In this zero-based budget guide, you’ll learn the basics of the budgeting technique and how to create one, with examples.
Also, you can download and use the free zero budgeting templates and sheets that will make you a smart money warden.
Have you ever experienced that awkward feeling of confusion after spending so much money—that you begin to think you’ve misplaced some cash when in actuality, you did not?
Well, that is a huge red flag pointing at you for your foul spending habit.
With a zero-based budget, you are practically aware of where all your dollars and cents are heading towards.
A zero-based budget automatically makes you function as a traffic warden—this time, you direct and control your money and not cars.
To benefit those who may not fully understand what this system is all about, I will begin this guide with the basics.
What is a Zero-based Budget?
A zero-based budget is a budgeting method where you allocate all your expenses to swallow up the whole of your income, thereby leaving a zero balance.
Yes, that may sound a little awkward because you wonder what happens to a saving habit and investment.
With a zero budget, your savings are equally treated like expenses even when they dwell inside your bank account and investment likewise.
For a corporate body, a zero-based budget is a budget with a zero balance at the end of the year.
Unlike the traditional budgeting system, where you have a balance carried forward of some reasonable figures and build on it, a zero-based budget kicks off with a zero balance until an income is earned.
When you generate these incomes, you put them to work until you attain a zero balance, and the circle continues.
In a nutshell, any amount allocated into the zero-budgeting method must be exhausted.
What Happens when you Overspend a Zero Budget?
If you don’t tackle cases of spending more than the allotted amount in a category, it usually leads to a budget deficit.
When you overspend the amount in a budget category, you are to make it up from another category in the same budget.
What Happens when you Underspend a Zero Budget?
Spending less than the allotted amount brings about a budget surplus.
When you underspend a budget, you are to re-allocate the money to other categories in the same budget, thereby arriving at a zero balance at the end of the month or year.
What are the Advantages of Zero-based Budgeting?
1. Fresh Start
A zero-based budget gives whoever is practicing it a fresh start from a zero figure.
This budget method comes with a clean slate, and it is left to its handler to determine what and what will make it into the budget.
So, instead of building on a previous failure, mistakes, fraud, or even success, it gives users a platform to start afresh.
Therefore, with a consistent fresh start, the old and lazy approach of making just a few adjustments to a previous year’s budget is wholly eradicated.
A zero-based budget now forces you to think through what a year’s budget will look like as they are starting from scratch.
2. Plain and Understandable
The popular idea of balance carried forward, balance brought down, and having an equal amount on both credit and debit sides of an account has been a confusing factor for many people over the years.
A zero-based budgeting method helps remove this complication as your focus is limited to making money and devising a suitable means of spending them appropriately.
The zero budgeting approach is easy and understandable to many.
3. Curbs Budget Inflation
Budget inflation, also known as incremental budgeting, has been a tool used by many to finance their pocket.
Corporate fraudsters now deliberately finance a budget with more than required to have the lion’s share diverted while getting the work done.
The idea of re-allocation of surpluses to other categories in a zero-based budget practically kills this practice.
Therefore, any money pumped into a zero-based budget doesn’t make it out until it is spent.
4. Optimizes Resources
This budgeting system cracks the brain as equal attention is given to both income generation and expenses.
Most times, people concentrate more on how to earn and bother less about spending.
With this budgeting system, spending becomes a task.
Hence, you become creative at it, thereby bringing about efficient optimization of resources.
What are the Disadvantages of Zero-based Budgeting?
1. Time Consuming
The zero-based budget is time-consuming, and the process is very tedious.
Because every budgeting year kicks from a zero status, neglecting the previous year’s data and analysis makes the process more lengthy and sometimes tedious.
Most people find this budgeting technique overwhelming, tiring, and time-consuming.
2. Requires Expertise
The zero budgeting technique requires more expertise and professionalism to practice effectively.
Some households have nobody with such a skill set.
Hence, the process becomes a disaster before it even kicks off.
This requirement has made this budgeting approach fail in some households, making it unpopular.
3. Short-Sighted
The zero-based budget is considered to be short-sighted as it is only valid for a cycle (month or year).
Outside this cycle, its data are no longer relevant, and references cannot be made to it.
Hence, if you intend to engage in long-term finance, the technique would be a disadvantage.
4. Expensive
Due to its complexity in nature, the zero budget method requires more training for one to get the hang of it.
This budget approach also calls for the use of modern software, and they all come with a prize.
Summing all this together makes the zero-based budget an expensive option when compared to the traditional budgeting system.
How to Create a Zero-based Budget
The execution of zero-based budgeting can be tricky without a guiding template to lead you through.
Below are the most effective steps to successfully create and implement your budget from a zero status.
Step #1. Identify and Justify Cost Centers
Identifying cost centers is the first step in making a zero-based budget.
The cost centers in a corporate organization are different from that of a household.
In a corporate setting, cost centers take the form of the marketing department, research department, human resources, etc.
While in a household, the cost centers focus on categories like mortgage, savings, investment, and other regular bills.
Since a zero-based budget kicks off from scratch, it is essential to identify and justify these cost centers at the beginning of every budget circle.
In a corporate body, each departmental head justifies and defends the cost/expenses of their department.
Thus, making it possible to have an updated list of costs and recognizing which cost is more eligible and which is not.
Step #2. Align Cost with Goals and Objectives
Every organization and household has an objective and goals they intend to achieve in a given period.
Not all costs/expenses contribute to the achievement of these goals. Therefore, there is a need for alignment.
For effective cost alignment in an organization, the manager carefully analyzes the identified costs in reference to the organization’s goals and objectives.
Any expenses that do not in any way contribute to these goals are eliminated.
The same is applicable in a household.
Cost alignment helps in directing expenses towards the achievement of goals in a given period.
Step #3. Prioritize Cost Benefit
The prioritization of cost-benefit is the third step in creating a zero-based budget.
For every cost incurred, a benefit is expected, and these benefits are never equal.
It is important to note that a huge cost does not always imply huge benefits.
Therefore, there is a need to prioritize cost-benefit.
This stage requires careful analysis as one carefully looks at the percentage of benefit derived from incurring a cost.
A cost with a high percentage as a benefit automatically becomes a priority. This is how a priority list is formed.
Right here, you can see the categories that will yield more benefit right before the budget even kicks off.
Step #4. Allocate Available Resources
This is the stage where resources are disbursed to various cost centers that are in alignment with the goals of the organization or household.
The percentage of each disbursement is carried out in accordance with their cost benefits.
During allocation, limited resources are equitably shared for optimum utilization.
Step #5. Execute, Monitor and Control
The fifth step is more of a doing stage, and it is the final step.
Here, all proposed planning and analysis are executed and birthed to reality.
Performance is strictly monitored in this last step to ensure a desirable result is attained.
In a situation where there is a little fall out from what is planned, for instance, underspending, a control measure in the form of reallocation is exhibited to put things back on track, thereby achieving the predetermined goals and objectives.
Zero Budgeting Example and Template (Printable)
The printable template sheet below is a vivid example that sheds some light on the zero budgeting technique.
The above template best depicts what a zero budget should look like. Notice that the savings also make up the expenses or costs.
Anyone with a regular income can easily utilize this template.
The bonus here is that—it is integrated with the cash envelope system; thereby, giving users the best frugal experience.
Also Read: The 70/30 Rule in Budgeting to Maintain a Good Spending Habit
Is Zero-based Budgeting Right for Me?
Zero budgeting is typically suitable for people with a basic salary or a predictable income earner.
This does not imply that only a basic salary earner can use this technique, but it is more convenient with a basic salary or predictable income earner.
The reason being that—they are aware or able to perfectly guess what their impending earning will be; hence, they can plan with it.
Other earners can also make use of this budgeting method—this time, it comes with a little more creativity and expertise.
This is so because their monthly earning is not easily ascertained.
Can an Irregular Income Earner Make a Zero-based Budget?
The answer is Yes! But, it comes with a bit of a twist.
You can make plans with the minimum expected income if you are an irregular income earner who intends to use the zero-based budgeting system.
Take, for example, a freelancer who makes roughly $400 monthly.
Such an individual can make a zero-based budget that falls within $200 in case his service was not well patronized for that month.
Knowing that a zero-based budget is flexible, you can re-allocate the funds when you generate a higher income, and if you earn a lesser amount, you can adjust each category until it fits in.
Unfortunately, this process can be time-consuming and straining compared to someone who earns a regular salary.
Best Zero-based Budget Apps
1. YNAB
YNAB (You Need a Budget) is one of the highly recommended zero budgeting apps you can try.
This budgeting app has well over 1 million downloads on the play store.
One of the basic rules of this app is to give every dollar a job.
The app is designed to synchronize with your bank account, giving you a real-time picture of your income and the best way to maintain a good saving habit.
You have less to worry about as data privacy is guaranteed.
2. EveryDollar
EveryDollar is a budget planner and expense tracker tool with over a million downloads and thousands of good reviews.
You can tell that the app is serving its purpose. It helps users track their expenses while it gives them a Ramsey feature.
Although, this feature is more of an in-app purchase. Nonetheless, EveryDollar is a zero budgeting app you should consider.
3. Tiller Money
The Tiller Money app gives you a spreadsheet experience.
With this app, your financial life automatically updates alongside your spending, making you see how you are faring in your spending.
With Tiller money, you can track all your daily transactions and control your cash flow.
It is user-friendly and an excellent way to control your money.
The Bottom Line on Zero Budgeting
Hopefully, you now understand the basics, significance, benefits, and disadvantages of a zero-based budget.
Also, with the helpful examples, templates, and steps involved in making one, you can easily get started with this technique.
You are now at liberty to choose if this budgeting technique is perfect for your earning or not.
Nonetheless, you should put equal energy into the act of making and spending money.
It is not only wise but prudent to keep track of how you spend your money.
That makes you a smart money warden, and financial growth becomes eminent.
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