How would you explain a zero-based budget?

The zero-based budgeting process is a strategic budgeting approach that mandates a fresh evaluation of all expenses during each budgeting cycle . Unlike traditional budgeting, where previous spending levels are typically adjusted, ZBB requires individuals or organizations to justify every expense from the ground up.

Why is the zero-based budget the best method of budgeting your answer?

Zero-based budgeting is a way to plan how you use each dollar you earn. This budgeting style may give you greater insight into your finances and provides you the flexibility to customize your budget each month . Zero-based budgets require advance planning, particularly for those with inconsistent incomes.

What is a zero-based budget in your own words?

A zero-based budget, sometimes called a zero-sum budget, is when your total income, minus your expenses, equals zero.

What is the 50 20 30 method?

Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings . The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.

What is good about a zero-based budget?

The major advantages of zero-based budgeting are flexible budgets, focused operations, lower costs, and more disciplined execution .

What are the 5 steps in creating a zero-based budget?

Here are the key steps to create a zero-based budget. 1 Track your income. The first step is to calculate how much money you have coming in every month. ... 2 List your expenses. ... 3 Categorize your expenses. ... 4 Balance your budget. ... 5 Review and adjust your budget. ... 6 Here's what else to consider. Aug 31, 2023

What makes a budget a zero-based budget Ramsey?

You've probably heard of the 50/30/20 rule or the 60% solution, but we use the zero-based budgeting method. This is when your income minus your expenses equals zero —aka you're giving every dollar you make a job to do so none of it gets accidentally spent! It's simple math that works no matter your household income.

What is zero-based budgeting in real life example?

For example, let's say you're using zero based budgeting for your monthly expenses. You begin by listing all your sources of income, then allocate funds to different categories such as rent, groceries, utilities, and entertainment . This method encourages intentional spending and helps you maximize your money.

What is a zero-based budget quizlet?

Zero-Based Budget. Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period . Zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs.

What is a zero-based budget for kids?

A zero-based budget or ZBB (as the cool kids would say), is a method where you allocate every dollar of your income and assign it to either an expense or savings goal . Simply put, you take all your income sources and subtract your expenses and savings, to equal zero.

What is a zero-based approach?

A zero-based approach seeks to link organizational designs to strategic priorities (for example, areas for investment compared with efficiency optimization) instead of a “one-size-fits-all” solution across the business.

The Zero Sum Budget Explained (2024)

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A budget helps you get a clear idea of where your money is going. It helps you identify where you’re overspending so you can cut back your expenses and put money back in your pocket.

You are then in a better position to be able to determine where to put your income. The savings you make from implementing a budget will help progress toward your financial goals at a faster pace.

When you start a budget it can be hard to know the best way to approach in managing where your finances go. I recently published a post on the 50/20/30 budgeting rule. This budgeting rule defines an approach to dividing up your income. It’s an extremely effective and simple way of dividing up your income.

In that post, a blogging friend of mine mentioned the zero sum budget in the comments section. I’d heard about the zero sum budget but had never investigated how it worked. I decided it was time change that and do some reading.

To my surprise, I was already budgeting in this manner. To me, it’s a common sense approach to getting a grip on your finances and putting every penny to work. Let me explain:

The Zero Sum Budget

The zero sum budget is sometimes called the zero-based budget. It boils down to ensuring that every cent or penny of income you receive is assigned a task. You’re giving each coin a job. Every cent is used in your budget, leaving a zero balance.

If a particular area of your finances needs additional funds you adjust another to compensate. The budgeting system prevents waste and maximises your income.

The technique is powerful. Dave Ramsey conducted some research and found that people who work to a zero sum budget vs those who don’t pay off 19% more debt and save 18% more!

The power of zero sum budget

The power of the zero sum budget is not only in the fact that you are putting every penny to work for you. The real power is that once you’ve implemented the zero sum budget every decision you make about your budget thereafter requires a stringent review to keep to it.

Because you have already assigned your money to a task, if you need to modify expenditure in some way you must review other categories to compensate.

For example, if you have to increase your medical expenses or travel expenses in a particular period, you may have to reduce down the money you spend on entertainment to allow the increase elsewhere.

This forces you to keep within your income boundaries. You’ll work to keep from overspending and most importantly you’ll be ensuring each penny or cent is doing a job that pushes you toward achieving your financial goals.

If you sit down on a regular basis to update your budget, as I do, this decision-making process will become focussed and intentioned. Your financial goals will drive your decision making.

Using a zero sum budget for regular earners

If you’re a regular earning, like me, the zero sum budget will be easier to implement and maintain. Those of us with a regular salary generally see the same level of income coming in each period.

The predictability of income and expenses makes planning easier and enables us to get pay next month’s expenses from this month’s income.

Using a zero sum budget for non-regular earners

If you’re a non-regular earning you may find the zero sum budget requires a little more legwork from you. But there are some ideas on how you can make this work.

I’ve been in the position where I’ve had a variable income. I was working as a freelancer web developer back in the day and when there wasn’t a solid pipeline of work adjustments had to be made. Back then I wasn’t running a family budget, but I remember the fluctuation of income well.

The best tip I can give is to ascribe yourself an income. Take each earnings from each month and place them into a separate account. From this account assign yourself a wage.

If you’re a freelancer, for example, you should have a reasonable idea of what income you need to generate. You should be generating a pipeline of work and you should be running a cash flow budget in your business to help you manage seasonal trends in work or expenses. If you’re not, you need to start managing that better!

If you’re doing on demand work, like waiting or bar work where you can get big fluctuations in work then you should look to budget against the minimum income you’ll generally receive each week and ensure your employee keeps you within that threshold.

In either case, if you can be sure you can generate 16 hours of work per week then this is the weekly budget you can operate against. If you then earn 20 hours one week you put that money ahead for the following week, or weeks, in the event you don’t get 16 hours one week. This will bake consistency of income into your budget.

If you think putting money aside from funds you have “left over” isn’t stringently adhering to the zero sum budget I’ll correct you. It is. You are setting your budget up to be more manageable. Putting money into a separate account for income in this way is just like putting money aside for savings. You are still making your money work.

In fact, it’s wise to put this money into a savings account then the extra 4 hours of income is put to work earning interest.

Yes, it may be better put to use on high-interest debt like a credit card, if you are carrying debt. However, you’re creating a bed of savings to ensure you’ve got enough to live on. In these circ*mstances, your priorities may be different.

As your savings build up, say for example you’ve built up a couple of weeks of income, and you feel that there’s a reliable albeit variable stream coming in. You can start to use your extra income to service debt. Your income savings will be your buffer.

Give the zero sum budget a try

Just like me, if you are already budgeting you may realise that you’re already using the zero sum budget yourself. I was adhering to it by ensuring every penny went somewhere sensible, I just never realised what I was doing had a name. I can attest that it’s a really powerful approach to budgeting and one that can be implemented with other methods like the 50/20/30 budgeting rule.

Let me know in the comments if you’ve tried the zero sum budget and how it’s helped you? Would you have any tips or guidance for others, particularly those on a variable income?