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What Is a Zero-Based Budget Approach and How You Can Use It

Man working on budgeting from home

Are you struggling to follow a monthly budget? You are not alone—74% of Americans have a monthly budget, but 84% say they exceed it. When they break their budget, 44% say they use a credit card to pay for things.

Which leads to a cycle of debt and repayment.

Enter zero-based budgeting. Keep reading to learn what a zero-based budget approach is and how it can help you take control of your finances.

What Is a Zero-Based Budgeting Approach?

It’s a form of budgeting that maps out and assigns a reason for every expense you have in a month. This includes fun money and saving goals. And by the end of the month, your spending money is down to zero because every dollar has been assigned to specific expenses.

Another key aspect of zero-based budgeting is that it resets every month, allowing you to make adjustments as your life or prices change.

What Is a Zero-Based Budget Example?

Let’s say you make about $5,000 a month. An example of zero-based budgeting would look something like this:Zero based budgeting example

You can add other expenses like student loans, credit card debt, or a vacation fund—you just have to account for every dollar by defining which category each expense goes into. For example, if you have streaming services, does that count as fun money or part of utilities, given it’s such a common part of your life?

How Is Zero-Based Budgeting Different from Other Methods?

The biggest difference between zero-based budgeting and other budgeting methods is the amount of planning that’s required, because it’s so exact.

50/30/20 Method

Other methods are a bit more generalized—like the 50/30/20 budgeting method. If you aren’t aware, the 50/30/20 rule is where 50% of your income goes to needs, 30% goes towards wants, and 20% goes to savings.

It’s important to note that there’s nothing wrong with this form of budgeting—but if you struggle with overspending, it’s easy to start changing these percentages. Additionally, this method makes it difficult to categorize needs—would paying off credit card debt be considered a want because you want to pay more than the minimum each month, or is it a need because of debt?

60% Method

Similar to the 50/30/20 method, this budgeting technique focuses on percentages. With this method, wants and needs are lumped together to take 60% of your monthly income, with the remaining 40% being for savings.

Again, it’s not a bad method, but being so generalized creates problems. How do you divide the saving portions? Most people don’t have equal saving goals. Some want to focus on more immediate needs, like adding to an emergency fund versus a retirement account.

Not to mention, there’s a lot of math involved with this technique, which quickly becomes tedious after a few months.

Reverse Budgeting

This budget method focuses on savings. The majority of your money should go to savings first and then to mandatory expenses. The problem with this form of budgeting is that by focusing too much on savings, you ignore other financial needs like paying off debt.

While you may pay off the minimum amount, you don’t try to pay off more because this method requires extra money to go into your savings.

It can also be incredibly frustrating to try this method when you don’t have a lot of money. Despite the idea of focusing on yourself first, there are bills that must be paid…and when you don’t make a lot of money, there probably isn’t a lot left over to put into savings.

What Are the Advantages of Zero-Based Budgeting?

Here are a few key advantages of using this method of budgeting:

It Shows Where Your Money Is Going

One of the many reasons people struggle with budgeting is because they feel like their money goes into a black hole. Labeling parts of your budget as “saving” can be too general for people. With zero-based budgeting, you’ll see where every dollar goes—and are more likely to consistently budget over time.

It Gives You Control

By being specific, you get to decide where your money goes and how much to dedicate to different expenses. There are so many expenses we can’t control, so actively planning where your remaining money provides a greater sense of control.

It’s Flexible Enough to Handle Monthly Changes

Woman working on budgeting on her laptopLife is unpredictable, and goals change. Despite the planning involved with the zero-based method, it’s pretty flexible. Because you plan things out month by month, it’s easy to change your budget based on the changes in your life.

It Helps You Save More

How many of us have subscriptions we don’t actually need? It’s easy for these subscriptions to add up, especially when using auto payment. By having to look at everything you spend money on, you’ll see these types of expenses and stop them.

Additionally, most people add whatever is left over from the month to their savings. This can lead to little or no growth—but with zero-based budgeting, you decide ahead of time how much money will go into savings.

Who Benefits the Most from Using this Method of Budgeting?

People who feel frustrated by other budgeting methods should try zero-based budgeting. As mentioned before, by being more exact, people feel more in control, see where their money is going, and can make adjustments easily.

If a person is struggling with saving or paying off debt, they should also use this method. This is because zero-based budgeting offers a map to follow, and can reduce “wants” expenses by showing where their money is going.

What Weakness Does Zero-Based Budgeting Overcome?

Lack of discipline. With zero-based budgeting, you have to work on it each month and list out expenses. While it may be hard to follow at first, people become very disciplined about this form of budgeting once it becomes a habit.

What Are the Disadvantages of Zero-Based Budgeting?

No budgeting method is perfect, so here are some disadvantages of zero-based budgeting:

It Can Be Hard to Start

Because zero-based budgeting is so exact, it takes a lot of time. Not only do you have to review your finances, but you have to watch what you spend and compare it to your budget each month. This can be intimidating, so people may struggle to start this method and follow it.

It’s also hard to motivate yourself to do this every month—budgeting isn’t the most fun activity out there.

It Takes More Work with Irregular Incomes

At the core of zero-based budgeting is dividing your monthly income, assuming you have a regular amount each month. If you have an irregular monthly income because you’re a freelancer or get paid by the hour, this budgeting method requires more diligent effort.

What works one month may not work for the next, so regular adjustment is required to balance everything out.

Tips for Successful Zero-Budgeting

We understand this type of budgeting can be challenging to start, so here are a few tips:

  • Accept that mistakes will be made, and it won’t be perfect at the start.
  • Track your finances for two months without worrying about budgeting and make a list.
  • Create an accurate list of expenses and financial goals.
  • Set aside quiet time to start putting together your zero-based budget.
  • Make budgets before the start of a new month.

Power Finance Texas Is Your Go-To for Emergencies

No matter how well you budget, surprises happen, and you may need some extra financial help. Whether it’s a car breaking down, a medical emergency, or something else unexpected, Power Finance Texas can help.

With installment loans ranging from $100 to $1,250 and a six-month payment period, we offer friendly emergency loans. Plus, if you can pay us back early, you won’t have to worry about a prepayment penalty.