Let’s discuss zero based budgeting. At its core, budgeting is simple. The idea is to spend less than you earn, and ideally have something left over. But as we already know, that is much harder said than done if your costs are sky high already.
Personal finance is different for everyone, because it’s just that- personal. One budgeting method won’t fit all which is why there have been a crazy number of budgeting rules and methods and schools of thought that have been founded over the years.
There are several budgeting methods which are hailed for their success. From the 50 30 20 rule which is very simplistic in its approach, to zero based budgeting which requires a little more effort to maintain.
In this post we are asking: what is a zero based budget? And how could you implement it?
What is a zero based budget?
A zero based budget works on the premise that you have zero ‘left over’ at the end of the month. Base zero. Each pound of your income is assigned to something- whether you are spending it or saving it.
Zero based budgeting was invented by Peter Phyrr in the 1970s. A zero based budget can work really well if you want to switch things up and seriously gain some control over your money.
It can be quite a shock to the system and makes you engage with your money habits. This can be particularly helpful if you are struggling to get out of debt and break spending cycles.
How to implement zero based budgeting
To start implementing the zero based budget rule, you should start by writing down all of your outgoings. Track every single expense- ideally over a 1 month period- and record it either on paper, on an Excel spreadsheet, or in a dedicated app.
Tracking your expenses over a one month period means that you will get full visibility of your spending and overall outgoings. This forms the basis of your budget for the following month. You will identify the areas where you spend most of your money, and the areas in which you might be able to cut back.
At the end of the month, compare your expenses to your income. Is there anything left over? Are you in negative or positive figures?
Once you have done this comparison, it’s time to categorise your spending for the following month. These categories are completely up to you, but might be things like rent, debt repayment, transport, savings, groceries, shopping, meals out etc.
Use the expenses that you tracked the previous month to inform how much money you need to allocate to each category. Using your income, split this into the categories so that every pound of your income is allocated to a category. Make sure that you have nothing left over.
You might find that you want to pay more money towards debt, or perhaps pay more money to your savings account. You need to reduce your spending to do so, so that you have more leftover at the end of the month. See which categories you could cut costs from to facilitate this.
It will be difficult to get to zero at the end of the month straight away, it might take several months for you to tweak your budget enough times to get it down to zero. And if you’re a few pounds over, you can always roll this over into savings for the months ahead.
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How to use zero based budgeting
You can use some of the best money saving apps around to help you with your zero based budget. Monzo is particularly helpful due to it’s easy budgeting feature.
You can deposit your income for the month, and use Monzo for all of your expenses. You can even open a savings account with Monzo.
Monzo will automatically categorise your spending in the app which makes it a really painless way to track your expenditure. You can set your budget for each category, and Monzo will automatically notify you if you are going to exceed your budget for that category.
It will track your progress against your budget within the app. If it gets to half way through the month and you’ve spent the majority of your budget, the tracker will turn yellow and advise you that you might go over budget.
Monzo is completely free to use. Sign up using my link to get a free £5 to get you started.
Excel can also be your best friend when it comes to zero based budgeting. With its capacity for calculations and formulas, it can be a great asset when you are calculating how much money to allocate to each category to get to that zero base.
An example of a zero based budget
If you earn £2,500 a month, you will allocate a category to every last pound of that sum of money. Every pound has a ‘job’ to do in your budget. A breakdown of a zero based budget for a single person might look something like this:
Rent- £650
Household bills- £100
Insurance- £20
Phone bill- £15
Groceries- £200
Meals out- £70
Entertainment- £70
Shopping- £50
Travel- £100
Debt repayment- £300
Long term savings- £400
Short term savings- £525
These figures are purely an example. As you can see, the total amount of these categories adds to £2,500. If the person in this example stuck to their budget exactly, they would have zero leftover at the end of the month.
It’s important to remember that a zero based budget should be changeable. It should be reviewed before the start of each new month.
The reason you need to regularly review your budget is because no two months are the same. Each month will incur different expenses and it is important to adjust your budget accordingly. For example, one month you might have a wedding to attend, and the next you might be going for a city break abroad, the next you might want to start thinking about Christmas.
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Zero based budget Vs 50 30 20 budget
A zero based budget is virtually opposite to the 50 30 20 budgeting rule. The zero based budget works on the basis that every pound of your income is allocated to an area of spending or saving- and is categorised accordingly.
In contrast, the 50 30 20 rule is more flexible, and works on the assumption that 50% of your income goes on ‘needs,’ 30% is spent on ‘wants,’ and 20% is saved or invested. The 50 30 20 rule is a perfect starting point if you find managing your money overwhelming- it’s simple and is a great introduction to the concept of budgeting.
Why does zero based budgeting work?
The zero based budgeting method is effective because it forces you to address your spending habits, and has a goal at the end of the month. To achieve zero leftover. This pushes you to stay within the parameters of your spending categories and not overspend.
By first tracking all of your expenses for a month before drawing up your budget for the following month, you get full visibility of what you spend your money on. It shows you the real truth behind your spending, and you can identify overspending triggers. Do you spend when you’re happy? Spend when you’re in a rush? Spend more than you want to if you haven’t planned ahead?
Being confronted with the cold hard facts shows you where you could cut back, and where you can improve your money habits for the future. It gets you into the routine of regularly checking and engaging with your money which is a crucial step forward. Especially if you are someone who has been previously in the habit of avoiding checking your bank balance. I’ve been there!
If you’ve got any experiences with the zero based budgeting method, let me know in the comments below or drop me at DM @thriftylondoner on Instagram.
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Zero based budgeting- how could it help you?