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As the name suggests,
zero-based budgeting always takes a fresh start from a blank page!
There’s no previous financial history attached and doesn’t demand to drastically cut back on certain costs.
Instead,
- It aligns with dynamic financial demands,
- Makes your finances smart,
- Andm, lets you save while spending simultaneously.
Interesting much? Heck, yes!
But how zero-based budgeting can be a game-changer for your present and future finances? Need answers? Simply scroll further below and dive deep into everything you need to know about it!
Zero-Based Budgeting: What Is It?
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Well, it’s exactly what it sounds like: The expenses should be in-line with every new budget period!
Like, if you earn $5000 and after taxes and deductions, the net income rounds up to $3500.
With a zero-based budget, every expense should be justified. For instance, after filling your savings, emergency funds, retirement accounts, and fulfilling your daily necessities, the sum should be $3500! Nothing more or less.
So, the new budget would be again “zero-based!”
Or, in simple words:
Everything starts from scratch and the new budget is allocated with keeping ‘needs and costs’ rather than comparing what was needed for it or how much money was used for it! - Wikipedia
However, one thing to note here is that this type of budgeting is mostly used by the companies to tackle low cost problems. Still, it’s nothing complicated that can’t be used by individuals.
Importance Of Zero-Based Budget
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You hear friends talking about it, you see it in the reels, every other blog title has it, and all of a sudden you ask, “what is this all hype for?”
Right?
The good news is, we’ve got your back! And we’ll start off with “why zero-based budgeting is so important after all?”
Here are a few of the advantages to get your hands on:
1. Money Efficiency Is Increased
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Zero-based budgeting helps you do “more” with “less!”
Yes, you read that right!
You are able to make choices that nurture your finances, credit score, and everything in between.
For example, instead of using a high-interest rate-based credit card, you prefer to opt for a secured credit card with the lowest interest rate. Saving money and improving your financial profile at the same time without making drastic changes.
2. Future Goals Become Clear
As mentioned before, zero-based budgeting makes your money efficient.
And this results in clear future goals.
Let us explain here:
- You know exactly where your money is going
- You are mindfully attending to your current needs
- When previous needs are met, you start to think clearly about the next steps
For example, there’s this entertainment subscription you are paying for too long but aren’t really using. Your zero-based budget will let you track down that subscription and cancel it right away.
Now, you have a clear goal in mind about how to make productive use of the money saved from that subscription and not keep up with things you aren’t using anymore!
Yes, it is that magical.
3. Every “Need” Gets The “Deserved” Treatment
Your zero-based budget doesn’t frustrate your finances by adding more and more expenses each month. In fact, it does the opposite.
- It subtracts unnecessary “wants”
- Allocates the saved money to “needs”
In simple words, it simplifies financial matters for now and in the longer run simultaneously. With this method, you can focus more on achieving your goals rather than thinking about making a new objective whenever your budget fails!
4. Let You Be Flexible With Your Planning
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Coming to the best part about it! With zero-based budgeting,
You are able to work on both short and long-term financial goals at the same time!
This means that while you are saving up for your post-retirement days, you are also flexibly making changes to your current day-to-day finances.
For example, if you feel like your previous month’s zero-based budget could make more improvements, you can easily add those points to your next month’s goals.
5. Brings Clarity To Accountability
Zero-based budgeting helps you dive deep into your monthly finances and find out why your certain money goals aren’t working out as planned.
This simply means that your money accountability becomes more transparent and easy to understand. In fact, it won’t be wrong to say that it helps push you forward in the right direction by telling you the wrongs in your financial planning.
Also Check: The 50/30/20 Budgeting Rule!
Okay, enough with the importance and the basics. Surely, if you’re reading this you fully know what it means and why it’s necessary to include it in your improving finances step-by-step plan.
Now, onto the features and how to create one!
Zero-Based Budgeting – 5 Key Features
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Now that you are fully aware of why zero-based budgeting plays such an important role in shifting your finances from bad to good, it’s time to head to its key features!
1. Focuses On Why
Unlike the traditional budgeting method, a zero-based budget focuses on why your certain goals aren’t working out and what can be added or removed to improve their efficiency.
With this, it becomes easier to find the root cause, work on it, and then create a more problem-solving financial plan.
2. Always Takes A Fresh Start
You don’t really have to stick to something that isn’t serving you right anymore. Instead, a zero-based budget always sets a new floor for you to optimistically work on your savings goals.
3. Prevents Unguided Changes In The Old Budget
More precisely, it would be right to say that it helps you discard your old and redundant budget altogether.
Traditional budgeting only tells you how much more money you need to meet certain expenses instead of improving your financial efficiency.
4. Each Section’s Capacity Is Tested
Zero-based budget puts each expense to a test and examines how appropriately it is serving your comfort. This way you realize which expense to keep up with and which one to drop right away.
5. Aligns “Financial Actions” With “Targets”
This is more like ensuring equity instead of equality to align financial actions with certain targets. And, that’s the key to reaching your 20s, 30s, 40s, or 60s goals!
How To Create A Zero-Based Budget?
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We are sure the above-mentioned benefits and features must have been forcing you to ask, “but how does a zero-based budget is created after all?”
Well, the good news is, we heard you! Below are some basic steps to make money work for you and not the other way around.
- Bring your income streams to one place.
- Then thoroughly analyze how much you spend out of your average income.
- Now, if your expenses are less than your income, congratulations, you have some money left in your purse!
- However, if the situation turns out otherwise, simply track down money-draining holes.
- Once tracked, keep the ones that are serving you right and discard the ones that aren’t.
- Now, you are left with only options that are mandatory. From here on, you will need to improve their efficiency only.
- Also, don’t forget to keep a check on your current expenses throughout the month for more close scrutiny.
- Similarly, keep improving your strategy each month and allocating the saved money to something useful!
The basic zero-budget formula is to minus your expenses from your income in such a way that the final number is zero! And, the above-mentioned steps will help you do exactly that!
Final Verdict
Saving money necessarily involves budgeting the money you have. Yes, that includes anything and everything you have in your name.
However, to do so, you need to create a financial plan that’s based on reality and allows you to build your wealth while working on your current goals.
Zero-based budgeting entering the chat!
This guide includes anything and everything on the said topic so, give it a read and enlighten yourself with the endless knowledge.
Lastly, hopefully, this article was worth your time!
