What is a Zero Based Budget and How Could it Help You?

By Randall Orser | Budget

If your income and expenses change every month, you have no idea how much you spend in your budget categories, or you do not want to take the time to sort out your personal finances then the zero-based budget might be the best option for you.

A zero-based budget ensures that your income matches your expenditure completely.  You decide how every dollar is spent whether it is for groceries, pay bills or for entertainment.  As your expenses will change from month to month you will need to set a new zero-based budget for each month.  

During the month you will move money from one category to another.  For example, if you overspend on groceries you will have to move money from a different category such as entertainment and at the end of the month income and expenses must be even.  With this type of budget, you should not be spending all of your money each month, you should also be able to build savings and investments into your budget.  Controlling where your dollars go each month will help you to simplify your life and reach your financial goals.

How to set up a zero-based budget – Although this might take some time at first it will get easier as you go along, as some categories will transfer easily into the next month.

  1. Start by determining your monthly income, if you have to estimate do it on the low side so that you are not struggling to meet expenses later in the month. 
  2. Calculate your regular monthly expenses and your seasonal expenses such as Christmas, income tax, and include savings, and investments.
  3. Subtract your expenses from your income and makes sure that your total is zero.  This is a balancing act as you will need to reduce or delete some expenses or find a way to add income so that your budget balances. 

Benefits of a zero-based budget -  You will better understand where your money goes each month and why you are not reaching your financial goals.  You will be able to make better decisions about your spending and see where you can cut down in all categories.  

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About the Author

President/CEO Number Crunchers® Accounting Inc. Learn how to just say stuff it to this bookkeeping thing with our 'Just Say: "Stuff It" To Bookkeeping program.