What is zero-base budgeting?
In a nutshell, it is preparing a budget from scratch, ignoring last month or year figures and budgeting from the ground up. Zero-base budgeting is not just about budgeting, it is also about planning every expense. Whereas, traditional budgeting is basically using your existing budget and making changes to it to get to the desired budget.
This method is appealing as it forces you to justify every expense on your budget. As our financial resources are limited each activity must prove its merit to earn a place in the budget.
What are the Disadvantages?
As appealing as this may sound from a financial perspective, there is a downside to using zero-base budgeting. The downside is that practically it can be time consuming. There is a fatigue factor which means that building a budget from zero every month can be tiring and can lead to loss of motivation.
What are the Advantages?
Following a set budget month after month is quick, easy, and has an element of simplicity requiring very little effort. While rolling over budget from previous month or year can be tempting, there is an inherent problem that causes inefficiencies to be carried forward. Zero-base budgeting, on the other hand, requires that you build your budget at the lowest level possible and then add additional spend based on the cost-benefit of the specific activity.
In effect, you are incrementally increasing your budget from the lowest level possible to a level you feel more comfortable. This activity highlights your essential expenditures that are included in your base budget and then identifying the discretionary expenditures. The insight this activity provides is invaluable in understanding your financial constraints and your spending habits. Let’s not overlook the fact that this method incorporates a high level of accuracy in your budget, that cannot be realized by just tweaking your previous budget.
So, is this method a waste of time? In my opinion, absolutely not, as the advantages of this method far outweigh the disadvantages. It pays to take time to evaluate expenditure in greater detail as required under zero-base budgeting.