The Advantages of Zero Based Budgeting

Zero Based Budgeting is a popular budgeting method that has a number of advantages.

If you’re new to the world of personal finance, you might be thinking “Zero Based Budgeting? What even is that?”

It could even sound quite intimidating. But don’t be put off!

It’s not something reserved just for businesses and big corporations; It’s a budgeting technique that could be really effective in improving your personal finances too.

What is Zero Based Budgeting?

Put simply, Zero Based Budgeting (ZBB) means having zero leftover at the end of the month.

It doesn’t mean that you have no money, but that you are giving every penny that lands in your bank account a place to go.

Let’s look at an example:

Salary £2,000

Fixed Expenses:

Mortgage (£600)
Bill 1 (£150)
Bill 2 (£80)
Debt Payments (£240)

Variable Expenses:
Food Shopping (£300)
Socialising (£200)
Petrol (£120)

Total Expenses £1690

Excess (Income – Expenses) = £310

Savings (£310)

£0

In this example, we can see that after paying bills and expenses, there is £310 leftover.

But instead of being left in the account to be frittered away, it is given a job to do and is allocated to savings.

Leaving us with a zero balance.

(This is obviously quite a simplistic example. Your budget will probably have many more categories, but you get the idea.)

How to Create a Zero Based Budget

To create a Zero-Based Budget, you need to know a few things:

1. Monthly income (your salary, any benefits you receive and any other money that you receive into your bank account)
2. Fixed expenses (the payments you have to make each month e.g bills, debt repayments)
3. Variable expenses (food shopping, eating out, travel expenses, fun money)
4. Where you want your excess money to go (overpaying debt, short term savings goals, investing in the future)

To get started, you might find it useful to track your spending for a month so that you can see where you money is going.

It could also be helpful to reflect over your past 1-3 month bank statements and see where you spent money historically.

(If you’re not sure what categories to include in your budget, you may find this post helpful.)

Once you have all this information pop it into a spreadsheet (or grab a copy of my free budgeting spreadsheet) and see what’s leftover. Then assign that leftover money to a category you noted down in point 4 above.

The goal is to get the balance to £0.00 and voilà – a Zero Based Budget.

Your budget will change from month to month, depending on what you’ve got going on – so this isn’t a create it once and you’re done exercise.

But it’s worth the effort, so let’s take a look at the advantages of Zero Based Budgeting.

The Advantages of Zero Based Budgeting

It limits overspending

The goal with this budgeting method is to achieve net zero. Ie. Money coming in = Money going out.

To do this, you need to get specific about where every penny is going and allocate all the income to an expense category.

Doing this increases your self awareness around spending and will help you to recognise more easily when something might not be in the budget.

Having a precise amount that you are allowed to spend within each category makes you spend more mindfully so that you don’t go over budget.

It helps you focus on your goals

When you budget to zero, every pound has a purpose.

Without ZBB, any excess that remains after your expenses are accounted for can easily be spent just because it’s there.

You’ll often hear people complain that they can’t afford to save but the reality is they’re just not looking closely enough at where their money is going.

ZBB gives you exact amounts available to spend in each category and identifies how much excess you should have once your necessary expenses are covered.

This clarity allows you to direct that excess money towards goals that are important to you such as clearing debt, saving for a house deposit or investing in your future.

You have more control

If you don’t budget, it’s hard to really know exactly where you stand with your money.

Come payday, you could easily check your bank balance and think, ‘Great, I have all this money to spend!’

ZBB defines exactly where your income needs to be distributed and gives you clarity over the money you actually have available.

You can plan for future expenses in advance and live well within your means without relying on debt and credit to get by.

It highlights room for improvement

With more clarity around your expenses and intentional spending, comes the ease of detecting areas that you can improve.

You’ll be able to pinpoint the problem areas within your budget and the categories in which you are regularly overspending.

Once you highlight these problem areas you can look at ways to improve them.

‘Can I cut back my spending in x, y or z category?… and if I can’t cut back my spending, can I increase my income?’

ZBB will help you get clear on how your finances can work best for you.

The Disadvantages of Zero Based Budgeting

It takes time

The biggest drawback of ZBB is that it takes time to create the budget and is something that requires ongoing attention in order to remain effective.

It can be difficult to use if you have an irregular income

If you’re not entirely sure just how much money you’re going to make this month then how can you possibly budget back to zero?

It can be difficult to get right

ZBB can be frustrating, especially to those who are just starting to learn to budget.

The numbers you set out in your budget categories may be too restrictive and you might find yourself going over budget.

This in turn can be discouraging and make you not want to bother with ZBB at all.

Zero Based Budgeting – Is it worth it?

Though there are some legitimate disadvantages to Zero Based Budgeting, the advantages mean that the good does outweigh the bad.

• It takes time to manage yes – but with time the process will become smoother and the more often you do it, the better you’ll become.
• You might not know exactly what is coming in each month but you will know exactly how much needs to go out.
• It can be difficult at first but the more acquainted you get with your finances, the better you’ll become at handling them.

Trying something new can be challenging. But if it sets you on a path of improving your finances and taking control of your money, then it’s worth a shot – right?