There are many ways to build a budget but my favorite is the zero-based budget because it is both simple to prepare and flexible. It can be used for both a family’s budget and a business’ budget.
What is a zero-based budget?
Simply put, a budget is a list of your income amounts minus your planned expenditures: expenses, debt payments, and savings categories. A budget is a plan for your future, not a review of last month’s spending. Sure, you can look at last month’s spending to inform the decisions you will make about next month’s planned spending, but don’t get stuck looking in the rear-view mirror. Making a budget is, by definition, a future-oriented activity.
A zero-based budget requires you to revise your expenditures (or income) until the net result is zero.
How does a zero-based budget work?
To make a zero-based budget, first, identify and list all forms of your income sources: “regular“ job, second (or third) job, side hustles, child support, alimony, rental income … you get it – all of the money that comes into your household.
Second, list all of your expenditures: expenses, debt payments, and savings categories.
Third, subtract your expenditures from your income. Likely, the difference is not exactly zero so this is where the zero-based budget methodology kicks in. You will need to make changes to your income or expenditures to make the bottom line exactly zero. A zero-based budget leaves none of your hard-earned dollars without a job. So, you have not completed your budget until every dollar of income is given a job!
If, after you subtract your expenditures from your income, the difference is positive, great! You can go back and increase spending, debt payments, or savings amounts. Or, you can decide to work fewer overtime hours. It’s YOUR choice how to allocate the “left-over” amounts in order to get the bottom line to equal zero AND to achieve your family’s financial goals.
If, however, the difference is negative – your expenditures exceed your income – you have some hard choices to make. You can either increase your income or decrease your expenditures. While these decisions may be tough, doing nothing will result in you spending more than you make and incurring debt for the difference. Bad choice!
But this is exactly where the zero-based budget shines! This form of budgeting makes it very clear what you need to do and how you can make a plan to prevent spending more than you make. You need to go back through each line of your budget and make deliberate decisions as to what changes to make to get the bottom line to equal zero.
Why is a zero-based budget the “best” way to prepare your budget?
- The power of the zero-based is in the decisions the individual has to make to get to the zero. It is flexible in that YOU get to decide what to change and by how much to get YOUR budget to zero.
- Your life is different each month and your budget should be as well. Each month you will prepare a new and unique budget that can take into account your specific plans for the coming month (birthdays, trips, holidays, additional overtime…). The one thing that will always be the same is that you have to get your “in-come” minus your “out-go” to exactly zero.
So, give it a try! The zero-based budget is both simple to prepare and powerful for its ability to help you see where you stand with your spending plan for the month (spending over or under your income)and how to give every one of your hard-earned dollars a job. It is also flexible, you should change as much of it as you want each month to keep your budget both accurate and relevant.
And, if my endorsement isn’t enough … money guru Dave Ramsey also endorses the zero-based budget!