Have you heard of zero-based budgeting? Originally developed for businesses, zero-based budgeting (ZBB) was created by a former Texas Instruments account manager, Peter Pyhrr, in the 1960s. It’s a detail-oriented budgeting system that starts at zero and requires justifying each expense for a reporting period.
While traditional budgeting calls for a budget to increase incrementally over its prior iteration, ZBB starts from scratch every time. Rather than only analyzing new expenditures, as is done in a traditional budget, ZBB calls for old, recurring expenses to be justified alongside new expenditures. In a business, the purpose of zero-based budgeting is to push managers to justify expenses and for an organization to optimize costs instead of just revenue.
Zero-Based Budgeting for Personal Finances
This might seem confusing, especially when you think of it in connection with your personal finances. Another way to explain it is that zero-based budgeting starts from scratch each new period, analyzing every function within an organization to determine its needs and costs. A new budget is crafted around the needs of the upcoming period, even if the budget is higher or lower than the previous one.
To use ZBB for your personal or family budget, you will allocate all of your money to needs, wants, short and long-term savings, and paying off debt. The goal is for your income, minus your expenditures, will equate to zero by month’s end. If this sounds a lot like living paycheck to paycheck, there’s a big difference. In ZBB, all of your financial needs are met. If you happen to come in under budget, you can add the rest of the money to the next month’s budget, or move it to a different category, like your emergency fund.
How to Start ZBB
First, you will have to know your income, including your paycheck, benefits, and other sources of income. This will inform your budget. Track your expenses for a month, noting areas in which you can cut back and categories to which you want to allocate more funds. You will need to identify your priorities and expenses, your needs and wants, your emergency fund and other savings goals, and dept repayment. To determine how much of your income should go into each category, you can use the 50/30/20 rule, allocating 50 percent of your income for needs, 30 to wants, and 20 towards savings and debt repayment.
Is Zero-Based Budgeting Right for You?
Zero-based budgeting can be a good idea if you haven’t tracked your money before, or if you feel like your spending is out of control. It won’t work for everyone, and those with unpredictable incomes may find it too complicated. Additionally, zero-based budgeting takes a lot of time and focus, because you will have to monitor your spending closely and consistently, holding yourself accountable for every penny.
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