The Advantages of Zero Based Budgeting for Personal Finances

Zero based budgeting your personal finances takes time and effort, but the advantages of zero based budgeting are clear. Particularly if you are trying to get a grip on your finances, zero budgeting gives you a clear road map.

advantages of zero based budgeting

Let’s start by agreeing what we mean by zero based budgeting…

First you estimate your income for the month ahead. It doesn’t have to be a month. For example, you might get paid every week, or every two weeks. What’s important is that you know determine how much you will receive for a set time-period.

The key to personal budgeting is live within your means. So, your total spending for the month must not be more than your income.

For example, perhaps your only income is from a job, and your normal pay check is $3,000 after deductions. Whether this amount goes into your bank, or you receive it in cash, you will earn $3,000.

How Does Zero Based Budgeting Work?

When you set a zero budget, you decide in advance how you intend to spend your income. If your income is $3,000, you make a plan to allocate the whole amount to various spending categories.

Key points:

  • Spending categories cover everything, not just your living expenses. They include saving for holidays, paying into a long-term savings account and making debt repayments.
  • You plan how to spend every dollar. So, if your income is $3,000 your spending plan is for $3,000.
  • If you cap your spending to your income, you are living within your means. But, more than that, if part of your spending plan allocates money for debt repayments or savings and investments, you are building a better financial future.

The Problem with Personal Budgeting

what are good financial goals

When you’re trying to get a handle on your money – and if you don’t use zero based budgets – it’s easy to go wrong. Let’s say you’re spending has got out of control and you’ve run up some credit card debts. You’re not sure exactly where you’re going wrong, but something has to change. You go to a café and spend a few minutes mulling things over…

…cafés, eating out, it’s a lot more expensive than pre-covid. Thinking about it, you’re probably spending $500 a month on café breakfasts and lunches, a few evening meals. No…$750, possibly $1,000. You could make a packed lunch, save at least half your café spend.

Maybe you follow your plan, cut back on your café visits, and make some savings. And, probably, your monthly spending does drop. But you may still not be living within your means. Why? Because you haven’t checked whether your total spending – on everything – matches your income.

Key Advantages of Zero Based Budgeting

Let’s assume that you have some goals and dreams. Your dreams may not involve money, not directly. But lack of money can limit your freedom – how you want to spend your time. If you want a greater sense of financial freedom, you need to put money aside for the future. And the only way to find that money is to allocate more of today’s income for a better tomorrow.

The advantages of zero based budgeting are:

  • You get an overview of the whole of your monthly cashflow
  • You realise that you only have so much to spend (your income)
  • You realise that you must make choices about how to spend your income

Using zero budgets you can decide to set aside a chunk of next month’s income (and each month after) for long-term savings. Or, if you have debts, you can start by living within your means, so you do not add to your debts. And then you can allocate income to pay off your debts.

Zero Budget Categories

savings pots

The starting point with zero based budgeting is to estimate your income. Then, you list out the items on which you have no choice but to spend money – and the items on which you want to spend. It’s useful to group similar items together into budget categories.

Key point: if you want to get the best from the advantages of zero based budgeting, it’s not enough to make a budget for each month ahead of time. At the end of each month, you also track how much you’ve actually spent on each category. Even better, you can record your spending every day or every week during the month. This may sound tedious, but it can make a huge difference to your success – particularly when you’re first starting out with personal budging.

Here are just some of the possible categories:

  • Groceries
  • Mortgage or rent
  • Electricity
  • Clothes
  • Transport
  • Medical
  • School
  • Eating out
  • Phone
  • Pet food
  • Subscriptions
  • Cinema
  • Gifts
  • Charities
  • Debts (minimum monthly payments)
  • Debts (extra payments to repay early)
  • Saving for a holiday
  • Saving for large or unexpected bills
  • Long-term savings

Dealing with Unexpected Bills

sinking fund

Life will throw unexpected bills at you. For example, car or house repair bills. Or birthdays or annual subscriptions you’ve forgotten. As you can see, the categories list includes putting money aside into sinking funds to save for items like these.

Also, if you have debts to clear, you can use some of your income to reduce the debts month-by-month until, finally, you are debt-free. And once you’re debt-free, you can allocate more of your income for long-term savings.