Every institution should have a budget that they control their money by. These institutions can be as small as one individual who is responsible for themselves, to a family, up to a large corporation & the government. There are different ways to budget & different names people call it – like cash-flow plan, or money plan.

Traditionally budgeting is set up to increase each year at a given rate that is automatically approved. There is no review of the previous year’s spending to determine if the increase is necessary and valuable or if that amount of increase will be enough. In personal budgets, this often happens without regard to each month. Usually a budget is made for the year, and very little review is given to it each month, though it needs to be review and revised for each month’s expenses.

However, zero based budgeting is a plan that works by a complete review of the previous years budget along with expenditures made to evaluate the effectiveness of the budget given for that category (or department). This form of budgeting takes a little longer, but can save lots and time and hassle if the budget given doesn’t fit. In personal budgets zero based budgeting must be reviewed each month and should look like the following formula:

Total Income – Total Expenses = 0

It is a very simple & valuable plan to use when budgeting. It requires constant review so your money doesn’t get “lost” & it allows you to give every dollar a name before it actually comes into your hands. That way you know exactly where that money is going to go. You no longer have to say – “hey I have $200 left over at the end of this month, where should I put it? You already allotted it a spot at the beginning of the month”.

Whether or not you should use zero based budgeting is entirely up to you. It is a valuable resource to use for 3 reasons:

1. You don’t “lose” any money at the end of the month by not having it in a given budget category.

2. You are doing a periodic review of your budget to be sure it is the best fit for your spending habits.

3. It is very flexible from month to month.

Some people don’t like to use zero based budgeting because they feel like they “won” when they have a little money left over at the end of the month, or because they don’t like the extra “hassle” of reviewing the budget on a regular basis. Both of these presumptions can cause problems down the line.

Having money left over at the end of the month doesn’t mean you’ve “won”, it just means you haven’t told all your money where to go. So you have left over “extra” money. When you “find” “extra” money, you tend to spend it more foolishly & quickly than if you have a plan for it. It just so happens that since YOU are in charge of YOUR money, you can put this “extra” money in any category that you want. If it makes you feel good to have extra money at the end of the month, budget in the extra money to go into your savings account. If you like to use that “extra” money for shopping or going out, budgeting that amount into your shopping or going out category for the month. You will find that you have so much more control over your money if EVERY dollar has a name BEFORE the money comes into your hands.

The other presumption we have that reviewing the budget on a regular basis is a hassle & we shouldn’t have to deal with it, is that our lives & companies change. Nothing is stagnant, even money is fluid & we need to be flexible with that change. By doing a regular review you will find that your budget categories more closely match your expenditures which will relieve you of great hassle if there are times when you go over budget in certain categories using zero based budgeting.