What Is a Zero-Based Budget?

A zero-based budget is a budgeting process in which you assign every dollar of your income. At the end of each month, after you account for your expenditures, savings, and spending, you should have no money left.

Definition and Examples of Zero-Based Budgeting

Zero-based budgeting is a way of managing financial resources whereby each expense or expenditure is evaluated based on its own merits, without regard to the amount of money that has already been spent. This method can be effective when it is used in conjunction with other budgetary practices such as forecasting and goal setting. Some common examples of how zero-based budgeting can be applied in business include:

ocating funds for new projects by evaluating the potential benefits against the costs associated with those projects;

allocating funds for existing projects based on whether or not they are meeting goals set originally;

evaluating expenses and making necessary adjustments to spending in order to stay within a budgetary constraint.

Examples of zero-based budgeting implementation in organizations include the United States Army and NASA. The U.S.

Also known as zero-based budgeting, zero-sum budgeting is where your income minus your expenses equal zero. It encourages you to direct the flow of money in your monthly budget to debts, payments, and financial goals. This helps you know where all your money goes.

As an example, let's say you take home $3,000 per month. With a zero-based budget, you could allocate all of that money to bills, savings, and spending, so that at the end of the month you have $0 left.

How a Zero-Based Budget Works

You need to know how much money you earn each month in order to determine how much you earn in take-home pay. Then, you need to assign a value to every piece of your income that you will use to pay expenses, including any money you want to save for later, and any money you want to spend on things like dining and shopping.

Suppose, for example, that you earn $5,000 per month at your place of employment. You could set aside $2,000 to cover rent, utilities, and other living expenses, and then put $1,000 toward student loans and credit card debt.

After that, you save $1,500 so that you have an emergency fund and can buy a home one day. You're allowed to spend the last $500 on anything you want to, whether it's eating out, shopping, gas, travel, or anything else you can afford.

In this example, your income of $5,000 minus the total expenses of $5,000 equals $0. With a zero-based budget, if you underspend in one area, you should reallocate that unspent money to another area. Conversely, if you overspend in one area, you have to substitute that with money from another area.

Pros and Cons of Zero-Based Budgeting

Pros Explained

By incorporating a zero-based budget to your budget, you can observe where your money is going. If this strategy is applied, you can see that you spend X on expenses, X on debt, X on savings, and X on needs.

If you have a tendency to overspend, a zero-based budget may help. You may be less likely to spend money you don't have since it was already spent on other areas of your budget.

You can set a zero-based budget to achieve your unique financial goals. To pay off your student loans or any other debt as quickly as possible, for instance, you can allot your allotted cash to that debt each month.

Cons Explained

Creating a zero-based budget can take time. You'll need to examine your monthly take-home pay, determine how you wish to use it to divvy up your finances, and assign each dollar to a specific category.

If you are self-employed, a freelancer, or sole proprietor, or work on commission, your income likely fluctuates every month, which can make it difficult to create and adhere to a zero-based budget. Feel free to make use of your past month's earnings to forecast what your upcoming earnings will be.

Expenses that vary from month to month are not included in a no- or zero-based budget. If you have a budget set up for each category, a zero-based budget can help you account for or have realistic expectations for recurring expenses.

How to Create Your Own Zero-Based Budge

Determine Your Net Income

Consider the income you already made in addition to other sources to use to determine how much you have to spend each month.

You are recalculating your take-home earnings, which is the income you make after taxes are taken out and retirement contributions are also included. This is also known as the net income.

Track Your Spending

For a few months, use your credit card statements and receipts to keep track of what you usually spend. Doing this will enable you to anticipate categories where you can cut your spending as well as areas where allocating additional funds would be beneficial.

Categorize Your Expenses

Submit your expenses and priorities in writing. Include anything you want and need. Your needs might be things like rent, utilities, and health insurance, while your wishes may be your gym membership, takeout food, and movie tickets. To save money to buy a home, create a "home fund" category. Want to pay off your credit card debt? Create a "credit card debt" category.

Alternatives to Zero-Based Budgeting

If you're not sure about the merits of zero-based budgeting, consider these alternatives first.
Essentially speaking, you can only use cash to pay for goods and services. That means no debit or credit cards, no payment apps like Venmo; and no checks.

Similar to a money-only budget and zero-based budget, you'll use envelopes to allocate money to different accounts. Once the envelopes are empty, your spending for the month is complete.

With this budget, you will spend 50% of your take-home pay on needs, 30% on your wants, and 20% on savings or financial goals. The 80% 20% budget assigns 20% of your money to savings and 80% to spending.

Takeaways

A zero-based budget implies that your earnings minus your expenses are equal to zero, meaning you possess no money as of the last day of the month. Each dollar you earn goes to a particular job.

A zero-based budget will enable you to easily determine where your money is heading and prioritize you particular financial goals.