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Advantages of Zero Based Budgeting

Why going all in on budgeting is worth it.

June 3, 2024

Zach Whelchel

Let's Set The Scene... Desire Strikes

Sure I wasn't planning on getting a new board game... but Amazon knows me too well. This game looks awesome. It's got a gajillion pieces and the artwork is beautiful. Miniatures, cute little trays to put your pieces in, it's got it all. I'm a sucker for new board games... and it can be on my doorstep in two days. But wow... $80? Can I afford such a high cost? Should I get it?

The Question: Can I Afford It?

We find ourselves asking this question all the time. Before I kept a budget the answer came from a quick glance at my bank balance and a lot of mental juggling:

Ok, I've got $1,783.23 in my checking account. That seems like a lot. Oh wait, what day is it? Did our rent get paid yet? Nope, it's not the 1st yet. So... that means I'll be down to $583.23, but we get paid this Friday, so that will be another $1,200 or so. But we have that birthday gift to buy...

Sound familiar? Sure you've gotten by like this for years now... but wouldn't it be nice not to always be guessing? Only to have it come back to bite you? Wouldn’t it be nice to feel confident and able to afford the things you prioritize?

A Decent Solution: Traditional Budgeting

Most people think of a budget as a one and done thing. You list out your income in a typical month on one side of the paper. On the other side you list your expenses in a typical month. You fudge some numbers around until they equal out. And then you pat yourself on the back. You're done until you make a new budget next year right? Not so fast. There are a couple of big problems with this approach:

  1. There is no such thing as a typical month. All months are different!
  2. Your fudged numbers are often too ambitious. You'll blow through them and have no way of understanding the consequences.

A Better Way: The Envelope Method

True budgeting is different. It's something you carry with you. Remember when your grandma used to give you envelopes to keep your money in? On one she would write "Savings", on another "Lunch Money", maybe a third said "Fun" on it (my favorite of course). This system of tracking your money is called the "envelope system" and believe it or not grandma was onto something.

The envelope method is brilliant. And it's the foundation for feeling in control of your finances. Let's take a look at how it works now that you're all grown up.

How Does Zero Based Budgeting Work?

Let's pretend you drove to your bank right now and took out every dollar you own. You drain your checking account, and your savings. You drive to the other bank across town and drain those accounts too. Then you drive back home (be sure to roll up the windows so your dollars aren't flying out), take all your dollars, and dump them on the kitchen table.

Take a quick selfie with the pile of cash and then pull out the envelopes.

Start labeling each envelope and stuffing it with cash. You need to pay rent. So write "Rent – $1,200" on an envelope and add $1,200 of your dollars from the kitchen table to it. You'll need more money for groceries this month so do the same. Phone bill. Internet. Netflix. Kids soccer equipment. Keep going until you have an envelope for everything and every single dollar on your kitchen table is assigned.

Congratulations, you have zero dollars left on your kitchen table. Every dollar has a job. You are officially on your way to zero based budgeting.

Advantages Of Zero Based Budgeting

No More Mental Math

You just pulled up to the grocery store. How much can you spend? Check your "Groceries" envelope. It has $325 left in it for the month. There is your answer! Simple.

Real Tradeoffs

Can I afford my board game? I checked my "Board Games" envelope and I only have $50 left in there. I'm $30 short.

But wait! Here is the beauty of a living budget… just because I'm short doesn't mean I can't buy it. I've got several other envelopes that still have money in them this month. Am I willing to take $30 from "Eating Out"? No way. I love food. But "Clothes"? That's a different story. I'd gladly buy less new clothing this month to make my board game dreams come true.

This real tradeoff concept is huge. The truth is you make trade offs every time you spend money. You just didn't know what that trade off was before you kept a budget. Now that every dollar has a job you can make real decisions about your priorities.

On The Same Page With Your Partner

Financial decisions can be really stressful with just one personality. Put two together and it takes a lot of hashing out to align your priorities. With a zero based budget though... you've already made those decisions. Will my spouse be upset if I get this? Nope! You both already made that decision. You're on the same page. My wife and I do this monthly when we "fill our envelopes".

Break The Paycheck To Paycheck Cycle

When you have a plan for your money, you aren't always in frantic mode. Over time you'll find that your bank balances grow. You'll be able to cover this month's bills with last month's paychecks. Sounds wonderful right?

Wrapping Up: Is It Worth It?

I tell everyone I can about the benefits of a true zero based budget. You know what most people say to me after I get off my soap box?

Well Zach... this sounds really great and all... but doesn't this take a lot of effort? Keeping track of all these envelopes and switching money around and tracking your line items?

The answer is... yes. There's no sugar coating it. Budgeting takes effort, and sometimes is a little painful. But do you know what else is painful? Ignoring your finances. Bouncing checks. Missing bills. Racking up credit card debt because you didn't get the mental math right. Having to skip dinner with friends because you ran out of cash.

The truth with money, as with many things in life, is you get to pick your pain. Would you rather be blissfully unaware, and live with the consequences? Or be hyper aware of your finances, which is a process that takes effort... and reap the rewards that being strategic brings?

We chose the latter. And it's been life changing for our family.

One More Thought

It's the year 2024. We have drones and self-driving cars (kind of). No one actually carries around envelopes these days. We have apps that do all this for us. The best budgeting apps help you keep track of the dollars you have to budget (like your kitchen table) and allow you to move money around easily between digital envelopes (no need to scare the teller at your bank when you ask for all your money in $1 bills).

If you are ready to build a zero based budget, MyBudgetCoach offers a free 35 day trial of our app. The best part? You'll be paired up with a real life coach who can help you out. Browse through our coaches today and find one that resonates with you. We'd love to help you set up a true zero based budget and start taking total control of your finances.

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