What Is Zero-Based Budgeting? (Advantages And How To Create)

By Indeed Editorial Team

Published 25 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Whether you are a professional managing a company's finances or starting a new job, budgeting can help you achieve financial success and track your spending. You can use a zero-based budget, or ZBB, to organise and manage your finances because the ZBB considers your spending patterns. Understanding everything about ZBB can help track your expenditures, save money and plan for the future. In this article, we answer 'What is zero-based budgeting?', discuss its advantages and disadvantages, outline the steps to create a ZBB and review an example.

What Is Zero-Based Budgeting?

The answer to the question, 'What is zero-based budgeting?' is that it is a method of budgeting where you give details and justify every expense during a specific period. Using this method, you distribute every rupee to a particular financial category, such as paying rent, saving money or buying clothes. The goal of ZBB is to ensure that your income completely matches your spending categories. At the end of the budgeting process, your objective is to have zero rupees left unassigned. The ZBB approach is useful when you want to control your spending or increase your contribution to savings.

Companies use the ZBB technique to allocate funding based on the necessity and efficiency of business processes rather than their budget history. Using the ZBB method, companies start from scratch and develop a budget by including expenses that are essential for running a business. The company does not add any additional expenses to the budget.

Advantages Of Using Zero-Based Budgeting

Here are a few advantages of using a zero-based budgeting technique:

Provides a reason for every rupee spent: The ZBB can tell you where you spend your money. This helps in understanding the areas where you spend the most.
Tracks your income: The ZBB approach can help you keep track of your income if you have income coming from various sources. It can help you understand what you are spending money on and when you are spending it.
Sets clear saving goals: Separating budgets into different categories, such as saving or retirement funds, can help develop specific financial goals. For example, after determining how much money you can save, you can create a separate holiday fund for the remaining rupees.
Ensures customised planning: A zero-based budget is customisable and you can create a complex or simple budget based on your spending and saving habits. You can even add or delete categories.

Disadvantages Of Using A ZBB

Here are a few disadvantages of using a ZBB:

Requires time-commitment: Using a ZBB requires meticulous organisation, planning and time commitment. As the ZBB requires you to review spending and revenue from the previous month, it can take a lot of time to create a budget.
Does not account for changing income: It might be challenging to calculate your monthly income if your income constantly varies. Though you can use your average income, the process is challenging if you work as a seasonal employer or receive regular tips.
Difficult to predict variable expenses: Zero-budgeting requires you to plan every expense, but unexpected expenses like gifts or holidays might be hard to predict. It is challenging to plan for these variable expenses, but you can add a separate category to help you save money for such unexpected circumstances.

How To Create A Zero-Based Budget

Follow these steps to create a zero-based budget:

1. Determine your budget timeline

The first step to creating a ZBB is deciding when you want your budget to begin and how long you want the budget timeline to last. Usually, a ZBB begins on the first day of a new month, but you can use any other day like the salary or payday, depending on your preference. Often, people use a monthly budget, but you can use an annual budget. After choosing between monthly or annual budget, decide the start date.

2. Calculate your income

Before creating your budget, list all sources of your income. This can include your monthly salary, rent payments and interest received on a savings account. It might be helpful to look at your bank account and keep records of the money that came into your account in the past few months.

3. List your expenses

In the next step, consider expenses and list them in various categories. If you frequently go shopping, you can create different categories for the types of purchases you make. Focus on scanning through the bank statement and recording where you spend most of your money. You can personalise the expense list by including categories such as child education, medical care or dental care. During the listing process, identify your largest expense. If you have a home loan or taxes that require payment, consider categorising them into housing. Here are some categories for listing your experience:

Student loans
Phone or interest
Healthcare
Rent or mortgage
Subscription services, including gym subscription
Groceries
Leisure activities like cinema, eating out and other paid activities
Travel cost including car maintenance, petrol cost and rail fares
Clothing

As your expenses might vary, this list is not comprehensive but an excellent place to start listing your spending. You can make a new category for expenses not mentioned in the above list. After categorising your expenses, focus on creating different groups to make it easier to manage the ZBB.

4. Create your spending categories

After defining your spending categories, group them further into smaller and more general sections to overview your budget. You can create the following groups:

Personal spending
Fixed costs
Debt repayment
Savings

5. Know your expense amount

After building a list of your expenses, focus on calculating the cost of each expense. Some expenses have a specific monthly cost like rent payments and mortgages. Other expenses such as grocery or pet care may change regularly. You can even list your expenses depending on the average spending of the previous month. If you are creating a monthly ZBB, estimate your spending every month.

6. Disperse your income

The goal of a ZBB is to ensure that there is no money left unassigned after placing your income into different categories. To account for every rupee that you earn, total your monthly income and disperse your salary into various previously defined categories. First, start by paying for your basic needs and then spending upon different categories in order of priority. Also, if you have any money left, add it to your savings. If you reach zero and have categories left on your list, you can make the desired changes in any category.

For instance, if you place ₹1,000 in a retirement fund every month and your budget reaches zero before you add that amount, you can take ₹1,000 from your shopping expenses and move it to your retirement fund.

7. Choose your format

Once you have your income listed and expenses planned, you can choose a format for your budget. Focus on choosing a format or system that you find easy to use. You can either use a spreadsheet or create a table by hand or use various websites and applications to create a ZBB. Focus on choosing a visually appealing budget format to simplify the overall process.

8. Track and compare your spending

Tracking your expenses and spending is essential for ensuring you can budget efficiently. Focus on tracking your expenses weekly, monthly or daily. If you overshoot the budget in some categories, your budget might require adjustments. Also, track and compare your spending in each category to understand which categories have extra funds and which might benefit from an increase. For instance, if you overshoot the monthly grocery expenses every month, you can adjust the amount from another category.

9. Evaluate your budget

Evaluating your budget each month can make it easy to adapt to changing priorities. Also, regularly reviewing and monitoring it can help you understand how your budget might change in the coming years. You can add new spending categories every month you notice changes in your spending habits. For instance, you might spend more money on electricity bills during summers than winters.

Examples Of A Zero-Based Budget

Here is an example of ZBB that you can use to create your budget:

Monthly income: ₹1,00,000

Needs

House rent: ₹14,000
Groceries: ₹6,000
Water and electricity bill: ₹3,000
Gas bill: ₹750
Phone and internet bill: ₹225
Health insurance: ₹400
Car insurance: ₹800
Home loan: ₹20,000
Credit card: ₹5,000

Requirements

Restaurants: ₹375
Entertainment: ₹1,750
Subscription services: ₹1,000
New clothing: ₹1500

Savings

Retirement: ₹25,000
Saving account: ₹12,000
Emergency fund: ₹8,200

Amount leftover = 0