Zero based budgeting is a financial planning technique that starts from scratch each year, building a budget by factoring in only the revenue and expenses associated with specific projects or goals. This differs from traditional budgeting methods, which typically carry over last year’s budget as a starting point.
Steps in Zero-based budgeting
There are several steps involved in zero-based budgeting:
- Determine what your goals and objectives are for the upcoming year.
- Assess your revenue and expenses from the previous year, and determine what needs to be carried over and what can be eliminated.
- Create a budget for each goal or objective, factoring in only the revenue and expenses associated with that specific goal.
- Compare your actual revenue and expenses to your budgeted amounts, and make adjustments as necessary.
The main benefits of zero-based budgeting in accounting are that it forces you to consider every expense, and it allows you to tailor your budget to your specific goals. This can help you save money and make better use of your resources.
Here’s an example of zero-based budgeting in action. Let’s say that your goal for the year is to save $10,000 for a down payment on a new house. Your zero-based budget would look something like this:
- – Salary: $50,000
- – Interest and dividends: $500
- – Total income: $50,500
- Housing: $12,000
- Food: $4,000
- Transportation: $2,000
- Utilities: $1,500
- Health care: $2,500
- Debt payments: $5,000
- Savings: $10,000
- Total expenses: $40,500
As you can see, the total expenses equal the total income, and the savings goal is factored into the budget. This zero-based budget would be revisited and adjusted on a monthly or quarterly basis to ensure that you are on track to reach your goals.
Traditional budgeting methods can be helpful for managing your finances, but zero-based budgeting can be a more effective way.