Zero-Based Budgeting

Instead of starting from last month’s spending and adjusting, zero-based budgeting starts from zero each period and requires every expense to be justified. In personal finance, it means giving every unit of income a job before the month begins.

For example, someone with take-home pay of 3,000 might allocate 1,200 to rent, 400 to food, 200 to transport, 150 to utilities, 300 to debt repayment, 400 to savings, 250 to personal spending and 100 to a holiday fund. Every unit of the 3,000 is assigned.

The method encourages careful thought about spending and makes it easier to spot waste. Assigning money to savings and goals at the start, rather than saving whatever is left, often increases saving.

Zero-based budgeting is also used by companies and governments, where each department must justify its budget from scratch each year, rather than starting from the previous year’s figure. Its drawback is the time and effort it takes, which is why some people prefer simpler approaches, such as the 50/30/20 rule.