The zero-based budget calls for going back to the drawing board with your budget periodically to justify every expense.
Want more zeroes in your bank account? You’ve gotta go back to zero first.
That’s the idea behind zero-based or zero-sum budgeting, which calls for reviewing your expenses frequently to make sure that every cent you spend counts. At the end of each month or financial quarter, you want your expenses subtracted from your income to equal zero. That means your money is going exactly where it needs to go – toward rent, toward supplies or toward an emergency fund or retirement savings – so nothing should be left over.
Zero-based budgeting (ZBB) was first developed in 1969, and President Jimmy Carter proposed using it for the federal budget in the 1970s (although President Ronald Reagan scrapped that in 1981.) It’s reemerged as a popular cost-cutting measure over the last couple of years, with 38% of surveyed North American companies saying they would use ZBB, up from just 10% in 2014.
Coca-Cola and Kraft-Heinz have tapped the technique to save money by axing thousands of unnecessary jobs, closing inefficient factories, selling corporate jets – and even requiring workers ask permission before making color photocopies. Verizon just revealed its plans to cut $10 billion in costs by 2021 with a zero-based budget.
“The reason this has become sexy again, in terms of corporations, is because everything needs to be approved,” budget expert Neale Godfrey, president of the Children’s Financial Network, told Moneyish. “Because zero-sum budgeting really makes you examine your expenses, you can see where you’re really spending your money. So budget items aren’t just automatically pushed through anymore.”
And consumers can work this method to trim the fat from their budgets, too. The first rule of personal finance site YouNeedABudget.com is to “give every dollar a job” by determining where to allocate your cash. SixFiguresUnder.com also calls for budgeting every penny to pay off debt.
But bringing your bottom line sum zero each period doesn’t mean you have to give up everything you love.
“Hearing ‘zero’ makes you think, ‘I’m going to have to cut out everything I like spending money on,’ but it doesn’t have to be that way,” personal finance blogger and HalfBanked.com writer Desirae Odjick told Moneyish. “A zero-sum budget could mean spending differently – getting a $100 a month unlimited yoga class pass, instead of paying $120 for a cable package – depending on what you’re prioritizing.”
So how would you apply a zero-sum budget in your own life?
Track your spending. The hardest part is getting started. Add up all of your net income each month so that you know what you have to spend. Then you need to take a hard, honest look at where every dollar and cent is going, by looking at your bank and credit card statements, reading over receipts and keeping tabs on where you’re spending cash – ideally for a month before you dive into ZBB. “It can be as low-tech as jotting down what you’re spending on an index card, or taking pictures of your receipts with your phone,” Godfrey said. “But you need to take a step back and see where your paycheck is disappearing to.” Or tap a free budgeting app to simplify matters, such as Mint (for iOS and Android), which lets you link your bank and credit card accounts to automatically see where all of your money is going. You can also add transactions and expenses manually.
Prioritize your expenses. Now that you now how much money you’re working with, flag where every dollar needs to go; for example: Rent ($1,000), utilities ($150), groceries ($300), cell phone bill ($100), savings ($100), etc. And you can also allocate money to things you enjoy, like dining out or going to the movies – but make sure you stick with whatever cap you set, like $30 a month on flicks, or $50 a month on brunch. You can’t go over! And that makes you creative. “If you run out of brunch money, you’ll just have to invite your friends over for a potluck, which can be just as much fun,” said Godfrey. Try apps like Goodbudget and Mvelopes (also for iOS and Android), which put a digital spin on classic envelope budgeting, when you would tuck money for different expenses into different envelopes. When you run out of money for a category, you have to stop spending.
Cut where you can. You have to justify every expense – so don’t just accept that your cable bundle is going to run $120 a month because that’s what it’s always been. Call up and see if you can get it reduced, or consider cutting the cord and streaming Hulu or Netflix for $10 a month instead. “Do not assume ‘that’s what my mortgage costs’ or ‘that’s what my rent costs’ – see if you can renegotiate the mortgage, or rent a room out on Airbnb to offset your rent. What other alternatives can we look at?” said Godfrey. “The zero-based budget makes you put everything under the microscope.”
Revisit and revise. You probably won’t hit a perfect ‘zero’ at the end of each period, which is why you go back over where you spent your money, and reassess. Your grocery tab came in at $200 instead of $300? Put that extra $100 into your savings account or emergency fund this month or quarter, and only assign yourself $200 for grocery money next time. If unexpected expenses came up – like needing to buy a birthday gift, or going on a trip – create a “variables” fund and start allocating money into that. “Stuff happens,” said Godfrey, “so you build that into your budget.”
“The best method for household budgeting is the zero-based budget,” agreed financial expert and radio host Dave Ramsey. “You might be able to add some extra spending money to your restaurant budget, or tack on some more money to pay off debt. The point is to put every dollar on paper, on purpose, so that you know where every dime is headed before it’s ever spent.”
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