The Ultimate Guide to Zero-Based Budgeting

by Nisha Ramesh  |  March 29, 2021

Making money work for you is one of the best ways to attain financial freedom. Whether you earn a six-figure income or a minimum wage, every single rupee you bring in adds to your opportunity to build wealth.

Most people’s approach to achieving this is saving or investing. While saving and investing is a part of the process, that alone is not enough to get you there – you need a strategy.

Financial strategy requires more than just funnelling some money into assets. It may also help you plan and save for some of the most important things in your life, like buying a vehicle, a wedding, your child’s education, or perhaps a trip around the world. 

Many Financial Strategies can help you gain power over your finances. Zero-Based Budgeting is one of the popular ones.

In this article, I will give you an ultimate guide to Zero-Based Budgeting – what it means? How to create it? And most importantly, how to use it? 

What is Zero-Based Budgeting?

As the name suggests, zero-based budgeting is a budget where you allocate a job to every rupee you earned to reach the equation:

Income – Expenses = Zero

Sounds odd? Let me explain

Suppose you earn ₹30,000 every month; zero-based budgeting requires you to account for all of the ₹30,000 so that there is no extra money left at the end of the month. The major goal here is to be mindful of your money and make smart spending choices. 

Your budget would allow for expenses like groceries, utilities, savings, investments, entertainment etc. Instead of being bothered about whether you have enough money to spend on something or waiting for the month-end to settle bills, this type of budgeting forces you to make spending and saving decisions in advance. This way, you know accurately how much money you have for something and decide to spend it or not based on whether it fits your budget.

If you truly aim to achieve your financial goals quickly, you may realize that every rupee you make needs a purpose, and zero-based budgeting enables you to do it. Since this strategy forces you to make financial decisions in advance, it keeps you aware of your debts and expenses. It allows you to stick to your goals. 

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Zero-Based Budgeting vs Traditional Budgeting

 

Zero Based Budgeting Traditional Budgeting
  • It always starts from scratch
  • Calls for justification of both new and old expenses.
  • Budget oriented
  • Higher clarity and responsiveness
  • Complicated and requires more time
  • Builds atop the figures of the previous budget
  • Analyses only new expenditures
  • Accounting oriented
  • Lesser clarity and Responsiveness
  • Simplistic and requires less time

 

Creating and Implementing Zero-Based Budget

You could start creating a zero-based budget by listing down all the things you spend money on every month. It can include rent, transportation, groceries, EMI, essentials, utilities etc. The more detailed your list, the more efficient this strategy will be. 

Then analyze how much money you will need for each bucket. You may use your previous bills to give you a realistic figure. Once that’s settled, subtract your expenses from your income. 

It may lead to two scenarios.

  1. Your expenses exceed your income – revise the budget and cut costs.
  2. Your income exceeds expenses – assign it to an existing category or create a new savings category.

If you have money that is not budgeted for, you are more likely to spend it on something less essential for your long term goal. 

Creating a budget is not the end of it. The important part is implementing it in your lives. After you draw up a solid budget, you have to start tracking your spending in various categories. Suppose you catch yourself overspending on one category, stop yourself and reconsider cutting the cost of revising the allocated amount for that expense. 

You may have to track your expenses every day. Find a routine for yourself and spend sometime recalculating your finances regularly. 

Also, remember that zero-based budgets are not very static. You may need to change the budget when needed. For example, if your loved one’s birthday comes up, you may have to allocate more money towards gifts for that month and cut down on other expenses. 

Pros and Cons of Zero-Based Budgets

Pros:

  • It lets you focus on your goals
  • Easy to spot where to spend and save
  • Dynamic – more room to adapt and improve 

Cons:

  • Requires more practice
  • Complex and requires more effort
  • Rigid spending guidelines

In Summary

Zero Based Budgeting is a simple and reliable way to achieve your financial goals. 

There are some myths that this is only for those who are reckless with money. Whether you are financially strong or struggling, this strategy could give you the benefit of taking control of your money. 

I’m headed to draw my budget for this month, and I hope you will give it a try too. 

Happy Budgeting!

KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.


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