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What is Zero-Based Budgeting?
The process of budgeting and following budget stipulations is a useful tool in both business and home life. Maintaining a budget allows you to see where necessary expenses land and how much you have leftover for less urgent things. There are also multiple ways to approach a budget, so how do you know which one is best?
Zero-Based Budgeting (ZBB) is a common method among companies and businesses, however, it can also be implemented in the home too. But, ZBB isn’t the only method out there. So how does Zero-Based Budgeting differ from other methods?
In this article, we’ll go over exactly what ZBB is. We’ll also cover the pros and cons of ZBB and offer a comparison between other methods. If you decide Zero-Based budgeting is the way you want to go, we’ll also leave you with helpful tips on how to do so successfully.
What is Zero-Based Budgeting?
Also known as ZBB, Zero-Based Budgeting involves setting a budget for a certain period and reassessing after each period you choose. For example, if you choose to budget monthly, then you’ll set your budget for that month only. When the next month arrives, you’ll sit down and set a new budget based on the new month’s needs.
It doesn’t matter if the new month’s budget is more or less than the previous month. Each month of ZBB is unique to that specific time period. In the business world, ZBB is used so managers can tackle lower costs in a company.
However, using ZBB in the home involves you allocating each cent of your earnings to a specific area. These areas include retirement and savings, so by the end of each period, you should have zero dollars left over.
Pros and Cons of Zero-Based Budgeting
ZBB is certainly an effective way for budgeting your money. With that said, there are some disadvantages that may turn some people off of this specific budgeting method. Of the advantages, ZBB is great for short-term planning, giving you a more structured plan, and more flexibility in certain areas.
On the other hand, the short-term planning ZBB caters to can be cumbersome if you want to save up for something specific. ZBB is also something you need to constantly revisit, so that can be draining after a few months.
Let’s take a closer look at the advantages and disadvantages of Zero-Based Budgeting.
Zero-Based Budgeting Advantages
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It’s Great for Short-Term Planning
ZBB is great for short-term planning because you split your money between different expenses and you can allocate more or less in one spot depending on the month. For example, if you’re planning on taking a vacation at the end of the month, you can prioritize that part of your budget and put enough money toward that specific event.
It’s a Very Structured Method
If you like a lot of structure and you enjoy planning, ZBB gives you the opportunity to do so every month. Chances are pretty high that if you’re a planner then you’re also very interested in your financials and where everything is going. By revisiting your budget each month, you can get an accurate idea of where your needs are each period and plan accordingly.
It Offers More Flexibility
Because ZBB requires you to adjust your budget each month accordingly, you have more flexibility to move money around to different facets of your budget as needed. This method is far more flexible than other budgeting methods because you can set your period for budget reassessment to fit your specific lifestyle.
Zero-Based Budgeting Disadvantages
The Short-Term Favoritism Can Be Cumbersome
If you want to pool more money toward something specific, using ZBB can make the process more stressful as you have to reassess everything after each period. On the same coin, using ZBB in business rewards short-term thinking which can cause the “long-term” aspects of your business, like employee training, to get less funding than what’s needed.
It Changes From Period to Period
Individual ZBB budgeting requires you to reassess your budget after each pay period, or however long you choose the budgeting period to be. If you don’t like change or the thought of constantly reassessing your finances, this may not be the best option for you.
Zero-Based Budgeting vs. Traditional Budgeting
While Zero-Based Budgeting is a more thought-intensive method, traditional budgeting is simpler in that it automatically calls for a specific increase in the budget. Regardless of overall performance or individual/company needs, a traditional budget will not budge.
Zero-Based Budgeting vs. Incremental Budgeting
Incremental budgeting is very similar to traditional budgeting in that this budget is prepared by taking the current number and adding incremental amounts in the following period.
Zero-Based Budgeting vs. Performance Budgeting
Performance budgeting is exactly as it sounds: a budget is determined by the overall performance of an individual or company. This method is commonly used in government agencies at all levels.
How to Zero-Based Budget Effectively
To effectively follow a zero-based budget, there are specific steps an individual should follow. These steps are similar to the way a company would approach ZBB, but these are catered more toward individual budgeting.
- Note your monthly income. Before starting on your budget, you need to know how much you’re working with. While you can do this with pen and paper, you can also use a digital spreadsheet to keep things neat. You should include all forms of income you receive including side work, allowances, and any jobs you hold.
- Note your expenses for each month. Once you know how much you’re working with, you need to know how much to take away. Your monthly expenses include everything from rent or mortgage to groceries. You should also include any non-essential expenses like entertainment subscriptions or leisure money.
- Jot down any other expenses. Seasonal expenses like HOA fees or a holiday shopping budget should also be noted. This way, you have them in mind while factoring in your budget each month.
- Do some math. Now you need to subtract your income from all of your expenses until it equals zero. In other words, each dollar you earn should be spoken for. This is the best way to ensure you stay on budget and don’t spend more than you earn.
- Keep track of monthly spending. Now that you’ve made your budget, you need to do the work to stick to it. Whenever you spend money, make sure to take note of it somewhere to help you stick to your plan.
Keeping track of your finances can be a daunting task without the skills and tools needed to get the job done. If you think this budgeting method is right for you, give it a try and take the first steps to get your budget back on track.
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