Zero-based budgeting: How to use it to take control of your finances

In a world filled with fast payments, subscriptions, recurring purchases, direct debit orders, and ever-easier ways to spend money, budgeting becomes even more critical. When you budget, you have a clearer vision of your finances and plan your expenses according to your savings and investment goals.

Planning and budgeting go hand in hand.
Planning and budgeting go hand in hand.

One of the ways to do that is called “zero-based budgeting” or ZBB. It’s a budgeting method associated with the idea that all your income is used by the end of the month. In other words, if you subtract expenses from your income, the total result is zero.

But don’t think zero-based budgeting is an excuse to overspend! Instead, the idea is that the “expenses” category should also include savings, investments, donations, etc.

With ZBB, you assign every cent of your monthly income to a purpose. Whether it’s food, housing, clothing, traveling, an emergency fund, a charity donation, you name it.

How to zero-budget?

There are three vital steps to implement a zero-based budget:

  1. Know how much you make: If you have a fixed income, then this should be easy. But if your salary month to month, you’ll need to check your bank accounts or payslips and write down the numbers to have a clear idea of the money flowing into your account every month.
  2. Know how much you spend: Track your expenses for a few months to understand how much you need, on average per month, for food, housing, education, paying off debt, etc.
  3. Put all expenses into “boxes”: Categorize all your expenses to make your budget organized. Use the most common ones, such as food and housing, but create as many as you need. For example, if you want to travel to Japan in 2021, create a “Japan fund” or “Travel fund” category.
A simple zero-based budget example.
A simple zero-based budget example.

Why zero budget?

There are many ways to budget, so why choose ZBB?

  • It’s easy and intuitive to do. The concept is pretty basic: Pre-assign 100% of your income to your predicted expenses based on recent amounts from previous months.
  • It makes you better at tracking your income and expenses. With ZBB, you know exactly where your money is going each month. Many people have no clue where their money is going or where they overspend because they don’t track and monitor their expenses. But with zero-based budgeting, that is a requirement. So a side-effect is having a better overall notion of where your money is going.
  • It helps you avoid spending money you don’t have. As you plan expenses beforehand, you can rationally think about your expenditures and avoid overspending or buying unnecessary things. In other words, it helps you make smarter financial decisions.

Although these are excellent pros, ZBB has some cons as well:

  • It may be tricky to budget if your income fluctuates too much. In that case, a nice workaround is planning everything based on a low-income month—your lowest earning month in the past year, for example.
  • It takes a bit of time both for planning and tracking. You might have to dig into your account statements, receipts, payslips, and so forth, which is no-one’s idea of fun.
Budgeting helps you to stay on top of your spending.
Budgeting helps you to stay on top of your spending.

But look on the bright side. Nowadays, many modern banks offer digital solutions to help you track expenses. See if an integrated solution like that can help you. If not, there are apps to help you with your expenses as well. Worst case scenario? Collect receipts and create a spreadsheet for yourself.

Whether you are trying to achieve your investment goals, go to Japan, build a house, pay off debt, or start a company—you will need to budget. That doesn’t mean ZBB is the only method, there are tons of other budgeting options, but this is one of the simplest and most transparent ways to understand your finances and be on top of it every month.

Will you try ZBB? Share this article with a friend who you think can benefit from Zero-based budgeting.

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