What the Heck is a “Zero-Based Budget?”

August 28, 2006

I was over on Lifehacker a while back and they linked to a post on something called a zero-based budget. According to the author of the post,

“a zero-based budget is one where your total income minus your total expenses equals $0. In other words, it forces you to assign every dollar of income to an expense (or savings) category.”

In my opinion, a zero-based budget is simply a fancy name for a budget.

In other words, most people who have a budget simply allot any positive cash flow to a savings account or slush fund that is used to pay for any unexpected expenses. If they have a negative cash flow then they need to trim their expenses so that their cash flow is either zero or positive. For really dire situations, drastically cutting back on extras like cable, cell phone, extra groceries, eating out, entertainment, etc., may be called for.

The main thing is to have a budget in the first place.

6 responses to What the Heck is a “Zero-Based Budget?”

  1. I’d guess it’s an “accountant’s budget”, meaning you have explicit allocations to savings and regard it as an “expense” for computation purposes.

    For us, we budget around savings targets instead of spending targets – I’m too lazy to enter every grocery line item, etc into the PC – although we audit ongoing expenses every couple of months to make sure nothing has creeped up.

  2. JLP..
    Dave Ramsey talks about a zero-based budget, and he basically supports the idea of “spending every dollar, on paper, before the month begins…” In other wordes, every dollar has a place to “go” during the month… towards bill, debt reduction, savings, etc… but you are right, that’s what a budget should be anyway…
    NCN

  3. I don’t budget like that. Unless you’re in negative cash flow when you don’t budget, otherwise, just let all the remaining dollars flow to your bottom line (or saving accounts). When your focus is at cutting down expenses, saving automatically follows.

  4. I agree with Frugal to a degree, but I would advise people to make sure that money flowing into savings is automatically drafted from your checking account and MOVED. It’s far too easy to spend “savings” when it’s supposed to happen after expenses have been addressed.

    A zero-based budget is powerful. It’s a way of making sure every dollar that flows into your life is doing something meaningful.

  5. Thanks everyone for your comments. I guess my point is that a REAL budget does have a place for everything, even if the “remainder” goes into savings. A true budget should have areas for savings so that savings is a priority. Any leftover amounts should be in excess of the savings category, which would make that amount serve as a miscellaneous category.

    I think the term “Zero-based budget” is much ado about nothing.

  6. I disagree with the definition of a zero-based budget.

    A budget is a tool used to predict/project costs in a future period. A zero-based budget is one of the many different models that is used to predict/project costs when you preparing a budget.

    What the ‘zero-base’ means is that, when costs are predicted/projected using this basis, you start with a base of zero, determine the expected activities that would be performed and cost those activities in arriving at a budgeted figure.

    This is unlike a historical cost based budget, which would begin with an examination of the historical spending levels, which would then be adjusted for abnormal activities in the previous period or abnormal activities expected in the forecast period.

    Whether budgeted income equals budgeted expenditure or not, how savaings are managed, etc. has nothing to do with a ‘zero-based budget’.

    Hope this helps