The surge of social media users who document their spending habits has brought the money concept of zero-based budgeting to the forefront of spending trends.
We’ve reached out to three money experts to share how this concept can rein in spending and help whip your finances into better shape.
[Read: How to Make a Budget — and Stick to It.]
What Exactly Is Zero-Based Budgeting?
Zero-based budgeting is a technique involves starting with a new budget each month and allocating every dollar of your take-home pay to your expenses and savings, Mary Hines Droesch, head of consumer and small business products at Bank of America, said in an email.
“This method is trending as part of a larger series of financial trends and financial tips on social media due to Gen Z’s heightened interest in managing their money,” she added.
How Does This Create a Better Handle on Spending?
According to Droesch, zero-based budgeting can help control spending because it gives you a clearer picture of where your money is going.
“At the beginning of each month, you assign every dollar of your take-home pay to a spending or savings category,” she said. “This forces you to accurately map your spending and helps you avoid stretching yourself too thin.”
How to Create a Zero-Based Budget
Use these four steps to create a zero-based budget:
— Calculate your monthly after-tax income. Once you have this figure, you see exactly what you have to spend.
— Add up your nonnegotiable expenses. “These are expenses that you must pay every month, like rent/mortgage, student loan and car payments, savings, utilities, transportation, groceries, etc. Once you add these up, subtract them from your income,” Droesch said.
— Decide on other disbursements. Allocate the remaining portion of your income to different spending categories and goals until there’s nothing left over, Droesch said: “These are categories like savings, subscriptions, your gym membership, eating out, travel etc.”
— Track and adjust your budget. A zero-based budget requires monitoring where your money is going. For example, if you underestimated your grocery bills one month, take note and adjust for the next month, advised Droesch.
[READ: How Much Should I Spend on Groceries?]
Are Savings a Part of This Budget?
Experts say savings should always be part of your money strategy.
Zero-based budgeting assigns a job to every dollar you earn. If one of those jobs isn’t a savings goal, you aren’t going to have money left over at the end of the month to fund it.
“Including savings in your budget ensures that you have prepared for future needs, financial goals and any unexpected costs,” Adam Davis, vice president, head of financial health and customer liquidity for Retail Bank at Capital One, said in an email.
You can use your bank’s recurring transfer feature to automatically save a set amount at the same time each month, he said.
Implement the Concept to Feel Empowered
Like any financial strategy or approach, Davis said it’s important to personalize this budget in a way that fits into your life and works for you.
“For some, taking this thorough approach to budgeting can be very positive and empowering,” he said.
With a budget, you’re able to properly plan for discretionary spending on the things that make you happy, like going to the movies or taking a vacation, without losing sight of your goals and necessary expenses, he said.
[Wants vs. Needs In Your Budget — How to Tell the Difference]
“There is a sense of accomplishment when you can achieve your financial aspirations, and zero-based budgeting can help give you a roadmap to more intentionally managing your finances,” Davis added.
Can This Type of Budgeting Help Reduce the Chance of Incurring More Debt?
Not only can Zero-based budgeting help you get organized around your debt and pay it off on time, it can also help you avoid debt in the future.
“This preparation reduces the chance of financial surprises that could lead to debt,” Dasha Kennedy, a member of National Debt Relief’s Financial Wellness Board, said in an email.
“Having a plan for unexpected expenses means you’re less likely to resort to credit cards or dip into your savings, which will help you maintain your financial stability,” she said.
Kennedy also said the best budgeting techniques feel expansive.
“It’s really about giving yourself the power to decide how to use your money in a way that makes your life better,” she said. “It’s about choice, not restrictions. By focusing on what you gain — like peace of mind, financial security, and the ability to do more of what you love — you can see budgeting as a positive step.”
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What Is Zero-Based Budgeting? originally appeared on usnews.com
Update 04/01/24: This story was published at an earlier date and has been updated with new information.
