You start every new job or project with a zero-based budget, which gives you a complete set of operating expenditures for the upcoming year. This is a great way to see what you spend and how you spend it, allowing you to make better decisions and tighten your belt in the future.
It’s been said that “zero-based budgeting” is the most important management tool in your organization’s toolbox. This type of budgeting doesn’t require you to record each and every budget line item. The idea is to start with the end in mind and slowly work your way backward to see what you have and what you need.
What Is Zero-Based Budgeting?
Zero-based budgeting is a valuable way to track and allocate funds since it helps you to be more mindful about the money you have to spend (vs. cash you have already spent) on every transaction. It also helps to minimize waste since you only pay for the things you need.
The practice is different from other budgeting techniques since it isn’t based on a simple balance sheet. Instead, it is based on a zero-based view of your budget. This means that you start by assigning a number to each transaction (e.g., the amount spent on a monthly magazine subscription) and then track how many transactions are associated with that number. It allows you to see how much money you can allocate to each area.
It has similar implications for businesses and institutions. Zero-based budgeting is a simple concept that has a significant impact on the effectiveness of your organization and your ability to manage your company’s finances. In essence, it is the process of identifying your organization’s current financial situation and then creating a budget that is based on zero.
This means that the amount of money available to your organization for the specific purposes you had identified when you began the budgeting process would be the amount needed for those purposes. By doing this, you build a budget that is focused on what you need, and you don’t waste money that is already available.
In a nutshell, zero-based budgeting will require you to account for all your income and expenses. You have to balance these figures so that at the end of a month or period, your money will be zero. Keep in mind that the essence here is to ensure that you have your essentials provided with enough allocation. This includes your savings and emergency funds. You don’t want to reach zero without putting money on those lines.
Once you can do this, you can guarantee that no money is being wasted or unaccounted for.
How To Make A Zero-Based Budget?
- Determine your monthly income – You need to know how much income you make before you can know how to spend it. There is no need for shame in discussing this; it is perfectly healthy to talk about your financial health. If you have no idea how much money you make, then you are not in control of your money, and you are not even aware of all the ways you could spend it.
- Track your expenses – It’s alright if you do some trial-and-error. Before you start budgeting, you might want to monitor your spending for a few months. It will help you analyze your spending pattern, as well as the areas where you put most of your resources. It gives you an idea of how to set the budget and make it work for you.
- Categorize – Once you are done tracking your spending, it is time that you put categories to the things within your expenditures. You have to put your essentials on the top of the priority list. This would include your savings and emergency funds. You should also make a separate category for your wants and leisure. Just because you are budgeting doesn’t mean that you have no right to have some fun.