What is zero based budgeting?

Dating back as far as 1924, zero-based budgeting is a simple idea that’s still being used by businesses and individuals today. 

From saving for a rainy day or special occasion to avoiding getting into debt, budgeting is an important part of managing your finances. Although it can be difficult to do at first, the advantages of zero-based budgeting are undeniable. Here we explore this in more detail. 

What does zero-based budgeting mean? 

Although it was introduced as a concept in the 1920s, it took until the 1970s for it to be widely adopted. It was mainly used by businesses as a way of balancing their books, but has also been taken up by individuals looking to better manage their personal finances. 

The technique works by planning your income and outgoings in advance and balancing them so that you end up with a £0.00 balance. This means that every pound you earn is accounted for, whether that’s for bills, debts, or savings. The simple formula to use is: income - outgoings = £0.00. 

How can I use zero-based budgeting for my personal finances? 

Since zero-based budgeting helps businesses keep track of their money, it makes sense that you can use it to keep track of your money too. If you ever find yourself wondering where your money goes each month, then using this budgeting method will help to give you a clear picture. 

It’s easier to start any kind of budget at the beginning of a month, so spend the previous month writing everything to do with money down. Go through your bank statements and make a note of everything you spend, and what you spend it on.  

How to make a zero-based budget 

Usually, the hardest part of any budget plan is getting started. Luckily, the zero-based budget approach is super simple to begin, and can be done just by following a few simple steps: 

• write down your total monthly income 
• write down your total monthly outgoings 
• think of your financial goals (e.g. paying off a debt, saving for a wedding) 
• create categories made up of incomes, essential outgoings and your financial goals. 

You can keep track of your budget on a piece of paper or with a spreadsheet. Go for the option you find easiest will help you to stick to tracking your finances and budgeting successfully. If you prefer an electronic method, consider opening an online bank account that has built-in budgeting capabilities, as this will help you stay on track. 

Each month, fill in each category. This should leave you with a total for the income, and a total for the outgoings. You should have a £0.00 balance when you subtract the outgoings from the incomings.  

If there’s a positive number, then you’ve got some extra cash leftover that you can put into savings. A negative number means you’ve spent more than you’ve earned, so you’ll need to look for areas you can cut back on next month. 

A zero-budget spreadsheet might look like this: 

SEPTEMBER	Expected	Actual
Wages	£1,500	£1,500
Other income	£200	£100
Total incomings	£1,700	£1,600
Rent/mortgage	£900	£900
Groceries	£240	£240
Phone bill	£50	£50
Credit card payment	£150	£150
Miscellaneous	£100	£100
Savings	£260	£260
Total outgoings	£1,700	£1,700
DIFFERENCE	£0	£-100

This is a very simple example, and you’ll likely have many more categories in your budget. In this example you can see that the actual incomings were £100 lower than expected. This led to a £100 deficit when the difference should be £0.00. In this situation, you would then have to think about areas where you can cut back on spending. 

It’s important to include a miscellaneous category for unexpected expenses or the occasional treat. 

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

Of course, not every type of budget plan will work for you, so it’s important to weigh up the pros and cons before making a start. 

Pros of zero-based budgeting 

• zero-based budgeting makes you analyse every aspect of your finances. Because every penny is accounted for, you really need to think carefully about where to allocate your money
• breaking your spending down into categories will help you work out what you consider to be essential spending and to identify areas you can cut back on
• it’s flexible and you can change the categories or amounts each month if you need to
• if you regularly overspend in one category, then you can allocate less to another category. Or if you always find that you have surplus money leftover, then you can earmark the extra cash to the debt or savings category
• focusing your mind on your finances like this can make it easier for you to save money or to clear debts. 

Cons of zero-based budgeting 

• it takes a little getting used to and it does require you to spend some time thinking about and keeping a note of what you spend
• you have to commit to sticking to the budget every month
• this method of budgeting may be difficult for people with unpredictable incomes, such as freelancers
• you’ll have to be very honest with yourself about whether you really need that takeaway coffee! 

If this isn’t for you, read about the 50 20 30 rule of budgeting.