• Harry N. Stout

Is it Time for a Zero-Based Cash Budget?


If you're like me, after over 90 days of lockdown, you still find yourself going out much less, spending more time at home and, as a result, having more me time. This is a great opportunity to do something that could really benefit your money plans. Remember the saying, “if you don’t know where you are going, you may not get there?”A good cash budget will make you aware of your income, spending and cash available for savings and investment.


In a number of different posts, I have stated that I believe that you should have a budget of some type in place as part of your reflective money practices. Many of our readers use a budget application, some home-grown spreadsheets and others simple written tracking. There are many different ways to create a budget. In my July 2019 post, I discussed the popular 50/30/20 method. Using that method, you limit your needs or basic living expenses to 50% of your after-tax income, your wants (travel, special clothing, expensive hobbies) to 30% of your after-tax income and 20% to pay-off debt and to save. This method was popularized by Senator Elizabeth Warren and her daughter. In this post, I will explain another budget technique the zero-based approach and how it could benefit you.


What is a ZBB?

Zero-based budgeting is a budget method where your income minus your expenses equals zero. It is an offshoot of a business technique developed over 40 years ago by Texas Instruments. With a zero-based budget, you have to make sure your expenses match your income during the month. You do that by tracking every dollar down to ground zero to determine if it is necessary and supports your life goals.


Let’s take a look at a hypothetical example of Devin, age 37, who earns $4,000 after-taxes each month. For Devin, he needs to examine his money habits to make sure everything he spends saves, donates or invests for his future adds up to $4,000. This way he will not fall into the situation of spending more than he earns each month. Using ZBB he will know exactly where and on what his cash is used for. If Devin implements ZBB, he will have a complete understanding of where his money is coming from and where it is going.


How to Make a Zero-Based Budget

A ZBB is typically created by carefully examining income and outflow each month. Here is an overview of how it is done:

  1. Write down your monthly income. This would include all your after-tax income from your job, income from any side gigs you have and any other sources of income you generate.

  2. Write down your monthly expenses. You need to detail every expense you incur from basic living expenses (e.g., rent, utilities, food, internet, cell phones), debt service, planned savings into your emergency fund, charitable contributions and insurance premiums. You need to be thorough here and capture all that you are spending. You can’t forget things like clothing, sporting dues and gaming costs. Everything needs to be added in. This is the hardest part of doing a ZBB in that you have to examine each and every dollar you spend.

  3. Subtract your income from your expenses to equal zero. Your objective with ZBB is to have your income and expenditures equal. If they don’t you have to take actions to put them in balance. Either earn more income or spend less. That is where the rubber meets the road. You must take the necessary actions to balance the equation. By doing so you may find a way to reduce your outstanding indebtedness or it may prompt you to ask for the overdue raise at work or to find a higher paying job.

The Benefits of Zero-Based Budgeting (ZBB)

The major benefit of ZBB is that it requires you to track and understand every dollar you earn and spend (getting to ground zero) to see if it is really needed. Do you need the subscription service? Is the gym membership really used? Do you really need the second car, or could you use a car-sharing service? Should you be spending some money on taking a course at the community college to improve your skills? Overall ZBB requires you to assess each amount spent against your needs and plans.


Because of its detail-oriented nature, zero-based budgeting takes a lot of time and focused effort. ZBB can help lower spending by forcing you to look at and assess every dollar spent to see if it is necessary and whether it supports your personal money goals.


Summary

I know when I write about budgeting, it's not a favorite subject for many of you and you don’t want to spend time on the topic. In fact, less than 30% of people keep a formal cash budget. The exercise of creating and maintaining a cash budget can be liberating and will reduce your money stress. Having a road map for your dollars can create peace of mind. Using a zero-based approach is the most detailed and time-consuming method you can implement. It may, however, yield the most benefit to you.

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