Using the zero-based budgeting (ZBB) method, you could plan your expenses by computing your monthly income and assigning specific amounts to your listed budget categories until you reach zero. It aims for you to learn to assign each dollar you make to a particular expense to cover all or at least most of your spending.
Understanding zero-based budgeting
It originated in the 1960s by Peter Pyhrr, a former Texas Instruments account manager. His goal for this technique is to encourage fiscal responsibility. This type of budgeting justifies all your expenses for every new period. The ZBB process starts from a zero base, and every expense would be analyzed based on its importance and cost. After that, you should form a budget that covers all the necessary spending for an upcoming period. Whether the budget is higher or lower than the last one does not matter.
Usually, the zero-based budgeting method is known for being used by companies. However, some individuals and families prefer this kind of financial process. Most of the time, the budget plans are suitable for a period that lasts more or less than a month. Plus, the ZBB helps some companies deal with lower costs.
In terms of business, this method allows vital strategic goals to be applied in the budgeting process by linking them to certain function areas within the organization where costs are categorized and measured by prior results and your expectations now. Moreover, this practice is suitable for areas with direct revenues or production.
Yes, it may be naturally detail-oriented, but ZBB has been done for many years. Besides, the zero-based budgeting method can reduce costs by avoiding unfavorable increases or decreases based on your last period’s budget. On the other hand, it still can be a tedious process that consumes more time than traditional cost-based budgeting methods.
How it differs from traditional budgeting
Traditional budgeting prefers gradual increases over past budgets, opposing justifications of old and new expenditures applied in ZBB budgeting.
Also, the traditional method only evaluates new expenses, while zero-based budgeting justifies old and recurring ones when added to new expenditures. Additionally, ZBB puts the obligations on managers’ shoulders to account for expenses and aims to drive value for organizations through cost optimization instead of just revenue.
Starting a zero-based budget
Before starting with this budgeting approach, you must take these few steps to ensure you are planning a realistic budget.
First, know how much you make in a month. Compute the total of your paycheck plus benefits and add if you have other sources of monthly income too. Find out how much money you have to work within your budget plan.
Next, study your expenses for a few months. List down the expenses you usually spend on, such as primary or daily needs, important bills, etc. After that, you can build a framework that fits your list as you go forward. Tracking your expenses can help you detect the areas wherein you can cut back on or refrain from spending and those where you can focus your finances more.
Lastly, group your expenses. Identify your priorities in your expenditures, needs, wants, other goals, and areas you need to pay for. You can try listing them according to importance to cover the most critical spending first as you go down your list.
Advantages and disadvantages of ZBB
Advantages
Zero-based budgeting gives you more awareness about how much money flows in and out of your pocket. As a result, it can limit you from spending what you do not have. Also, knowing how much you need to spend or where your money goes gives you more control over your budget, making it an excellent financial method.
The ZBB process is customizable and beginner friendly. Using a zero-based budgeting method does not need technical experience or knowledge. It is a safe approach if you are new to handling money.
This method can help you practice strategy and prioritizing. If you use this technique, having a visual copy of your budget could be helpful to correctly see where you can divide and allocate the money you have to particular expenses. You could also identify the expenditures that require more focus. It is a bonus for you if you manage to hold yourself back from labeling leisure expenses as needs.
Another advantage is you can lessen the chances of misallocations of your money whenever there is a change in your budget. It would even give you a heads-up of upcoming payment deadlines to avoid using your money for unnecessary things.
Disadvantages
If you want to use this approach, be prepared since it will consume quite some of your time. Also, you will place yourself in a position of responsibility to track your spending closely. For some, they consider it as too much work.
Furthermore, minor mistakes such as not accounting for your irregular expenses might make zero-based budgeting ineffective. This means you may not have enough money to cover most expenses.
There are slight chances wherein short-term perspectives may be rewarded, but the long-term goals would be overlooked. Because it requires some strictness, it might take away opportunities to spend some for yourself or things you consider fun.
Keep in mind
Whether you choose to use a zero-based or a traditional budgeting method, knowing how to work with the amount of money you make in a certain period is vital. Just because you use a method that looks effective does not guarantee total success in your budget plans. Budgeting requires responsibility and discipline to reach at least a good percentage of your goals.
Handling money is not an easy task. However, you are still held accountable for your plans’ successes and failures. Execution plays a significant role in making a budget work. The methods presented above will just guide how you will build your framework and form your budget. Implementing or applying it to your lifestyle is entirely up to you. Although, repeating the method could make you get used to the process, thus, making it easier for you as a new period comes along.
