Zero-based budgeting, also known as zero-sum or zero-balance budgeting, is the practice of essentially accounting for every dollar you have.
Budgeting may not be fun, but it's even less fun ending a month not knowing where those extra $300 went off to. With zero-based budgeting, you are employing your dollars to help achieve your goals. Once you have come up with a plan for each of your dollars, you will have 0 dollars left to budget, which is where the "zero" part of "zero-based budget" comes from.
An Example Workflow
Budgetwise works best if you only budget for the money you currently have on-hand, since it's the only guaranteed money you can spend. Let's say you have $1,000 in your checking account, and you get paid next Friday. There are a few questions that you will need to ask yourself:
- What bills do I need to pay from now, until next Friday when I get paid again?
- What other expenses do I need to plan for? Things like gas, groceries, upcoming birthdays, etc.
- Do I have any money left over? If so, what do I want to do with it? Here you can decide what to do with your remaining dollars. If you have a big expense coming up later in the month, perhaps you can set some money aside to prepare for that. If you are saving up for something and have no other obligations, this would be a great time to put money towards your savings goal.
Answering these questions will help you prioritize where your money goes, and you'll never lose track of it again. With each dollar allocated to a certain category, you only need to watch your budget to make sure there are no surprise expenses. If something comes up, you will need to re-prioritize and figure out which category you can pull money from to cover the difference.
Once Friday comes and your paycheck is deposited into your account, it's time to plan for that money up until the next time you get paid. Rinse and repeat, watching your checking and savings accounts grow and debts shrink as less and less money is spent without a plan.