What Is Zero-Based Budgeting? Know Its Nuts And Bolts Here (2024)

FAQs

What is zero-based budgeting in simple terms? ›

Zero-based budgeting (ZBB) is the process of building your annual budget from zero each year to verify that all components are cost-effective, relevant, and drive improved savings.

Zero-based budgeting is when your income minus your expenses equals zero. Perfect name, right? So, if you make $5,000 a month, everything you give, save or spend should add up to $5,000. Every dollar that comes in has a purpose, a job, a goal.

It also doesn't mean you blow all your money. And here's the reason we love this method: Zero-based budgeting just means you give every dollar a job to do—giving, saving, spending. It's all accounted for and has a purpose.

The zero-based budgeting process is a strategic budgeting approach that mandates a fresh evaluation of all expenses during each budgeting cycle. Unlike traditional budgeting, where previous spending levels are typically adjusted, ZBB requires individuals or organizations to justify every expense from the ground up.

The Bottom Line

Zero-based budgeting (ZBB) justifies all expenses for each new period. The process begins from a “zero base,” analyzing every function within an organization for its needs and costs.

Zero-based budgeting example

You decide to use zero-based budgeting for the upcoming year. As you're listing expenses, you realize you can make your own hair products for cheaper than the supplier's price. Making your own products will save you $22,000.

Zero-based budgeting differs from traditional budgeting in that the companies using it create a budget for each new period. The benefits can include lower costs by keeping old and new expenses in check. Potential disadvantages are that it can reward short-term thinking and be resource-intensive.

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

This budgeting method is ideal for companies in mature industries where growth has stagnated and it's necessary to pursue cost efficiencies, such as the healthcare industry. On the other end of the spectrum, zero-based budgeting can be useful at a startup.

ZBB is a highly effective business-planning tool to help a company identify and eliminate unnecessary costs, keep control of your spending, and focus on high-profit initiatives. Budgeting, including ZBB, is the tactical implementation of a company's strategic plan.

How do I pay myself first? ›

The "pay yourself first" budgeting method has you put a portion of your paycheck into your retirement, emergency or other goal-based savings account before you spend any of it. When you add to your savings immediately after you get paid, your monthly spending naturally adjusts to what's left.

What is zero-based budgeting (ZBB)? Zero-based budgeting (ZBB) is a budgeting technique in which all expenses must be justified for a new period or year starting from zero, versus starting with the previous budget and adjusting it as needed.

The foremost theoretical advantage of ZBB is that it offers a rational and comprehensive means to cut the budget. ZBB can be used to make different cuts to different services based on the perceived value to the organization (rational) and all spending is put under scrutiny (comprehensive).

In zero-based budgeting, your income minus your expenditures should equal zero. Savings goals, debt paydown and fun are all included.

The difference between zero-based budgeting and living paycheck to paycheck is that all of your financial goals are met (the first is intentional and mindful, the second is not). You can repeat expense categories (budgets in Budget Zen) and amounts every month or mix it up.