively each month will be crucial to achieving them. ZBB is particularly useful for hopeful home buyers or aspiring holidaymakers, budgeting through the year is the best way to guarantee you’ll get what you want when you want it.
One of the best methods for keeping track of your personal finances is zero-based budgeting, which is also sometimes written as zero-based budgeting, budgeting ZBB, or simply ZBB. The ZBB process is easy enough to understand, but it will take some diligence and commitment.
So, it’s time to stop asking ‘what is a zero-based budget?’ and start learning all about this useful approach to personal finance management. We’ll cover everything you need to know from start to finish. Let’s get to the most commonly asked questions:
Zero-based budgeting or ZBB is a budgeting method that entails starting from scratch with a new spending plan each month. The idea is that you take your monthly income and allocate your expenses for the month ahead until they equal zero. So, you should have nothing left to spend when your total expenses are taken away from your income.
When you budget from zero, it’s much easier to track your expenses. By aggregating each item in your budget at the start of the month, you get a concrete overview of what you’re going to spend on essentials, leisure, and savings before you do anything with your money. For people who want to get a handle on their finances, zero-based budgeting means being savvier in the pursuit of an important long-term aim.
For this budget system to work, you have to be on the ball at all times. Any additional expenses that crop up must be accounted for and money should not roll over into next month. Zero-based budgeting starts and ends with being more intentional about how you spend, so always be realistic when allocating costs and stick to your allowance.
Zero-based budgeting is important because cost management is important. We live in a culture of cost-consciousness, where every little expense matters. With a student loan to pay off and high house prices to save towards, cost accountability counts.
When you make good use of the zero-based budgeting process, each budget cycle offers you a brand new opportunity to add more to your savings accounts or stay on track with personal loan repayments. And, crucially, when budgeting from zero, you can do all of that without having to worry about going beyond the limits of your bank account.
Originally, the zero-based budgeting system was created to be used exclusively by businesses. Developed by a Texas-based accounting manager called Peter Pyhrr back in the 1970s, it is used by huge international corporations including Unilever and, more recently, Kraft Heinz.
Since then, it has become apparent just how effective ZBB can be for personal cost management, too. It’s also easy enough for anybody to try, although admittedly it can be time-consuming at the start. The zero-based budgeting examples we cover later will help anyone new to the game get a grip on the concept more quickly.
With budgeting meaning different things to different people, it stands to reason that different methods of budgeting would work better for some than others. As such, plenty of people and businesses choose not to implement ZBB in favour of other spending strategies.
If you’re stuck on which approach to take, we’ve created summaries of what each budget requires and how they compare with zero-based budgeting. Some will be better for businesses while others make more sense for a sharp young saver with something big to work towards.
Note: All things considered, ZBB remains one of the most effective options for personal financial management.
It’s worth noting the difference between bottom-up budgeting vs. zero-based budgeting because they’re both such popular approaches. However, the bottom-up method is much better for businesses while ZBB is better for keeping track of your financial situation.
While, in ZBB, a person or institution allocates all costs for the month based on overall income, bottom-up budgeting entails individual entities within a company, family, or another group submitting their spending plan for a specified period. Usually, one person will evaluate each plan and either agree to them or request that alterations be made.
In zero-based budgeting, a person starts from scratch each month, so that all costs are accounted for at all times. Activity-based budgeting, on the other hand, is a more analytical approach to managing your finances.
It involves rounding up all expenses and costs incurred throughout a month and scrutinising them. The idea is that you look for areas in which you can be more efficient when the next month comes along and work those new spending habits into future budgets.
Also sometimes called ‘incremental budgeting,’ traditional budgeting is all about taking note of what you earn and what you spend so you can set goals based on your current financial standing.
With a traditional budget, many people find it harder to cut costs than with a zero-based budget. This is mostly because expenditure isn’t allocated at the outset. As a result, it’s all too easy to overspend.
So, it’s clear that zero-based budgeting is a great way for individuals to manage their finances, but it’s also ideal for accountants planning for long-term business growth.
So, what is a zero-based budget in accounting? Well, when an accountant takes charge of a business’s budget, whether that be in the public sector, corporate finance, or another industry entirely, a budget period will be set.
While for an individual, that should ideally be based on the day they get paid, for a business, cost accounting for a new period could begin at the start of every quarter or financial year instead. All allocated funds will be broken down by department and set based on the goals each team in the company is expected to hit. This helps to ensure manager accountability.
Zero-based budgeting can be as simple as you want it to be. It can, for example, be worked out on a napkin or in the notes app on your phone, or it can be tracked automatically by a budgeting app. Whatever approach you take, ensure it’s something you’re likely to stick to.
Budgeting starts when you know what your expenses for the upcoming month are going to be. Each expense should be included as a different line item and you’ll need to allocate the amount you expect to spend on it before your next payday.
You may need some additional tools to help you work out your fixed expenses, including an insurance calculator, mortgage calculator, and payoff calculator.
Important: After you allocate funds, you might find that you have money left to spend. It is crucial that you don’t let this roll over into next month when your new budget starts. Instead, you should find a way to put that money to good use. You could, for example, put more into your savings account, add to your Christmas fund, or pay off a larger chunk of your business credit cards.
For a better idea of how each budgeting cycle might work, it’s worth looking at a zero-based budgeting example. Say, for example, that you earn $2,000 a month including all wages, benefits, and other sources of income. Get that down and, underneath, list all outgoings until your income equals zero.
Starting with the essential expenses first, your spending plan might look like this:
When calculating your estimated expenses for the month ahead, always keep your financial goals in mind. If, for example, you want to bump up the amount you can save, look for ways you can reduce costs elsewhere.
Or, if your budgeting priorities change one month, perhaps because of an unexpected extra expense, then you would need to revisit your budget. Based on the zero-based budgeting example above, you could decide against buying new clothes to free up more money to cover the new expense.
You don’t need budget apps or anything fancy for zero-based budgeting. In fact, one of the most common approaches to ZBB is to create and track a spending plan in Excel. It’s really simple to do, even if you’re not too familiar with the platform.
All you have to do is list your outgoings, as above, with the names of each expense in one column and the costs running alongside in an adjoining column.
Then, create an additional column for how much you actually do spend on each. If it’s higher or lower than you anticipated, tweak the rest of your budget so you still end up with zero at the end of the month.
Note: To make your cost allocation even more efficient, you can create expense categories. These will help you to better break down and monitor your spending habits. Some of the most useful categories include fixed expenses such as your rent, variable expenses such as your utility bills, debts such as your student loan, and savings.
With your budget starting to take shape, it’s time to take a look at the pros and cons of the zero-based method of budgeting.
The myths and realities that surround ZBB do tend to differ, so it’s important that your expectations are set appropriately. Ultimately, successful ZBB can be a great way of cutting costs and doing the budgeting required to meet your financial goals.
For starters, it’s one of the most accurate ways of tracking your outgoings against your income during any given budgeting period. With ZBB, you always know what you’re going to end up spending by the end of your budgeting cycles, so you’re far less likely to waste money on unplanned purchases.
It’s also an effective approach to cost reduction. With all of your fixed and variable expenses laid out in front of you, it’s so much easier to see where you’re overspending unnecessarily. With an eye to long-term targets, you’ll find that substantial cost savings are far more achievable each month.
Companies and business owners who employ zero-based budgeting can enjoy similar advantages. That’s because it’s such an accurate and efficient method of allocating resources, it can help organisations to cut down on activities that aren’t making money and improve communication across departments.
Zero-based budgeting is great for all sorts of reasons, but that doesn’t mean it’s a perfect system. There are a fair few disadvantages of ZBB that you should know about, the first being that the characteristics of zero-based budgeting can be difficult to get your head around at first.
That’s not to say that it’s overly complicated. But, when you begin laying out your monthly expenses, trying to get them to equal zero can be a painstaking task. If you’re aiming to make cost reductions and increase your savings, it can end up being pretty time-consuming.
Not to mention the fact that you can never be sure exactly what a new month will throw your way. If, say, you’ve already spent most of your allocated budget for the month and one of your appliances breaks down, you might struggle to find the money to get it fixed.
It also isn’t the ideal method for annual budgeting. While you can break down each of the coming twelve months using a zero-based approach, this type of budgeting requires regular evaluation.
The idea is that you set your expenses on a month-by-month basis. Trying to do that so far in advance will likely lead to constant tweaking and changing as the year goes on.
Now that you understand the realities about zero-based budgeting, from what it is and how it works to who it benefits and where it falters, you can make up your mind about whether it will work for you.
The whole budgeting process revolves around the idea that, if you’re intentional about how you spend your money, you’re far more likely to spend it wisely.
For those with specific financial goals, this can be a big help. Whether you want to save for a house, buy an expensive pair of trainers, or pay off your loans quicker, zero-based budgeting can help you do just that.
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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.