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There are many ways to design your monthly budget, but it seems that zero based budgeting is really starting to catch on. For years, businesses have relied on this technique to maintain a steady profit. Recently, zero based budgeting has caught on for many people doing a household budget.

With a traditional budget, you are spending the same amount every year and adding a slight increase to account for new spending. This is basically incremental budgeting. But a zero based budget flips the entire script to identify key savings.

What is Zero Based Budgeting?

This fiscal way of accounting was created by Pete Pyhrr many decades ago. With this strategy, all budgeting starts from zero and all spending must fit certain criteria.

The previous year’s budget is not taken into consideration for the upcoming year. For example, just because you spent a certain amount in a specific category does not necessarily mean that you have to spend the same amount the following year.

You would focus on your essential living expenses first and then build a budget out from that. In other words, every single dollar that you spend in your budget must be justified.

With zero based budgeting, if there is an opportunity to cut spending in a certain category, then you follow that. If you have limited funds to spend, then you prioritize the spending categories that are essential. And some budget items that are not considered to be essential could be eliminated altogether.

Advantages of a Zero Based Budget

There are many benefits to maintaining a zero based budget. For some people, this strategy represents the most effective way to eliminate wasteful spending. It allows people to organize resources based on their importance instead of previous spending. Additionally, it improves communication, accuracy and efficiency in a household. And for some people, this budgeting strategy improves their overall wellbeing.

Disadvantages of a Zero Based Budget

As with any financial strategy, there are some drawbacks. In some cases, zero based budgeting can seem time consuming, impersonal and chaotic. It is sometimes difficult to compare the benefits of two spending categories with each other. One problem with zero based budgeting is all of the focus on short term spending with little regard to a long term spending.

The Solution

After weighing the pros and cons, you should determine if zero based budgeting is for you. If it is, and you need more information, you an always find a zero based budgeting ppt online.