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What is Zero-Based Budgeting?

Budgeting your income is like organising a closet. You can allocate some space to every item that you own and live a clutter free life. When you allocate your income in the form of a budget, you are essentially adding discipline into your spending pattern, which can essentially help you in the long run.

Typically, budgets are created by identifying the weaknesses in your current money management plan or making changes to it. However, if your former budget constitutes of flawed core ideas to begin with, making minor changes wouldn’t make much of an impact.

As a result, you can give zero-based budgeting a try. Zero-based budgeting is an idea of formulating and allocating money to monthly expenses from the ground up. In this form of a budget, you assign a purpose to each area of spending and match it with an amount from your income. With a zero-based budget, you become more conscious about where your money goes, and therefore, you become empowered to implement changes in your spending patterns.

It is worth noting that a zero-based budget requires time and specific considerations, therefore, if you want to try this method of budgeting, take the following into account.

Differences between Zero-Based Budget and a Traditional Budget

There are some differences between creating a traditional budget and a zero-based budget. As apparent by the name, a zero-based budget starts from zero. With zero as the starting point, further considerations and calculations are made, depending on the importance and priority of the expenses.  Whereas, a traditional budget considers the previously created budget as the foundation of a new financial plan which means you consider previous numbers and make your calculations based on that basis.

Consequently, preparing a traditional financial plan for your monthly income is quite simple. All you have to do is categorise your spending, make a few tweaks in the numbers and you are good to go. On the other hand, in a zero-based budget, you are required to sit down and identify each area of your spending. In this form of money allocation, there are no assumptions. Instead, you have to focus on each and every expense that uses up your income. For instance, in a traditional budget, you may not add the cost of coffee or money spent on frivolous snacks. However, in the zero-based budget, every £ is assigned with an intent.

For this reason, a zero-based budget is clear and precise. It compels you to re-evaluate all areas of spending, each time you create a budget. On the other hand, a traditional budget doesn’t have much distinctness in between the categories. This makes it quite difficult for you to identify how much you can spend in one area.  Additionally, as it is based on historical data, you do not have to reconsider all your expenses. Hence, the plan is not as up-to-date as compared to zero-based budget.

In a traditional budget, you use previous information. This makes the method of creating a budget more related to accounting. You are simply required to add up the numbers, make assumptions and spend the money. Conversely, a zero-based budget requires some degree of decision-making. In this method, you are required to prioritise your spending, assign an objective to each pound, and consciously make the decision to spend it wisely.

All in all, zero-based budgeting is a much more disciplined, precise and clear-cut form of budgeting, comparative to traditional budgeting.

How does it work?

A zero-based budget is all about planning. You are required to have comprehensive knowledge about the amount of money you bring in each month, the amount of money you spend, and the areas in which you spend your money in. For this form of financial planning, you must have note down all of your expenses, including all relevant, intended and spontaneous spending. The aim of this form of budgeting is to spend 98% (or even 100%) of your income on your essential expenses by tracking every £ you spend (even cash!) and being more educated about the whereabouts of your expenses.

A zero-based budget is effective as it allows you to form a clear idea of how much you need to spend in one area. For example, you can allocate £300 to eating at restaurants, each month. With this information, you can make an informed decision regarding which restaurants to eat at, how many times you can eat out in a month and the amount of money you can spend, each time you make the plan to go out for lunch and dinner. This is so you are aware of your budget to spend on eating out and therefore, will not exceed the budgeted amount (hopefully!).

This form of financial planning further allows you to come up with innovative ideas to cut the cost in certain areas, which are not a priority for you. As a result, you are able to spend more on the things that matter and less on things that do not offer much value in life. For example, if you own a relatively new car that does not require frequent trips to the garage, you do not need to allocate a big budget. Instead, you allocate more budget to long term investment or to your entertainment division of the budget and less to the motor expenses/transport budget. Following the plan, you would consciously make decisions that add value to your life and increase happiness. This will enable you to save money from one category of your spending and spend it on other, more fulfilling or important category.

A zero-based budget does not restrict you from spending money, rather it adds discipline to the manner in which you spend your hard-earned money. It makes you more aware of where your money goes and pushes you to make better choices. This is why a zero-based budget is more effective than a traditional budget.

The Advantages of forming a Zero-Based Budget

A zero-based budgeting method is relatively new. This form of financial planning offers several advantages, such as:

  • When you create a zero-based budget, you become enlightened about your spending patterns. It urges to think about the things you spend your money on and subsequently, make changes to your spending routine
  • As this form of budgeting compels you to justify each area of expense. You become more likely to spend only on essential items
  • This method saves you from the myopic vision of the traditional budget plans. This type of planning forces you to think about each element that needs to be added to the list of spending. Hence, you are able to protect yourself from any setbacks
  • It urges you to administer full control in the allocation of your budget. This gives you the power to decide where you wish to spend money, and where you desire to save it. You can still enjoy what you love, while staying on a budget
  • If you have never had a financial plan before, a zero-based budget is an ideal way to start. As you have no historical data to refer to, you can start fresh in a precise and clear manner
  • With a zero-based budget plan, you are empowered with the knowledge on how much money comes in every month, and how much of it goes out. This places a responsibility on your shoulders, thus urging you to be careful with the way you spend. Therefore, enabling you to eliminate the habit of mindless spending or spending beyond means
  • As zero-budget planning integrate discipline in the way you spend your money, it can strengthen your faith in your ability to administer the same kind of discipline and self-control in other areas of your life
  • This type of budgeting further enables you to think creatively about the way you spend money. When you know you have a limited amount to work with, you can brainstorm innovative ideas to attain similar results, while simultaneously cutting expenses. For instance, instead of using hundreds of pounds to buy furniture for a renovation project, you could take advantage of 0% interest free purchase options offered by retailers, spread the cost over a number of months and integrating that amount into your zero-based budget. You won’t compromise on your lifestyle massively and pay off the furniture easily over a number of months, interest free (i.e. no extra cost to you)

The Disadvantages of a Zero-Based Budget

While the method of zero-based budgeting is efficient in its purpose, it is not completely free of flaws. There are a few disadvantages to this approach, such as:

  • A great con of this method is that it can restrict you from spontaneous, spur of the moment spending. For instance, if your friends invite you to a casual night out, but your budget refuses to align with the plans, you would have to sacrifice on a night of fun. If you dip into your budget for an event that is uncalled for, the zero-base method would not be effective
  • The creation of this type of financial plan is time-consuming. You are required to sit down and make consider for each area of spending (like every £!). As this process obligates you to be extremely thorough, you may have to revise the budget, as well as the calculation, if you miss out on adding a certain element to the section of monthly spending
  • Another time-related issue with a zero-based budget plan is that you would have to repeat the process, each month. Although they may only be minor changes to budget, performing this task every month can be time consuming
  • Zero-based budgeting is slightly difficult if you do not have a steady source of income. If the amount of money you bring in changes each month, you would have to get rid of certain categories or add new categories, depending on the amount of money you have acquired that particular month
  • Zero-based budgeting can eliminate the idea of panic spending. If you are a person who spends wildly in the face of struggle, this type of budget planning may not be applicable for you. As zero-based budget requires self-discipline and self-control, it is essential to only opt for this option, if you are sure that you can handle it
  • This form of financial planning requires knowledge and awareness. For this strategy to be effective, you would have to be well-informed about the money that you spend. Even a slight miscalculation can set you back for the entire month. Hence, precise computation is an essential factor of a zero-based budget

How to create a Zero-Based Budget?

In order to create a zero-based budget, you would need to have insight regarding three areas of your finances:

  • The total income you bring in every month
  • The category of your expenses
  • How much money you spend in each category (roughly)?

Before starting the process, you must familiarise yourself with the zero-based budget formula. In this form of planning, the end amount that you will have would be zero. The idea of the budget is quite simple, the formula can be illustrated as ‘your income minus your expenses = zero’. For example, as a child, you were given £30 on Christmas, that was your total income. From that £30, you plan to spend £15 on a brand-new toy, £5 on your favourite meal, £7 on a cake and to give the remaining £3 to your siblings as an act of generosity. In the end, you were left with £0. This is the general postulation of zero-based planning.

However, as an adult, the planning can get quite tricky. For that reason, you can start by creating a spreadsheet to highlight your spending categories. You can divide the sheet into three columns, expenditure, amount allocated and amount remaining. This process can make it easier for you to carry out your calculations. Additionally, as spreadsheet comprises of embedded computation functions, you can save yourself from committing calculation errors, which could mess up your entire plan.

After creating an outline for the spreadsheet, you would need to separately write down your total monthly income. This would include all of the money that you earn or generate in a month, including your monthly salary, the earnings from your part-time job, any sale that you made online and any money that was gifted to you (i.e., on your birthday or on a Holiday). Once you have written down the total income, you can move onto the next stage of identifying the areas of spending.

This stage is the most difficult when you are creating a budget. In addition to identifying the areas that are a priority, you would also have to examine your spending patterns to figure out the unintended areas at which you spend your money. Generally, this includes mortgage payments, debt repayments, repayment of loans, utility payments, monthly rent, car fuel/transport cost, the amount dedicated for groceries, payment for a subscription to a streaming service, travel fund, contingency fund and miscellaneous spending.

Once you have completed the list to which your money would be allocated, you would have to spend time thinking about how much money you would want to dedicate to a particular section. To make it easier for yourself, make sure to enlist the categories in the order of highest priority to the lowest priority. This would enable you to manage the cost effectively. Next, you can start jotting down the amount you would spend on each category. Based on this, you can subtract that amount from the total income. This would leave you with a remaining amount, which could function as the base for the next spending category.

For example, if your priority list follows the order of: mortgage, rent, bills, and food, and your total income is £3,900, you will allocate £1,900 to your mortgage which will leave you with £2,000 for other expenses. Next, from the remaining £2000, you can set aside £200 for bills, then £300 for groceries and so on. You can subsequently follow the same pattern until you are left with zero to spend on.

If you end up with the value of zero, while your list is still incomplete, you can make adjustments to existing expenses, less important areas. As this method is quite complicated, you would have to make certain adjustments before it comes out perfect.

A top tip would be to download your last month’s bank and credit card statement and see how much you’ve spent and where, categories it to come up with a total amount spend per category (e.g. grocery) and then see where you can cut down on.

Example of Zero-Based Budget

The following example illustrates the previous point in a tabulated form. You can use this structure as a base for your own zero-based budget plan. You may also add or subtract areas of spending, depending on your spending patterns and needs.


Monthly Expenditure Total Income: £3,000 Remaining amount
Savings, investment or contingency (emergency fund) £300 £2,700
Mortgage or rent payment £850 £1,850
Utility payment £150 £1,700
Council tax £100 £1,600
Groceries £350 £1,250
Debt repayments (credit cards, personal loans, etc.) £350 £900
Motor expenses £250 £650
Travel costs £150 £500
Eating out budget £250 £250
Clothing £100 £150
Miscellaneous cash expenses (snacks, coffee, etc.) £100 £100
Charity £50 £0
Amount left 0 0

Is it the right type of budget for you?

Creating a zero-based budget is not a task for everyone. If you struggle with managing your finances and are looking to implement a disciplined spending strategy, switching to a zero-based budgeting strategy could be the right solution for you. It would force you to act in a controlled manner, and master the art of self-management.

Additionally, if you never worked with a budget before, starting out with this plan could teach you the art managing money proficiently. As there would be no previous budget to work with, you would have to start from scratch. With a zero-based budget option, you can be more precise with your planning.

This type of budget is also recommended if you wish to save for long-term. For instance, if you want to purchase a home, or invest money is stocks and share, you can use the zero-based budget method to start saving by paying yourself first and allocating a certain amount to your fund each month.

Zero-based budgeting is ideal for you if you consider yourself as a ‘serial spender’. With this money management strategy, you can identify the flaw in your spending behaviour and consequently, make the changes required to lead a financially healthy life.


Zero-based budgeting is all about assigning value and intent to your money. While the method is time-consuming, it is also very effective in bringing discipline and control in your spending behaviour. With a zero-based budget, you can allocate your finances in a manner that allows you prioritise money towards the expenditure that add more value to you in your life. To create this budget, make sure that you add a purpose to every pound that you spend. The zero-based budgeting method makes you aware of your spending behaviour and allows you to make conscious and educated spending decisions.

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