One of the budgeting techniques that has gained some popularity in recent years is the zero based budget. In this budget, you make sure that every dollar is accounted for at the beginning of the month. You look at what you expect to get in terms of a paycheck, and then use every penny to pay bills, or accomplish your goals. As part of your budget, you decide what will go to debt reduction, or to building an emergency fund, or to your retirement account. You can also put money toward a vacation or some other goal, on top of making sure your groceries, gas, insurance premiums and other expenses are covered. Every dollar of income is assigned to a spending, saving or giving category. No dollar remains un-assigned.
A zero based budget is also expected to help you manage your cash flow. You match up expenses with your paychecks so that you can see when to pay your bills, dividing expenses into first of the month costs and end of the month costs. You can make the process a little easier with the help of bill scheduling so that your credit card payments, utility bills and other expenses are paid automatically — on a day that works best for you.
Is A Zero Based Budget For Everyone?
While I know people who swear by the zero based budget, I admit that it kind of makes me nervous. This type of budget doesn't really account for leaving a cushion (although I suppose you could budget in a cushion one month, and then it would be there for the future). I like to have extra money in my checking account at the end of the month, even after I've contributed to retirement and short term savings. It doesn't need to be a lot of money in the checking account, but I like to have a little something in there.
Another issue with the zero based budget, at least for me, is that I don't have a regular income. My income is variable. Trying to figure out exactly what I will make each month, and then matching it up with expenses, doesn't work for me, since my exact income depends on which projects I am doing, and whether I have extra money that month — or less coming in. Of course there is the option of faking a regular paycheck when you have an irregular income.
Instead of using a zero based budget, I prefer to create a more general spending plan. I figure out how much I need each month for regular expenses that are important spending priorities. Fixed expenses, like insurance premiums, the mortgage payment, car payment, IRA contributions and utilities, are all taken care of first, via automatic withdrawal or by using bill scheduling. Then I spend on other things that I want or need for the month. I track my income and spending, so that I don't exceed what I make, but I don't create a budget to limit what I can spend on entertainment, dining out, charity or other variable expenses.
In the end, how you decide to spend your money is up to you. But it does help to have a plan. Think about what sort of plan would work best for you, whether it's a zero based budget, or some other type of spending plan. As long as my most important expenses are covered, and my future provided for, I don't worry too much about where I spend my other money, as long as it reflects my priorities.
What about you? Do you have a preferred budgeting technique?
You mention what you see as a couple of hurdles to using a zero based budget, but actually I think a lot of good zero based budgets account for those things.
For example, having a cushion in your account: the software that we use for our zero based budget, “You Need A Budget” has a stated goal of building up a month’s worth of reserve so that you always have a cushion in your account. So any income that you make for this month is denoted as income available next month. In other words you’re always a month ahead. For many folks it might take a little while to get to that point, but it can be done.
Another problem you mention is having variable income. Dave Ramsey specifically talks about that in his Financial Peace University course, and talks about how a zero based budget is a great idea for those with variable incomes because they need to be able to track closely where their money is going – for those tough months. What Ramsey suggests doing is accounting for that variable income by taking what “regular income” you can count on and using that towards as much of your regular monthly and recurring bills as you can. Then, when that money is exhausted you take the rest of expenses and rank them in importance from 1 to however many there are. Then you just pay them off as they come in. Of course it also helps with this to have a buffer built up – and an emergency fund to help cover any months where you come up short.
In short – I think your objections to a zero based budge actually aren’t objections because many zero based budgets actually account for them! :)
Nice counter! :) I guess my biggest problem is that I don’t want to track my spending very closely. I enter my spending in my personal finance software, but I just feel trying to account for everything ahead of time is somewhat limiting to my love of spending. And I am a spender! I make sure the important things are covered, and just sort of pay for what I want as it crops up. I usually have money left at the end of the month, so I don’t really feel the need to really examine where each dollar is going.
I have operated on the principle of pay myself first and spend what is left but it is easy to allow spending to get too far ahead of income and borrow from one place to pay another. Zero based could be a good idea provided there is a built in cushion.
My process is a little different, I have a payroll deduction for my savings (retirement) and we live on what is left. I watch expenses by exception for variances. I investigate any variances and adjust the next month. It is very much similar to a business model.
I really like your breakdown of the zero-based budget, and I agree with Peter. I think seeing that extra little bit in your checking account at the end of the month is really just psychological. If you work out a zero-based budget with a cushion, then that little extra will always be there. My budget works similar to the zero-based model, but I pay in tiers. Tier 1 is requirements such as bills, groceries and retirement contributions, Tier 2 is sink funds and Tier 3 is “fun money.” I find that the best way to budget is to always use less than you think you need.
This!! I have been trying to fix what wasn’t broken by forcing myself to adapt to a Zero Dollar budget. It is not for me & it’s nice to hear I’m not alone. People are absolutely obsessed with this system of budgeting. Not I. ;)