Zero-Based Budgeting: Ready to Cut Unwanted Expenses? Start Here!
When it comes to budgeting and saving, we Indians often stick to our familiar habits. We make a rough estimate of how much we’ll spend based on previous months and make minor tweaks here and there. But, do you know? Instead of adjusting last month’s budget or continuing with existing spending, you must begin with zero and justify every expense. This helps you budget efficiently. It certainly helps you prevent unnecessary spending! Zero-based budgeting (ZBB) is gaining popularity in both personal and business finance.
Ready to learn how this budgeting method can help you in financial management?
Let us take the first step: start with zero-based budgeting meaning and dash towards your financial goals!
What Do You Mean By Zero-Based Budgeting?
Zero-based budgeting is a budgeting approach where every rupee in your budget must be justified from scratch every time you plan your finances.
For example, in a traditional budget, you might carry over costs like rent, fuel, and groceries from the previous month/year. In zero-based budgeting, you would explain why each expense is necessary and how much should be spent, even if it’s the same as last year. Every rupee is allocated based on current needs, priorities, and goals.
ZBB approach helps you in building your budget with only the necessary costs in mind.
In other words, when you use ZBB, you’re asking the important question: “Do I really need to spend money on this item?”
So, what is the exact meaning of Zero-Based Budgeting?
The meaning of zero-based budgeting is simple but powerful. It means that you start from zero every time, re-evaluating every expense.
Key Principles of Zero-Based Budgeting: How it Prioritizes Your Essentials First
The process of zero-based budgeting cuts waste and allocates every rupee where it is necessary.
Here are some important principles of zero-based budgeting that will help you leap forward in your savings journey!
- Every expense is justified
Unlike traditional budgeting, where you base your budget on previous expenses, the process of zero-based budgeting forces you to justify every expense as though you’re starting with nothing.
Let us say you have a monthly subscription to a gym or Netflix; you must assess whether that expense is necessary for the current month.
- All expenses are categorized
Whether it’s essential or non-essential, each expense gets categorised. You’ll separate your needs (like food, fuel, rent, bills, and groceries) from your wants (like a movie in the theatre, a solo weekend trip, or luxury items).
- Income is allocated to priorities first
After you’ve listed your expenses and assigned them to categories, you focus on allocating your income to essential expenses first. This ensures that you cover what’s necessary before you allocate funds to anything else.
- No automatic carryovers
In ZBB, you do not automatically carry forward any previous expenses. Each budget cycle is independent and free from any preconceived impulses about what you “should” be spending based on last month.
Process of Zero-based budgeting
Let us say that you are preparing your monthly budget for the first time using Zero-Based Budgeting. In a traditional budgeting model, you might look at last month’s spending.
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But with ZBB, here’s how you’d approach it:
- Calculate Your Income: Let’s say your income is ₹50,000 for the month.
- List Your Essential Expenses: These are the non-negotiable items—things you must pay for. For example, rent (₹15,000), groceries (₹5,000), utilities (₹3,000), transportation (₹2,000), and debt repayments (₹5,000).
- Allocate to Non-Essential Expenses
Now, you’ll look at what’s left of your income after covering essentials. Let’s say you have ₹20,000 remaining. Instead of carrying over last month’s budget for entertainment and dining out, you’ll ask yourself, “Do I really need to spend ₹5,000 on eating out this month?” If the answer is no, you may reduce that budget and assign it elsewhere—perhaps saving or investing it for the future. - Zero Out the Budget
At the end of this exercise, every rupee of the ₹50,000 will be assigned to an expense or savings, ensuring you don’t spend more than you earn.
The best part?
ZBB helps you prioritise your needs and ensure you’re not wasting money on things that don’t align with your goals.
Once you’ve allocated all your income, it’s important to consistently track and review your spending throughout the month.
Zero-Based Budgeting in Business
Now that we’ve covered how ZBB works for personal finances, let’s shift to how it’s applied in businesses.
Zero-based budgeting isn’t just for individuals—it’s a highly effective approach for companies looking to optimise their financial resources.
Let us consider a company that uses Zero-Based Budgeting. Instead of assuming that last year’s budget (say ₹5 lakh) should just roll over into this year, the company starts from scratch.
- Every Department Justifies Its Budget: The sales department doesn’t automatically get ₹1 lakh for marketing just because it did last year. It must present a clear case for why it needs that amount to achieve sales targets. If it can’t justify it, the budget might be reduced or redirected.
- Focus on Efficiency: If a company is looking to reduce costs, ZBB helps by identifying and cutting unnecessary expenses. For example, if a company has been spending ₹2 lakh on office supplies every year, but it only actually needs ₹1.5 lakh, ZBB will help them cut that ₹50,000 excess.
- Strategic Investment: ZBB helps businesses reallocate resources to areas that align with their current goals rather than automatically renewing budgets for programs that may no longer be needed. If a business is focused on expanding its digital presence, more funds could be allocated to digital marketing rather than traditional advertising.
If you’re budgeting for a household or a business, involving key stakeholders, such as family members or financial advisors, can ensure that everyone is aligned with your financial goals.
Advantages and Disadvantages of Zero-Based Budgeting
Like any budgeting method, zero-based budgeting has its advantages and disadvantages.
Advantages of Zero-Based Budgeting
With zero-based budgeting, you decide where every single rupee of your monthly income goes. This means you’re less likely to spend unnecessarily, helping you spring to better financial control.
1. Better Control Over Spending
Let’s say last month you spent ₹500 on extra snacks that weren’t really needed. This month, with zero-based budgeting, you look at your expenses carefully and decide to spend ₹200 on snacks and save ₹300. This approach can help you jump start your savings.
2. Helps You Save Money
By looking at your needs carefully and cutting out unimportant expenses, you can leap forward in your savings.
If you have a habit of buying clothes every month without thinking, zero-based budgeting makes you stop and ask, “Do I really need new clothes this month?”
If the answer is no, you can save that money instead and scale up your savings.
3. Focus on What’s Important
Zero-based budgeting forces you to prioritise your needs, like food, bills, and savings, before anything else. This helps you dash towards your most important financial goals.
If you want to buy something like a new pressure cooker, you first make sure the essentials like groceries and bills are paid. This way, you ensure you only spend on what’s really needed, giving you a flying start towards your next goal.
4. Increased Financial Awareness
ZBB forces you to evaluate your spending habits in detail. It helps you become more mindful of where your money is going.
5. Increased Accountability
ZBB ensures that everyone, whether in an individual household or a business, is held accountable for their spending. When every expense has to be justified, there’s a greater focus on ensuring that money is used wisely.
Disadvantages of Zero-Based Budgeting
Zero-based budgeting helps you manage money carefully!
But, it can also take time and effort to track all expenses each month, which might feel like a challenge at first. It involves justifying every expense from scratch. For someone who is new to budgeting, it may feel difficult to track every cost. ZBB also demand a lot of attention to detail, which can lead to errors or missed items. It is often said that it might not be suitable for people with irregular incomes or limited financial knowledge.
But once you get used to it, you can launch it to new heights.
- Time-Consuming
Every month, you have to think about your expenses from scratch. This can take time and effort, especially if you’re not used to planning carefully, which might feel like a next-level challenge.
- Hard to Predict Expenses
Sometimes, your expenses may change from month to month. If you’re not careful, you might underestimate how much you’ll need for things like school supplies or festivals, making it tough to ace it every time.
If you have a family wedding or a religious festival coming up, you might need extra money for shopping, but because zero-based budgeting doesn’t carry over expenses from last month, it could be hard to predict these big events in advance.
- Requires Regular Tracking
Since you start fresh every month, you need to keep track of all your expenses regularly. It’s easy to forget small things that add up, but keeping everything in check will help you fly high with your budgeting skills.
If you forget to note down small purchases like a rickshaw ride or a cup of tea, it could throw off your budgeting for the month, making it harder to stick to your savings plan.
Difference Between Zero-Based Budgeting and Traditional Budgeting
You might be wondering what sets ZBB apart from traditional budgeting.
Traditional Budgeting
In traditional budgeting, you look at the money you spent last month and just repeat those same amounts for the next month.
It’s like saying, “Last month I spent ₹10,000 on groceries, ₹5,000 on bills, and ₹1,000 on other things, so I’ll do the same this month.”
Let’s say your mother spends ₹2,000-3000 on vegetables every month because that’s how much you spent last month. You don’t think much about whether this amount is too much or too little, you just keep doing it.
Zero-Based Budgeting
In zero-based budgeting, you don’t look at last month’s spending, you think about what you really need this month. You ask yourself, “Do I really need ₹3,000 for vegetables? Can I spend less, or do I need more this month?”
Let’s say this month you need to spend 3000 for a compulsory school event for your kid. Instead of sticking to ₹1,000 add-on you keep aside every month, his month, you have to spend ₹3,000. Thus, in the process of zero based budgeting, at the same time, you will have to reduce spending on other things to balance the extra expense.
- Traditional Budgeting: You follow last month’s budget without much change.
- Zero-Based Budgeting: You start fresh, thinking about what’s truly needed and adjusting expenses based on the current month’s needs
Zero-Based Budgeting (ZBB) can be made easier with the right tools. You can use budgeting software or financial planning apps to automate the process, making it less time-consuming.
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Conclusion
Zero-based budgeting helps you manage money carefully, save more, and prioritise important expenses that cannot really be ignored! But, it can also take time and effort to track all expenses each month. However, once you get used to it, you can jump-start your savings journey!
Zero Based Budgeting: FAQs
Zero-based budgeting (ZBB) is a method where you plan expenses from scratch each time, starting at “zero.” You must justify every minor expense instead of basing it on your previous budgets.
It’s called zero-based because the budget starts at zero, and every cost must be explained, ensuring no automatic carryovers from past budgets.
First, you must list all your expenses. Next, rank them by importance, then assign money to essentials, and finally, track your spending closely.
ZBB method helps cut out unnecessary expenses and focus your money on the most important expenses and needs of your life. It’s a smart way to achieve your goals.
It’s a budget for short periods, like a month, where you plan and track expenses to manage your finances.
The key difference is in their approach to budgeting. ABB (Activity-Based Budgeting) focuses on funding activities that drive costs for efficiency. However, ZBB (Zero-Based Budgeting) starts from scratch, requiring every expense to be justified.
