How to approach a zero-based budget

What is zero-based budgeting?

Zero-based budgeting is a budgeting style where every expense must be justified for each new period, starting from a zero base. That means that each month, income minus expenses should equal zero.

That doesn't mean there will be a zero balance in the bank account at the end of the month. Part of that budget can go to savings, or paying off debt. Simply put, zero-based budgeting is about assigning every pound a job.

How does a zero-based budget work?

To get started, here are some easy steps to take to create a zero-based budget.

• Step 1 — Calculate income. This includes detailing all sources of income, not just a bi-weekly pay cheque. This tally should include child maintenance payments, side hustles, and any passive revenue.

• Step 2 — List expenses. Monthly expenses can be broken down into fixed and variable costs. Fixed costs are things such as rent for a flat or the cost of transportation. Variable costs can include anything from a fluctuating electric bill to holiday gift spending.

• Step 3 — Assign every pound a job. Often, as expenses are subtracted from income and allocated to different categories, there may be some money left over. In the zero-based budget process, the leftover money would continue to be allocated until there was nothing left unbudgeted. That could include a deposit to a savings account or a repayment on a debt, for instance.

• Step 4 — Review and adjust monthly. One reason why zero-based budgeting can be effective is that it adapts to the fluctuations of life. Received a bonus at work? That's a great time to up the deposit to a savings account. Spilled a cup of tea on a computer and had to replace it? That's the time to look at ways to trim back other spending.

Even though zero-based budgeting sounds straightforward, learning how to budget can be tricky and may require some trial and error. Budget apps, templates, and spreadsheets are good ways to get organised.

What are the advantages of zero-based budgeting?

There are many advantages of zero-based budgeting. For example:

• Tracking spending. Knowing exactly where each pound is going can improve financial awareness and financial security. Whether that's realising that a personal budget included more dinners out than was previously thought or additional sources of income were somehow missed, zero-based budgeting provides a full picture of the money in and out each month.

• Sticking to a budget. Making a list of expenses every month may prevent overspending. When every single coffee and impulse buy is displayed and accounted for, it can be easier to prioritise spending on essential items instead.

• Reducing debt. Many people choose to pay off debts by sending the same payment amount each month, even when they can afford to send more in some months. With the clear view afforded by zero-based budgeting, that's easier to do — potentially speeding up the repayment of credit services.

• Achieving goals. Zero-based budgeting helps in saving for specific goals, such as a house or a holiday. Like the idea behind faster debt repayment, zero-based budgeting can allow someone to reach a savings goal faster by putting away a little more during the months that are lighter on expenses.

Who should consider the zero-based budgeting method?

A variety of individuals and households might benefit from a zero-based budgeting method. Freelancers who have fluctuating incomes, for instance, can be good candidates for zero-based budgeting. Those struggling to repay a specific debt or aiming to buy a home within a set period may also be able to reach their goal faster with this type of personal finance strategy.

Common challenges of zero-based budgeting and how to overcome them

Those who are new to zero-based budgeting will want to keep an eye out for some of the initial challenges, such as:

• Planning every pound ahead of time, which can be time-consuming

• Difficulties in sticking to the budget

• Unplanned expenses

Some of these challenges can be mitigated with a few budgeting tips, such as using budgeting apps or automating a deposit to a savings account. Money management apps can take some of the guesswork out of hidden expenses (like those unused subscriptions).

Zero-based budgeting vs. traditional budgeting

The main difference between zero-based budgeting and traditional methods is that with zero-based budgeting, the budget starts from zero each month versus carrying over previous budget categories. This can be useful for costs that someone might take for granted in their budget, such as a subscription app or a gym membership, especially if that expense is no longer worth it.

Take control of your finances with zero-based budgeting

Zero-based budgeting offers a structure for managing finances and paying bills each month.

Whether a self-employed single person or a dual-income home with children, zero-based budgeting's flexibility means that it can be easily adapted. From giving a clear vision of debt and savings goals to helping eliminate surprise expenses, zero-based budgeting is an approach worth considering.