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Zero-Based Budgeting For Beginners

You may have heard the term, “Zero-Based Budget,” but what does it mean, exactly? A zero-based budget (ZBB) is a type of budgeting tool that uses one simple rule: Your income minus your expenses should equal zero. In this article, we’ll talk about the details of this budgeting system, how to build your own zero-based budget, and if this type of budgeting can work for you.

What Is a Zero Based Budget?

In zero-based budgeting, every penny of your monthly income goes to a different expenditure. This doesn’t mean you apply all your money toward only one thing, just that you  every penny you spend a purpose. This type of budgeting can be a useful tool to save up for those big purchases, pay down debt, more consistently save money. It is important you are realistic when building your budget and you allocate money for wants as well as needs.

How To Build Your Own Zero-Based Budget

So, how do you build your own zero-based budget? To start, you need to build a realistic budget:

  1. The first step is to figure out your total monthly income, after taxes. Make sure to add up all income, including any side hustles and even child support.
  2. Next, you will need to add up your monthly bills. A good approach is the Four Walls First – which includes food, utilities, shelter and transportation. After you have covered the basics, you will need to add in the rest of your monthly bills such as student loans, daycare, and credit card debt.
  3. Then you need to add in how much you want to spend each month on recreation and entertainment. This is usually an area where you can try to cut costs.
  4. The last step is to list all the things you want to save up for, like retirement, seasonal expenses like holidays and birthdays, or a down payment on your dream home.
    1. For seasonal items, think about how much you want to spend, and then divide that number by 12, or by how many months are left until that upcoming event.
    2. For a retirement fund or a down payment on a house, think about how many years are left until you plan to do it, then divide that number by 12. 

Now it’s time to determine if it’s the right budget for you, so let’s get into its benefits and disadvantages.

Pros To a Zero-Based Budget

Knowing exactly how much money you spend each month 

ZBB takes an in depth look at every aspect of your expenses, breaking it down for you month by month. This gives you better control of how you allocate your funds and tells you how much extra money you have so you can make a more informed decision on what to do with it. It’s also helpful for discovering where you can best save.

Financial freedom

You can have the ability to decide how much money you want to spend each month and on what. Being able to dictate where your extra money goes can give you a little breathing room, and peace of mind. This is a great way to take control over your own financial situation.

Paying down debt

ZBB allows you to clearly see how much of your income is spent on necessities and how much you must put towards paying down debt. The lower your debt, the more money you will have for the things you want.

Saving money for long term financial goals

ZBB makes saving money for long term financial goals, like retirement, buying a house, or building a safety net, much easier. Being able to set aside money each month, however small, can give you a better grasp on obtaining your future wants. Knowing that you are planning for a better future will also make budgeting in the short term less frustrating.

Cons To a Zero-Based Budget

Time consuming

With ZBB, you will have to sit down each month and make some decisions. Maybe you didn’t set aside enough money for your utilities, or you forgot something in your original budget. This type of budgeting takes time and effort every month for it to work.

Difficult for those that do not have a fixed income

For subcontractors, freelancers, or tipped workers, it may be difficult to determine your income each month. One tip to working with a flexible income would be to use the previous month’s income to determine the next. Another would be to approach it from an expense-first standpoint; how much goes out must equal what comes in.

Track Your Budget with Insight Mobile Banking

The trick to sticking to any type of budget, including ZBB, is to equip yourself with the tools to help you track your spending each month. Find a store near you and apply today for your own Insight Mobile Banking Account!