Have you ever heard of a zero based budget? Me either. The funny thing is that I have pretty much always used a zero based budget, but I didn’t know what it was called until recently! Maybe I just thought that’s how it worked or maybe I am just too much of a planner to do it any other way. Let me tell you what it is and why it rocks!
What is a zero based budget?
In a nutshell, having a zero based budget just means budgeting to zero. Every single dollar is assigned a spending job. Your income minus your expenses should be $0.00. That’s it. Last month I told you about Five Ways a Budget will Improve Your Life. A zero based budget takes it to the next level.
If you budget all your expenses and have $100 left over, great! What do you want that $100 to do? Do you want to pay off debt, save for a vacation, or use it for entertainment? Assign the money a job so it can work for you. Don’t just leave it there to wander aimlessly through life with no goal. Money without a purpose ends up being wasted.
Why is a zero based budget important?
When you give every dollar a job, you are constantly weighing priorities. If you decide you want to buy something, the money has to come from somewhere. Look at your budget to see what your money is supposed to do, and then decide if you want to adjust the budget or skip the spending. Maybe you decided that this new thing is more important than something else you were saving for. No problem. Just adjust your budget and move on. However, if this new thing really isn’t more important, maybe you will realize that you don’t really want to buy it. The process of weighing your priorities leads to less spending overall.
Weighing your priorities also makes it easier to say no. You have to reframe your thinking. Instead of thinking that you “can’t” spend any money, think of it as “choosing” not to spend right now so that your money can go to work on your priorities. It’s all about choices. If you are constantly telling yourself no, you could feel deprived. If you tell yourself “not right now because I want this money for something else,” you probably won’t feel deprived!
When you just have one large pot of money, you are constantly thinking about it and wondering how much you can spend or how much you need to save for your rent/mortgage, etc. It’s exhausting. It would stress me out to wonder if buying groceries would mean I would be short on my electric bill. By assigning all my money to a category as soon as I receive it, this process is eliminated. Now I simply check my budget to see how much is in my grocery category. Easy peasy.
Do you really mean every dollar?
Yes, yes I do. People often think they just need to budget some of their money, but I disagree. When you have a big pot of money, it’s too easy to dip into it! You should budget any money you have, including your savings!
For years I had $20 per paycheck automatically transferred into my savings account. What do I have to show for it? Nothing. Every few months, I’d transfer money back to my checking account for something we “needed.” Although I had this vague idea that we needed to save, I wasn’t saving for anything specific. Since that money didn’t have a job yet, it felt like it was okay to use it.
Now that I have assigned a purpose to every dollar, I haven’t touched our savings! We have a baby emergency fund of $1000 that has been sitting there for about 5 months now. That has to be a record for us. It’s a pretty sad record, but still a record. Now that I have given that $1000 a job, I can’t use it without really weighing my priorities. That money has been given the job of being there when (not if) we have an emergency. Is overspending on groceries an emergency? Is it an emergency when your coffee pot stops working? If that money wasn’t reserved for a specific purpose, it would be really easy to convince myself that I “needed” to use it for something else.
What about spending money?
Are you worried that you won’t be able to have any fun if you follow a zero based budget? I would argue that it has the opposite effect because there is no guilt. If you spend money and then realize you needed that money for a bill, you probably feel guilt and remorse. You won’t have that problem once all your money is assigned to categories.
It’s a GOOD idea to have some fun money. It’s up to you how much you allocate and if you want to track that spending or not. Remember, this is all about your priorities. If you ask 5 people how to handle it, you will get 5 different answers. You have to find what works for you.
Do you want to take out cash for your spending money and not track any of it? Would you rather track everything and just assign transactions to your spending money category? Either way is great. The key is really thinking through your priorities and deciding how much you want to spend and why you want it in one category vs another.
How do I create a Zero Based Budget?
You can do it on paper or using a spreadsheet. You can also use software such as Mvelopes or YNAB (You Need A Budget). The key is just to keep budgeting/planning until ALL of your money is assigned a job! Later this month I’ll give you 7 steps to create a zero based budget along with templates you can use!
What do you think?
I think a zero based budget is the best way to budget, but I’d love to hear your thoughts. Comment below to chime in! What’s your favorite way to budget? What do you think of a zero based budget?