Are you tired of feeling like your money is slipping through your fingers each month? It’s time to take control with a budgeting method that’s both simple and effective: zero-based budgeting. In this blog post, we’ll dive into the principles of zero-based budgeting, explore how it can transform your financial life, and provide practical tips to help you get started. Whether you’re looking to eliminate debt, save more efficiently, or just gain a clearer picture of your finances, zero-based budgeting could be the game-changer you’ve been searching for. Let’s break down how you can make every dollar count and achieve financial clarity like never before.

What Is Zero Based Budgeting?

In today’s fast-paced business world, where every dollar counts and strategic financial decisions are crucial, zero-based budgeting (ZBB) stands out as a game-changing approach. Unlike traditional budgeting methods, which start with last year’s budget and adjust based on historical figures, ZBB demands a fresh start each period. Every expense must be justified from scratch, ensuring that every dollar is purposefully allocated.

Zero-based budgeting is more than just a financial tool—it’s a strategic weapon for businesses aiming to streamline operations, cut unnecessary costs, and sharpen focus on high-impact initiatives. By dismantling outdated spending habits and scrutinizing every expense, ZBB helps organizations stay aligned with their strategic goals and adapt dynamically to changing conditions.

In essence, budgeting, including the zero-based approach, is the tactical embodiment of a company’s strategic vision. To meet long-term objectives, businesses need to translate their broader goals into specific, actionable financial plans. These plans are continuously monitored and adjusted to ensure progress toward desired outcomes.

Budgets foster accountability and ownership, driving sensible financial decisions and proactive management. They enable companies to forecast profits, uncover potential issues, and seize new opportunities. In this blog post, we’ll delve into the mechanics of zero-based budgeting, its benefits, and how it can transform your financial strategy from reactive to proactive. Prepare to rethink your budgeting approach and unlock new levels of financial efficiency and control.

Zero Based Budget VS A Traditional Budget

How To Make A Zero Based Budget

Before you dive into creating your zero-based budget, take a moment to log in to your bank account or dig out those bank statements you stashed away for a rainy day. (Surprise—today is that day!) Having these documents handy will be invaluable as you track your typical income and spending habits. Additionally, you might want to explore standard budget percentages and averages to see how your spending compares to typical household expenditures.

1. List Your Monthly Income

What counts as income? It includes your regular paychecks as well as any additional earnings you anticipate for the month. This might encompass cash from your side gig as a pizza delivery driver, income from your weekend balloon artistry, or any other extra sources of revenue. Make sure to jot down all these sources and tally them up. This total represents your monthly income—essentially, the budget you have to work with this month.

2. Lists Your Expenses

Now that you’ve got a clear picture of your income, it’s time to tackle your expenses. Consider every single thing you spend money on throughout the month—yes, everything. To keep things organized, list out your expenses in detail like this:

• Giving (10% of Income)
• Savings (Depends. Explained Below).
• The Four Walls (Food, Utilities and Transport).
• Other Essentials (Debt, Childcare, etc.)
• Extras (Entertainment, Eating Out, Vacations, etc.).
• Month Specific Expenses (Celebrations, Semi-Annual Expenses, etc.)

Tip: Don’t forget to include a miscellaneous category in your budget. This gives you a small cushion for unexpected expenses, so when something unforeseen comes up, it’s already accounted for. This way, surprises won’t throw off your entire budget—they’ll be neatly covered within your plan.

3. Subtract Expenses From Income

When you subtract all your expenses from your income, the goal is for the result to be zero. If you don’t hit zero on your first try, don’t worry—you’re in good company! Most people don’t get it perfect on their first attempt, and that’s perfectly okay. What’s important is how you adjust. Let’s discuss the steps to fine-tune your budget and get it on track.

Got money left over? First, celebrate—throw some confetti, do a victory dance (or if dancing isn’t your thing, a triumphant fist pump works too). Then, make that extra money work for you!

Where should it go? Apply it to your current Baby Step!

Definition Time: The 7 Baby Steps are a proven roadmap to saving money, paying off debt, and building wealth—essentially, the path to financial success. These seven goals will guide you from your current financial state to where you want to be. Allocating any leftover money to these steps will maximize your financial impact.

But what if you don’t have money left over? If your planned expenses exceed your income, you’re in the red—and that won’t work. But don’t panic! You can get that number to zero.

Grab your metaphorical hedge clippers and trim your budget. Look for ways to reduce planned spending or cut expenses entirely. (Pro tip: Start by slashing your restaurant budget, and consider meal planning to cut down on grocery bills and avoid the temptation of takeout.)

Alternatively, boost your income by starting a side hustle, selling unused items, or finding other opportunities to earn extra money. (If you’re not already a weekend balloon artist, maybe it’s time to become one—or even turn it into a weeknight gig for additional income.)

4. Track Expenses (All Month)

Setting up your budget is just the beginning—you can’t just set it and forget it. To truly manage your money effectively, you need to track every transaction. That means recording every bit of income and expense in the appropriate budget categories.

For instance, if you earn $100 from a side hustle, add that to your income category. When you pay your rent, subtract that amount from your housing budget. And when you fill up your gas tank, deduct that expense from your transportation budget.

This meticulous tracking is crucial for staying on top of your spending and avoiding overspending.

5. New Budget Before The Month Is Over

While your budget won’t need drastic changes every month, it will need some adjustments. Therefore, create a new zero-based budget each month to reflect any variations in your income or expenses.

Remember those month-specific expenses we talked about earlier? This is where they come into play, as they’ll help you account for irregular or seasonal costs.

Aim to set up your budget before the new month begins. This way, you’ll be prepared and ready for any upcoming financial demands, keeping your spending and savings on track.

Advantages of Zero Based Budgeting

1. 50/30/20 Rule

The 50/30/20 budgeting rule is a popular framework where 50% of your income goes toward needs, 30% towards wants, and 20% towards savings. While having a guideline like this can be a useful starting point, it’s important to recognize its limitations.

Firstly, if you’re following the Baby Steps , your approach to savings is different. Instead of allocating a fixed percentage, you’re focusing on one goal at a time, achieving quick wins and building lasting wealth through strategic steps.

Secondly, the 50/30/20 rule often treats debt as part of your needs category, but it only encourages minimum payments. To make significant progress, you need to tackle debt more aggressively, which the 50/30/20 rule doesn’t fully support.

Lastly, the 50/30/20 percentages remain static regardless of your financial situation. Whether you’re managing substantial student loan debt or are debt-free and saving for retirement, the same percentages apply. However, your financial priorities and strategies should evolve as your circumstances change.

2. 60% Solution

The 60% solution method allocates 60% of your budget to cover all your wants and needs, while the remaining 40% is designated for savings. This 40% is then divided into three categories: 10% for retirement, 10% for long-term savings, 10% for short-term savings, and 10% for “fun.”

There are a few issues with this approach. First, dividing your budget this way can be overly complex. Second, while saving is important, if you’re dealing with debt, putting 40% of your income into savings isn’t the best strategy. Instead, focus on aggressively paying down your debt. Once your debt is under control, prioritize building a fully funded emergency fund and then aim to invest 15% of your income in retirement.

Additionally, the average American spends around 80% of their income on needs, making the 60% solution unrealistic for many. This method doesn’t account for the diverse financial situations individuals face, making it less adaptable to different budgeting needs.

3. Reverse Budgeting

Many budgeting methods suggest allocating money for spending first and setting aside savings second. Reverse budgeting flips this approach on its head.

With reverse budgeting, you prioritize your savings and investments first. You determine how much you want to save and invest, and then you allocate the remaining funds to cover your spending needs, including housing, gas, food, insurance, debt, and nonessentials.

I appreciate this method because it ensures that savings aren’t an afterthought. It’s easy to overlook savings when you focus on spending first, but reverse budgeting helps keep savings at the forefront of your financial plan.

4. Set and Forget

Alright, starting with a budget means getting all your numbers down—both income and expenses. That’s your first step. But don’t stop there. Simply noting those figures and hoping they’ll guide your spending won’t cut it.

That’s the “set it and forget it” approach, and it doesn’t work well. While it helps you see where your money should go, it doesn’t hold you accountable for where it actually goes, which can easily lead to overspending. To truly manage your finances, you need to actively track and adjust your spending to stay on top of your budget.