An income-based financial plan can be a road map for you and your money. It will assist you in being more deliberate with your spending and saving habits. You can also use it to set yourself up to achieve your financial objectives and meet living expenses and unplanned emergencies. You can do this by using a variety of budgeting techniques.
There is no doubt that budgeting may be tricky. However, it can also empower oneself. The main objective of budgeting is to get more financial control.
Zero-based budgeting can be the best option if you seek an alternative beyond conventional budgeting. With zero-based budgeting, you aim to reach zero by allocating every dollar you make to a particular use each month.
To determine if the zero-based budgeting approach suits your financial circumstances, learn more about how it works and its pros and cons.
What is known as a zero-based budget?
In a zero-based budget, often known as a zero-sum budget, your total income, less all your outgoing expenses, will be zero.
This strategy’s objective is to ensure that every dollar is spent and not just sitting in your bank account waiting to be spent on an impulsive buy. It is not meant to force you to spend every penny you earn. Contributions to your savings account, creating an emergency fund, and, if applicable, paying off debts should all be included in your expenses.
Let’s say your monthly income, after taxes, is $5,000. You should have $0 left over after paying for your living expenses, debts, emergency savings, investments, retirement contributions, etc. If you’re not at zero, you can identify where you might need to adjust the budget for the following month. Your cost categories may change depending on your unique demands and financial objectives.
What are some pros and cons of zero-based budgeting?
Pros of zero-based budgeting:
Proper knowledge of available financial resources
Zero-based budgeting is an excellent exercise as part of your financial planning because it forces you to concentrate on how you will spend each dollar you receive in a month. Due to its thoroughness, you can determine which discretionary expenses are significant to you and which ones you can live without.
You’ll be more aware of the cash flow in your household. Therefore, when reviewing your bills, you can discover if you’ve been paying for several streaming services or a lapsed subscription.
Additionally, you’ll have to organize your indulgences, which can prevent useless spending. You’ll choose how many meals you’ll order, what type of entertainment you’ll pick, and what clothing you’ll buy at the beginning of the month. This equips you with the strategy to prevent overstretching yourself and your wallet.
Prioritizing financial objectives
While using a simple budget to track your spending will help you see where your money has gone, it won’t necessarily help you decide where it should go first.
Zero-based budgeting enables you to allocate funds to goals before expenses, prioritizing debt repayments such as credit card debts, payday loan debt, mortgage payments, and also student loan debt, savings goals, and other financial objectives you are working toward.
Better cost management
Zero-based budgeting’s main benefit is that it makes it possible to limit costs. You have to analyze your spending every month closely, as the budget from the prior months is not used as a benchmark. Because it makes you plan and account for every dollar each month, it helps you take charge of your finances and live within your means.
Finds inflated budget arrangements
The zero-based budgeting approach can rapidly identify the problem if too much budget is allocated to a specific line item. It considers the precise sum you require for a particular cost category for a specific review period. If you still have some balance left in your budget after making payments towards that category, you should focus more on other cost categories in your current budget plan.
More savings with less overspending
This budgeting strategy considers savings essential when deciding how to engage your money. Thinking about how you will prepare for today and tomorrow can be pretty beneficial, especially if you aren’t a natural saver.
The total amount you have at your disposal depends on your monthly income. People typically spend their money first and only save what is left over. A zero-based budget encourages people to consider how much they want to save at the beginning of the month before they make purchases. If you faithfully stick to this strategy, you’ll never spend more than you earn.
It may stop using obsolete processes
The zero-based budget eliminates anything that isn’t beneficial to your overall financial health to identify inefficiencies in your financial processes. Through this budget plan, any ineffective process, whether for personal or business use, will be identified and eliminated, saving you money on unnecessary purchases.
It’s comparable to having four streaming services but only using one regularly. The three that you don’t use would be canceled under this budget.
Simple to make adjustments
It gives you a framework for saving for emergencies and the future. You can even utilize zero-based budgeting to supplement and further flesh out the specifics of a 50/15/5 budget. But, the proposed amounts may not suit your current financial circumstances. If so, you might use a zero-based budget’s ability to be customized.
With a zero-based budget, you can adjust your strategy each month as your requirements, wants, and income shift. It enables you to distribute various sums to various places periodically. You can adapt your budget even if your income fluctuates.
But you must follow through on these plans after making them. Spending too much can cause you to deplete your savings or even accumulate debt, which will require you to set aside additional funds in the future. Even while zero-based budgeting allows for more personalization than other budgeting techniques, you should still strive to save at least 15% of your salary for retirement, including any employer match.
Highlights areas for improvement
A similar presumption that a basis from a prior period is not necessary guides the creation of zero-based budgeting. If a self-employed person’s income is changeable, they may be an exception to this benefit. The next step should be examining your monthly, quarterly, or annual expenses to ensure that every spending pattern is justified and offers some concrete advantage.
Cons of zero-based budgeting:
Since you must stick to your budgeted numbers and be willing to cut other spending when unforeseen expenses come, zero-based budgeting may feel overly restrictive for some people. Other approaches provide you greater discretion over your spending decisions without the concern over how they would impact your end-of-month zero balance.
Implementation demands financial expertise
The zero-based budgeting strategy might lead to conflicts because it takes a lot of expertise and effort to apply. You need to have such skills to utilize this strategy correctly. You can always take the time to learn from professionals in the field how to handle your money in this way, but that would require you to take on another commitment that you might not have the time to manage.
Planning is necessary for the effective execution
Zero-based budgeting can be time-consuming, especially when you’re initially getting started. So, you need strong plans for determining your financial objectives and obligations. If your income or expenses vary dramatically from month to month, this can be especially difficult because you may need to make significant budget modifications frequently.
Sticking to a zero-based budget might be challenging even when your income is steady. You must always confirm that any purchases you make are within the parameters you established at the beginning of the month.
It takes time for effective management
Since you must start from scratch each month and base your new budget on the previous month’s budget, managing a zero-based budget can take longer than other approaches.
Focuses on the short-term goal
Due to the excessive emphasis on your current financial condition required by this budgeting technique, it may be simple to overlook your long-term finances, including retirement planning and investment.
Variables don’t work effectively with it
Zero-based budgeting is flexible but functions best when your income and expenses are stable. This strategy ignores variables because you’re basing next month’s budget on this month’s outlays.
It’s not recommended for first-time budgeters
Advanced budgeters usually benefit more from zero-based budgeting. For first-timers, strategies like the 50/30/20 or envelope budget might work well. You can switch to zero-based budgeting if you’ve accumulated more expertise and feel more confident making and keeping budgets.
Smart budgeters may manipulate the method
The zero-based budgeting system can be used by people who know how to manipulate it to raise resources for themselves. When this disadvantage affects a family, it may cause enough strife to cause a split or worse. It frequently makes people feel like they are disposable or are being treated more like a commodity than a unique person.
Is zero-based budgeting the best option for you?
Even if you eventually switch to another planning framework once you’ve got a hold on this, zero-based budgeting is a helpful exercise for determining your spending relative to your take-home earnings. It can be highly beneficial to people whose financial condition has just altered.
You might be an outstanding candidate for zero-based budgeting if you have a steady income and want to take and keep greater control of your money to boost savings, consolidate debt, or accomplish other financial goals.
You can decide whether to try this budgeting technique by asking yourself the following questions:
- Do you ever reach the end of the month, unable to identify the specifics of your budget overruns?
- Is saving occasionally a last-minute decision?
- Do you want to plan your expenditures better going forward?
- Could budgeting be made simpler for you with a better-organized plan?
- Do you have the time to maintain a zero-based budget, or would a less time-consuming budgeting strategy be more beneficial?
Managing a zero-based budget each month will be most straightforward for people with consistent, stable incomes. However, people with less stable, erratic earnings can also profit, even if tracking every dollar that comes in would be more difficult.
But in the end, the most excellent budget for you is the one you can adhere to, which keeps you moving toward your financial objectives.
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Lyle David Solomon
Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.