Introduction to Budgeting Part II: The Zero Based Budget
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Yesterday, I talked about the 60% solution as a budgeting method. Today, I’ll be considering The Zero Based Budget. Dave Ramsey Advocates seem to use this budgeting method a lot, and there is definitely some merit to it.
The premise behind this budget is that every cent of your paycheck is allocated in advance, before you receive it and spend it. At the end of the month, your income minus your expenses should equal $0. Expenses include everything- mortgage, monthly bills, fun money, debt repayment, saving, taxes, insurance, etc. You set up a a $0 based budget by first figuring out how much you bring home every month. Then, you list your expenses for the month (i.e. every single thing you are going to spend money on that month, from your car payment to your Christmas bill). You can start by listing fixed expenses, and then go down the list and include all your variable expenses as well, including “grace“.
After you have listed all your income and all your expenses, subtract. If your income is greater than your spending, then you can allocate the extra money to debt repayment or savings, etc and then create an “Expense Line” on the budget for whatever it is your are allocating that money to, so that your total is Zero. If your spending is greater than your income, figure out which categories to cut and cut them.
I think this is a little better than the 60% solution but I still see a few problems. The clearest improvement over the 60% solution is that this budget forces you to allocate expenses by category. This way, you can see where your spending problems are and which categories of spending you need to work on reducing.
However, the Zero Based Budget is troubling because there is no requirement inherent in it that you save any money. On a purely theoretical level, the budget seems to suggest that as long as your income is greater than your expenses, you are OK. This is fine for those who consider saving money to be a necessary expense. It is not great for those who think that as long as they can subtract the minimum Mastercard payment from their monthly income and still eat that they are OK. I suppose it can be argued that most people who are creating a budget know that savings/ debt repayment is an Expense that has to be included every single month. But, this lack of incentive in the budget to maximize your savings and decrease your spending just doesn’t seem to be there (unless of course your expenses exceed your income and then the budget forces you to cut expenses).
So, I think this budget could work for those who are disciplined enough to know that savings/ debt repayment is an absolute requirement every single month and to treat that as a required fixed expense, so that they adjust their discretionary spending to account for this. Again, pay yourself first and then make everything else fit into the extra that is left over.
For those of you who don’t like this method, try:
