By now, most of us know exactly what a budget is. But what is a zero-based budget and how exactly does it work? When it comes to your budget it is important to find a method that is right for you and will help you achieve your financial goals and assist you in categorizing your income and expenses. Let us have a look at the Zero-based budget method.
What Exactly is the Zero-Based Budget?
Zero-based budgeting is a budgeting method where all expenses must be justified and revised for each new period. The Zero-based budget process starts from scratch (zero base). Your budget is then built around what you actually need for the upcoming period regardless of whether each budget is higher or lower than the previous month’s one. It is important to note that this method is usually used by companies but this type of budgeting can also be used by families and individuals.
Difference Between Zero-Based Budgeting and Traditional Budgeting
Zero-based budgeting and traditional budgeting are two very popular methods used for budgeting in businesses as well as households. You have to think about what your financial goals are and what you want to achieve through the process. Let us have a look at the differences between these two budgeting methods.
- Time: Zero-based budgeting can be time-consuming as you start it from scratch every single time. You spend a lot of time on projects because you need to go through countless comparisons and approvals. Traditional budgeting takes less time as you already have a foundation to work on and only have to implement small changes before the new budget period.
- Resource allocation: With Zero-based budgeting, you focus on things that are a priority and budget according to that but with traditional budgeting, there is no prioritizing and the previous budget is just adjusted.
- Justification of data: When it comes to the Zero-based budgeting method you do not rely on past data. Every single item in your budget requires justification. While traditional budgets only require some tweaks and a simple explanation.
Why Choose a Zero-Based Budget?
Using this budgeting method can be a great budgeting option. Whether you’re a business or a household you will be able to benefit from this method. This method will allow you to have a flexible budget, lower costs, and more discipline. The zero-based budget keeps you aware of how much money flows in and out every month. This can prevent you from spending money that you don’t have.
This can be a great method if you want to track your money better and you want to gain more control over your finances. This method allows you to easily adapt your budget every single month if you have any financial changes. If you have any budget left over you can just move it to another category like a holiday savings fund. This type of budget can improve your decision-making skills and make sure that all your money has a specific purpose.