How zero based budgeting works
Zero based budgeting is very similar to the envelope method but its more precise, the idea originates from business accounting. Its a type of budgeting where you allocate every single penny you earn to a different budget envelope. You have to identify any expenditures you will encounter, usually over the next 12 months and than label and create an envelope with a certain expenditure for each month, and place the allocated funds in each envelope when you receive your wages or any other income. Bills that only occur once in an annum or only a few times in a year are divided into smaller, monthly portions and placed in their own separate envelope. You must also create an envelope labelled an emergency fund, as well as placing funds in these so that if an unfavourable event occurs you’ll have the funds to pay for these emergencies. In addition make sure that each month every single penny of your income is allocated to an envelope, leaving a zero balance.
This method of budgeting is much more strict than its alternatives so its more ideal for individuals on low incomes or those whom lack self control and or discipline.
Benefits of zero based budgeting
- It can help with overspending because it makes you aware of every penny you spend, so it makes you question whether buying those new pair of trainers is actually the best investment you could make with your money or whether you could save it and spend it on something more meaningful like a holiday
- Helps you increase your savings
- Helps you avoid impulsive purchases
Check out my YouTube video about zero based budgeting!
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