This is not a term you hear commonly. It is a deep personal finance term which maybe your insurance agent, wealth management expert and financial institutions know. This is a budgeting method that actually encourages you to spend everything that you earn. But, before you get excited, understand that this model does not encourage frivolous spending either.
The idea behind this budgeting model is that every denomination should be used for some good purpose. Zero-based budget is also called a zero-sum budget.
This is a method that encourages you to allocate all your money or monthly income to meeting expenses, debt payments and savings. The goal here is simple: income minus expenses equals zero by month end. One of the best things about this budget model is that it is very flexible. You can easily repeat expense categories each month or mix it up, just as you need to. If one month you come under the budget or have more income, keep the balance aside for meeting next month’s expenses, or you can move the excess up in another category too like emergency fund.
Zero-based budget is the same as the Envelope System as a concept, which is all about distributing money for various expense categories.
Nowadays, there are some nice apps that help you to make a Zero-based budget, such as Goodbudget app. If you want to go the free way, just use a Google spreadsheet.
Before you implement this budget module, there are few ways to make sure you are planning your spending realistically.
Know your income: Total up your benefits, paychecks and all other monthly income sources to find out how much you have to work with.
Track monthly expenses: It is important to know what you are spending on per month. You need to know what you are spending on, or where all the money is going. By scrutinizing your expenses, you’ll see which areas you can cut back on and in which areas you need to spend more.
Categorize expenses: This is perhaps the most important step here. Categorize your expenses and priorities, and that includes your needs and wants, savings goals and emergency fund. This will be very helpful. For instance, if you want to go on a vacation, you can create a Travel Fund. If you want to buy a new car, you save up for that.
This is a common question.
Experts suggest that you use the 50/30/20 method here as well. In this approach, 50% goes to meeting needs, 30% towards meeting wants, and 20% towards meeting debt repayments and savings.