Money management

What’s a zero-based budget?

23 September 2020 | Posted by Clare Seal
person typing on a laptop

Why should you care?

Not sure where your money is actually going each month? A zero-based budget can help keep track of every penny.

What will you learn?

Why a zero-based budget can help you manage your money and how to start planning.

What’s a zero-based budget, and why should I try it?

The term ‘zero-based’ might sound quite intimidating but, simply put, a zero-based budget means that every penny of your income is accounted for and given a job to do. It’s been a popular way for businesses to manage their finances for a long time – because, on a larger scale, lots of lost pennies might add up to thousands or even millions of pounds’ worth of lost revenue. However, many people find it helpful in their personal finance, too. 

A zero-based budget might be good for you if you constantly wonder where your money is going, or if you find yourself consistently living just a little bit beyond your means.

The advantages of a zero-based budget

Many people swear by a zero-based budget as the key to financial control, and it’s easy to see why. The visibility of every tiny bit of your income is great for your peace of mind, and it’s easy to keep track of because your end balance should always be zero. It’s also easy to see where you might hit stumbling blocks well in advance, so you can try to avoid them. If your end balance is negative when you’re planning your budget, you know that you need to either increase your income or reduce your outgoings in order to balance the books.

How to set up your zero-based budget

Once you get the hang of it, this is a super simple way to run your personal or household finances – just follow these steps:

  1. List all of your income streams to get a total monthly income for yourself or your household.
  2. Identify all of your monthly outgoings, including debt repayments and savings contributions. It can be helpful to list them from largest amount to smallest so that it’s easier to make cuts if you need to.
  3. Compare your money in vs money out. If you have a surplus, give that money a job to do. You might want to allocate it to debt, so that you pay off your balance more quickly, add it to your savings or invest it.
  4. Keep going, and stick with it!

A few extra tips

There are a few things that you can do to make your zero-based budgeting journey a little easier:

  • Start at the beginning of a new month, rather than halfway through. 
  • Get to grips with which of your monthly expenses are essential, and which are ‘luxury’.
  • Make sure you allocate some of your income for things you enjoy where possible – it’ll make your budget much easier to stick to long-term.

Key takeaways

  • A zero-based budget isn’t just great practice for businesses – it can help you with your personal finances, too.
  • Simply put, zero-based budgeting is accounting for every penny that comes in and out of your account.
  • A zero-based budget is simple to use and gives you maximum visibility and control of your finances.
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