Why you should Implement Zero Based Budgeting in your own life

As we move through the holiday season and toward year-end, many of us begin to set goals for the new year.  This is typically an opportune time to sit down with your spouse and have a look at the family’s finances.  Often family financial management takes a back seat to all the other things we need to do.  This is the one time of the year, more than any other that it may make sense to take stock of where you stand.

Some of you may have heard of a term called Zero-Base Budgeting (ZBB).  This is a term prevalent in corporate management.  It has been around for a number of years but seems to have made a revival over the past year.  Driven by powerful investors like 3G Capital Partners, the force behind the 2015 merger of Kraft Foods and H.J. Heinz, Zero-Based Budgeting is, in my opinion, a great way to not only manage corporate finances but personal ones as well.

Most companies and families if they employ budgeting start by looking at last year’s expenses and then begin budgeting from there.  With Zero-based budgeting (ZBB), your expenses must be justified for each new budget period based on demonstrable needs and costs.  In my opinion, ZBB is a simple, straightforward method to reduce costs that cannot be rationally justified.

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Here is how to start:

  1. Review all income sources and input them into your budget.  Wages, bonus, interest and dividend income, rental property, royalties, distributions, etc.
  2. Break your expenses down by starting with three categories and everything else that you spend money on throughout the year. (Don’t forget those ATM withdrawals)
    1. Needs
      1. Food
      2. Shelter
      3. clothing
      4. Transportation
      5. Childcare
    2. What If’s
      1. Life Insurance
      2. Disability Insurance
      3. Auto Insurance
      4. Home/Rental Insurance
    3. Wants/Desires
      1. Dining Out
      2. Entertainment
      3. Vacations
      4. Before/After School Activities
      5. Other
  1. Zero-based budgeting then requires that you look for alternative ways to perform and pay for each of these activities (such as doing it yourself or paying someone else) as well as the different levels (Basic Cable, Expanded Cable, Every channel known).  This process helps you consider other alternatives to “get the job done”.
  2. Once you have researched the alternatives, it is time for a discussion with your family about what is necessary and what is desired and make trade-offs.  This could spark debate on what is more important to each family member…gymnastics, a beach vacation, Netflix, etc.
  3. Are you able to find any redundancies?  If so, look for bundling opportunities.
  4. Eliminate non-desired activities/costs and realize the savings
  5. Once you have figured out your savings from last year to this year, the key is NOT TO SPEND IT ON SOMETHING ELSE!  This is where discipline is necessary.  My advice is to set up an auto deduction when that expense was normally paid that will divert that money into an online savings account.  This is how you build your net worth!  Once you start accumulating savings, you can then auto deposit those savings into an investment account.  (That’s an entirely different discussion)
  6. Once completed, you have created your new budget for 2018!  Using this process on a regular basis (my suggestion is annually) can help improve your cash flow, your net worth and reduce the chances of getting in trouble financially.

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While taking a bit more time than traditional budgeting, this process can get the entire family involved and can force some introspection about what is really important to you and your family.

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