In response to the pandemic, companies are in search of ways to cut costs. Zero-based budgeting has turned into a popular solution for many businesses.
Entities such as General Motors recently made the switch to zero-based budgeting. By initiating cuts to advertising and discretionary spending, they successfully improved their earning power. Changing their budget has not only kept them afloat but also made room for more profitable investments in the future.
The question is, can the method work for individual households? And what is the best way to start? If you need to identify money leaks quickly, consider reading more below.
How to start a zero-based budget (ZBB)
There are five steps to convert your budget to zero-based.
1: Create – First, you’re going to create a new budget from scratch. Additionally, you will make it without considering any of last year’s spending.
2: Assess – Next, you will assess the expenses you currently have. Everything you spend money on, line by line, should go on the list.
3: Justify – Then, you will look at each item and justify its use.
4: Cut – This step is where you vow to plug any money leaks. Instead of spending on discretionary items, use the money to decrease debt.
5: Repeat – Lastly, put your plan into practice for three months. At the end of the quarter, you’ll repeat the process at step one.
The benefits of zero-based budgeting
The ZZB strategy accounts for every dollar. It’s beneficial for a household that wants to reduce waste. Furthermore, zero-based helps promptly determine gaps in money management. It’s the most responsive strategy, and it provides fast results.
One con of ZZB is the short-sightedness. While the method eliminates immediate threats, like debt, it does little to prepare for the long-term. You could counteract the lack by adding specific lines for savings and retirement, yet most people usually forget to do so.
Another con is it does not consider previous years. Some say there is no need to look at the past as long as your current budget is profitable. Households will need to decide if a ZBB will work for them on an individual basis.
Zero-based vs. traditional
Zero-based budgeting differs from traditional budgeting because you reevaluate each quarter. Moreover, every portion of your salary should have a course of action. A ZZB is a great way to align your spending targets, as well as spot misuses.
If you have questions regarding your financial strategy, contact our wealth advisors at 727.431.7692, or view www.achievacu.com/Home/AchievaWealthAdvisors.