In a way to help individuals and companies achieve their financial goals, Peter A. Phyrr, in the 1970s, introduced a method of budgeting called a zero-based budget. So far, professionals and companies have used this budgeting method to identify spending patterns and improve spending habits.
As you read further, you will be able to understand the zero-based budget, how it works, and five easy steps to create a zero-based budget. Additionally, you would know the difference between traditional and zero-based budgeting and why it is crucial to have a zero-based budget.
What is a zero-based budget?
A zero-based budget is a method that assigns your income to a specific category based on priority and objectives. This budgeting method ensures that expenses are accounted for each period instead of carrying them over from the previous period.
How does zero-based budget work?
Zero-based budget works in an easy way that is void of mental exhaustion. For instance, you earn up to $5000 monthly at your workplace. Zero-based budgeting works by identifying your priorities based on different categories, such as needs, wants, savings, Etc. and assigning money to them. You could transfer $2000 to needs,$1500 to the savings category, and $1000 to wants.
You can clearly see that all your income has been assigned to a specific category based on needs, wants, and savings. And if all of a sudden, you have an emergency call from home demanding $500 for health treatment; you could take the $500 from your savings, leaving you with $1000. Using the zero-based budget won’t just help you track your finances but will enable you to be frugal in your spending.
Five Easy to Create a zero-based budget
As aforementioned, creating a zero-based budget is pretty straightforward. With the five easy steps below, you can create a zero-based budget as a working professional or an organization.
- Determine your income : After deciding on the duration to create your budget, the first step would be to calculate your total payment for that period, including all sources of income such as salary, bonuses, investments, rent, pension, etc.
- List down your planned expenses: Make a list of your costs which may include regular fees such as everyday expenses(such as rent and transportation), variable expenses(such as hangouts and vacation), and irregular( such as maintenance, charity contributions, etc.
- Organize your expenses: Next, organize your expenses into significant categories with priority in mind. These categories could be classified as:
- Entertainment, etc. You could still divide these large categories into smaller bits. The saving categories could still be broken into emergency funds, vacations, gadgets, etc.
- Designate funds for each category: You can start allocating funds to the most essential expenses on your list, such as food, shelter, transportation, and other nonessential costs you can do without. If you still have, some money left, add more funds to either the saving or want category(such as rent, shelter, etc.). This budgeting method aims to ensure that your money is working for you.
- Track your spending: As you spend, please keep track of your spending throughout your budget period and compare it to your planned expenses. You can adjust your spending in each category to stay within your budget. Do not be surprised that these five easy steps can help you achieve your financial goals and keep you out of debt.
Traditional budgeting vs. zero-based budgeting
Zero-based budgeting is a vastly advanced method compared to traditional budgeting, as the latter is simplistic and incredibly time-consuming, involving numerous spreadsheets that increase the likelihood of errors.
In contrast, zero-based budgeting provides a more detailed and cost-effective approach, enabling businesses to generate more profits and individuals to save and invest more money. With its focus on thorough orientation, zero-based budgeting ensures a more accurate allocation of resources, making it an ideal choice for those seeking to maximize their financial gains.
Why should you choose a zero-based budget?
Becoming financially free has long been one of the goals of every working professional. And one step to achieving this financial milestone is using a zero-based budget. A zero-based budget will help improve how you save, spend, and invest your money as an individual and organization.
It will also enable you to keep track of the money coming into your account and provide you with details of where the money is going. Additionally, it helps you reduce your debt and eliminate impulsive spending habits.
A zero-based budget benefits your savings, spending, and investing goals by encouraging you to make the right financial decisions. A zero-based budget can work for you, whether you are a beginner or a financial professional. Most importantly, you can create a zero-based budget with the 5 easy steps I have outlined in this article. The right time to get started is NOW!!