Zero based budgeting is an accounting technique that was developed in the 1960’s to 1970’s by a guy named Pete Pyhrr who was an account manager at Texas Instruments, the calculator people! Zero Based Budgeting helps you assign your money to savings, debt and expenses. You can change the categories every month, or you can change them up based on upcoming events like. Birthdays or other celebrations, or even the dreaded tax day if you owe!
How to Start
You need to know how much money. You are bringing in first of all, and you also need to know what your expenses are. Additionally, you can either track them for a few months or you can look back at your bank and credit card statements and print them out and use different colored highlighters to track your spending. This is a fun choice for the artistic type of person!
Okay, So Give Me An Example!
|Monthly Income: $4,000.00|
|Gas for Vehicle||$80|
|Student Loan Payment||$250|
|Credit Card Payments||$500|
|Amazon Gift Card Balance||$100|
|Amount Left: $0.00|
Is There an Easier Way?
This way is actually super easy! There are actually computer software programs that can help you achieve this, or even apps for your phone or tablet! Some of the apps let you change stuff around…say your water bill doubled due to a leaky toilet…. I like to always put money onto an amazon gift card balance for those last-minute moments when you forget a birthday or break your favorite shoes.
What Are the Benefits of Zero-Based Budgeting?
- You know what money is coming in
- You know how much is going out and where it is going out to
- This plan is fully customizable
- For businesses, managers will need to justify all of the operating expenses they manage.
What Are the Cons or Downfalls of Zero-Based Budgeting?
- If you buy something unexpected and out of your categories, it will throw off your whole budget.
- It can be time consuming to set up and make adjustments to
- If you are a freelance worker or your monthly income varies, this could be problematic
- Promotes more short-term thinking instead of long-term planning
How Can I Incorporate Zero Based Budgeting Into My Business?
You can actually incorporate zero based budgeting in stages. You need to identify and come up with descriptions for each category, often called decision packages. Next, you would evaluate the decision packages to make sure they align with the overall goal of the company. Next you need to prioritize the packages or groups from most important to least important. Finally you would allocate resources/amount of money to each section.