Types of Budgets: The Zero-Based Budget
- Published 12/12/2007
- Budgeting
- Unrated
The zero-based budget makes up for unplanned use of positive cash flow
(see “Budgeting Pitfalls”), in that the goal is to have no
free-floating cash whatsoever; all income funds must be allocated into
a spending category in some way.
The zero-based budget typically runs on a monthly budgeting period. After monthly income is calculated, spending and expense categories are created. All of the income must fall into an expense area; for instance, your phone bill is a variable expense in which you might allocate $100 per month. Additionally, you may have a “fun” spending allocation in which you allow yourself $200 per month for anything you want; but you also have a savings area, in which you allocate $100 monthly. No matter how much or what area, all money must be allocated, so that your checking balance (on paper) is $0.
Should you have surplus funds, your end-of-month review will allow you to adjust how much you allocate to each area so that you are prepared for the following month.
Although you have to be pretty exacting with your projected allocations each month, the zero-based budget ensures that all money is used in some way, including for savings goals.
Modifications for Irregular Income Earners
If you earn irregular income, you might find it difficult to adhere to deducting from an income that varies, or allocating the funds you may not have. However, you can implement either type of budget by estimating an average income.
Most likely, you will do so on a monthly basis, but you will need to start by tracking receipts of all income earned over past quarters or months. From there, you can total all income earned for your tracking period, then divide that among your proposed budgeting periods. For instance, if you decide to use the zero-based budget, you can track the past 6 months of earnings, then divide the total by 6 to get your estimated average income that you can allocate into different expense or spending categories. If you use the income-and-expense budget, you can deduct expenses in a given period from the estimated average income of the same time frame.
If you would like to learn more about other types of budgeting like the income-and-expense budget---a simplified but useful tool in managing income and expenses that works well for traditional employees, please see “Types of Budgets: Income-and-Expense Budget”.
References
Howtodothings.com. How to Save Money
Gettingfinancesdone.com. What is a Zero Based Budget
John Casteele. How to Budget on a Irregular Income
The zero-based budget typically runs on a monthly budgeting period. After monthly income is calculated, spending and expense categories are created. All of the income must fall into an expense area; for instance, your phone bill is a variable expense in which you might allocate $100 per month. Additionally, you may have a “fun” spending allocation in which you allow yourself $200 per month for anything you want; but you also have a savings area, in which you allocate $100 monthly. No matter how much or what area, all money must be allocated, so that your checking balance (on paper) is $0.
Should you have surplus funds, your end-of-month review will allow you to adjust how much you allocate to each area so that you are prepared for the following month.
Although you have to be pretty exacting with your projected allocations each month, the zero-based budget ensures that all money is used in some way, including for savings goals.
Modifications for Irregular Income Earners
If you earn irregular income, you might find it difficult to adhere to deducting from an income that varies, or allocating the funds you may not have. However, you can implement either type of budget by estimating an average income.
Most likely, you will do so on a monthly basis, but you will need to start by tracking receipts of all income earned over past quarters or months. From there, you can total all income earned for your tracking period, then divide that among your proposed budgeting periods. For instance, if you decide to use the zero-based budget, you can track the past 6 months of earnings, then divide the total by 6 to get your estimated average income that you can allocate into different expense or spending categories. If you use the income-and-expense budget, you can deduct expenses in a given period from the estimated average income of the same time frame.
If you would like to learn more about other types of budgeting like the income-and-expense budget---a simplified but useful tool in managing income and expenses that works well for traditional employees, please see “Types of Budgets: Income-and-Expense Budget”.
References
Howtodothings.com. How to Save Money
Gettingfinancesdone.com. What is a Zero Based Budget
John Casteele. How to Budget on a Irregular Income
