It’s no secret that a budget is one of the best ways to set yourself up for financial success. With a traditional budget, you can see how much money you have and know exactly where your money is going. Once all this information is laid out, it’s much easier to manage your monthly bills and identify areas where you may be able to cut back.
While there are many budgeting styles, the Zero-Based Budget is a method that’s gaining in popularity. Originally created for businesses, the zero-based budgeting process forces organizations to justify every expense – helping to trim the fat and prevent excess spending.
When applied to individual or family budgets, it works in much of the same way. The ultimate goal of the zero-based budget is to help you identify must-have expenses, eliminate frivolous spending, and boost your savings. Keep reading to discover if this budgeting style is right for you.
What Is a Zero-Based Budget?
A zero-based budget is a method that requires you to justify each expense within your spending categories. In other words, you will allocate your entire income to your costs and savings. Each month, the goal is to reach a budget where your income minus your expenses equals zero. This concept gives every dollar earned a purpose and allows you to know where your money is going.
It’s a handy method if:
- You find yourself overspending regularly.
- You want to reduce high credit card balances.
- You commonly spend on frivolous items and experiences.
- You lack emergency or retirement savings.
Once you allocate all your income to your expenses, you shouldn’t have money left over. If you do have money left, you will use those funds to either pay down existing debt, build your emergency fund, or put aside for future events (such as holidays or vacations).
This budgeting style is more involved than a traditional budget, but it’s worth the effort if your goal is to cut back on frivolous spending.
How It Works
As with any budget, you’ll begin by listing all your monthly incomes. Next, you’ll want to break up your monthly expenses into categories, such as:
- Necessities: Rent/Mortgage, Utilities, Food, Transportation, and Clothing.
- Existing Debt: Credit Cards or Loans (other than your mortgage and car loan).
- Extra Expenses: Eating out, Extracurricular Activities, Kids’ Sports, etc.
- Savings: Emergency Fund, Retirement, Investments, Holidays, Vacation, Birthdays, Anniversaries, etc.
As an example, let’s say you make $4,000 per month. If you use a traditional budget, it may look like this:
| Monthly Income | $4,000 |
| – Necessities | $2,500 |
| – Existing Debt | $ 300 |
| – Extra Expenses | $ 600 |
| – Savings | $ 250 |
| Balance | $ 350 |
In this example, you would have $350 left over at the end of the month. While you may have good intentions to transfer those extra funds into savings, they often get lost to frivolous expenses.
Instead, review how the zero-based budget puts those left-over funds back into your budget.
| Monthly Income | $4,000 |
| – Necessities | $2,500 |
| – Existing Debt | $ 400 |
| – Extra Expenses | $ 600 |
| – Savings | $ 500 |
| Balance | $ 0 |
With the zero-based budget, the left-over $350 is redistributed back into your monthly budget. In this example, $100 was put towards Existing Debt, and $250 was transferred into Savings.
As you can see, 100% of the monthly income is allocated towards expenses – leaving no room for frivolous spending. In other words, every dollar earned serves a purpose.
Adjusting Your Zero-Based Budget
The greatest challenge with any budget is that it needs to be tweaked regularly. While many of your monthly expenses will remain the same, such as rent or loan payments, there are other variables to consider.
For example, depending on your job, your income may fluctuate monthly. Or seasonal expenses, such as holidays, birthdays, or vacations, will need to be accounted for in your budget.
It’s wise to schedule time each week to review your budget and make sure you’re staying on track. Use this time to make necessary adjustments and learn from any mistakes made along the way.
Takeaway
Without a budget, it can be challenging to manage your money. The result could lead to late payments, unnecessary fees, and little or no money put into savings.
While the zero-based budget is stricter than other budgeting methods, it’s great at keeping your spending in check. It will also allow you to build up your savings or pay down existing debt quicker. Yes, it will take a little more work, but the benefits are significant if you stick with it.
We’re Here to Help!
Budgeting can often seem like a chore, but it’s an excellent tool for building your savings. If you’re having issues making your budget work, we’re ready to help.
Together, we may be able to identify opportunities to put more money back into your budget, such as refinancing loans or consolidating debt. Or you might want to open a savings account specifically for your emergency fund.
As your credit union, we’re here for you. Please stop by any of our convenient branch locations or call 800-782-4899 to get started today.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.