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What is zero-based budgeting?

You may have heard of zero-based budgeting before, especially with the rise of the FIRE movement. In this budgeting method, your income minus your expenses equals zero. But that doesn’t exactly mean that saving goes out the window.

What is zero-based budgeting?

Zero-based budgeting is a type of budgeting method where you allocate every dollar you have to a specific expense until you have no dollars unallocated. This means you decide what your money is going to do before you spend.

A few popular methods of zero-based budgeting include using cash envelopes to budget (like the cash-stuffing videos on TikTok or Youtube) or using software to achieve the same thing (YNAB, Everydollar, or GoodBudget are a few examples).

Why is zero-based budgeting so popular?

Because it works. For myself and my clients, I’ve seen zero-based budgeting completely shift the way people think about their money.

This budgeting method forces you to only deal with the money you actually have instead of theoretical numbers. It helps you prepare for the unexpected, like those one-off expenses you always forget about or emergencies like car repair. It gives you the flexibility to make changes when you need to, unlike a traditional budget. And it helps you build a cushion to

To understand why zero-based budgeting is so effective, let’s first talk about how most people budget.

The Traditional Budget

Many people start a budget by estimating how much money they bring in per month. That’s how I did it too. Let’s say you get paid twice a month, and your total monthly income is $2000.

Estimated income per month is 2000

Then you make a list of expenses that you expect to happen per month.

List of expenses

And you assign what you expect to spend in each category. Some things are fixed and easy, like your rent or car payment. Other things fluctuate based on lots of factors, like the cost of food or gas. Either way, you make an estimate and end up with an ideal month of living according to a perfect budget.

The ideal month, in budget form

Now, all that’s left to do is spend according to this budget. I always started out optimistic, diligently categorizing my transactions after I made them, paying attention to where my money was going.

Of course, this never goes to plan. It’s your friend’s birthday, so you throw a party for them and spend more on groceries that month. It’s winter, so your utility bill goes up as the price of heating fluctuates. You blow a tire on the way to the store.

You find yourself accidentally overspending a little here, a little there. And so you shrug and think, “Okay but that was an outlier. It’s not my friend’s birthday every month. I don’t expect the car to break down again for a long time.” So you start over, with the same budget next month, resolved to do better.

But the same thing happens again. And again. Every month, something new and unforeseen comes up. It’s a simple fact of life and budgeting: There is no such thing as a normal month.

Eventually, this method of budgeting became a huge source of frustration to me. I had this perfect ideal budget in front of me, but I never followed it once. Real life never looked as perfect as I wanted it to be, and if I somehow lucked into spending under-budget, it was the exception, not the rule. I would always realize I went over-budget AFTER the spending actually happened, so there wasn’t a whole lot I could do other than shrug and move forward. I just kept repeating the cycle.

But there’s a better way.

How to start a zero-based budget

On it’s face, zero-based budgeting looks really similar to the old method. You make a list of expenses, and you might even try and set a target amount that you hope to put in each category.

But this time, we pay attention to the amount of money we have in the bank instead of how much we expect to come in. Yes folks, we’re working with actual dollars (cash in the bank) instead of theoretical dollars (estimated amount of paychecks per month).

Let’s say my bank balance is $1800. I have 1800 dollars that are ready to be assigned to categories.

As I start assigning money into each category, the amount I have left to assign goes down.

I keep going until the amount I have to assign goes down to zero. This is the basis of zero-based budgeting.

Now that your budget is set up, now comes the real work. Before you swipe your card, check your budget first (NOT your bank balance). As you spend, track the transactions in your budget and remove money from the “actual” column right away, so your budget is as up-to-date as possible. If this sounds like a lot of work, there are a few great zero-based budgeting softwares that can help automate parts of this process.

It’s looking similar to how it looked before. How is this different from the traditional way of budgeting?

  1. First, remember that we’re dealing with real money this time. This is your bank balance organized in a different way, not a wishlist for your future paycheck.
  2. Your ideal targets are separate from the actual money from the account. Meaning that, if you need to make changes, you can switch things up without blowing up your entire budget. If you only have $50 to put in Fun Money this month, that’s okay. You’ll try and get it to $100 next time.

What are the pros and cons of zero-based budgeting?

Pros:

  • It’s very effective for getting a clear view of where your money is going and setting an intentional plan for your cash.
  • It’s flexible and realistic about what life actually looks like, so it can shift and change as you do.
  • It’s customizable for your specific goals.

Cons:

  • It’s labor-intensive, especially in the beginning. It requires more maintenance and setup than a traditional budget.
  • It can be confusing. Many of us weren’t taught to think of money this way, and zero-based budgeting turns the way we think of money on it’s head.
  • It can be especially difficult if you don’t have a lot of cash on-hand. Because zero-based budgeting wants you to budget money you have, if you don’t have any… well, it can get very demoralizing, especially trying to do it on your own.

Is zero-based budgeting right for me?

There’s only one way to find out. Give it a try! Start a free trial with YNAB or get out a pen and paper and start making your list.

And if you need help, a finance coach can help you find and implement the best budgeting method for you.

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