Zero-based budgeting might work for some people, but there is a much better alternative for almost everyone.
Before I go further, let’s look at what zero-based budgeting is.
Quite simply, this is a process whereby you account for every single dollar you bring in. You budget every penny. You budget some money for spending and other money for saving. Nothing goes unaccounted for. You can use budgeting software or a spreadsheet to set this up.
I know that this system helps many people, but it would drive me (and more important…my wife) nuts. It’s a bit too regimented for us. We’d never stick to it. And my experience tells me that lots of people feel the same way.
Sure…lots of folks start off with good intentions. But after a short time, the work becomes too much. The burden too great. Out goes the baby with the bath water and we’re back to our free-spending ways.
Actually…the situation for many of us gets worse. Having gone through this exercise with 100% commitment, we get discouraged when we see it’s too much. Unfortunately, some people decide that they are doomed to a life of debt because this last-ditch effort failed so miserably.
Is there a better way than zero-based budgeting?
In a word…yes. Just pay yourself first and then spend as much as you like after that. In other words, create a financial plan. Then you know how much money you need to save in order to reach your goals. Add in an expected rate of return and calculate how much money you need to save each year to stay on track. If that number is too great, amend the plan.
How? Either work longer, retire with less or work part-time after you retire. This entire process is built around knowing one thing: How much money do you need to retire?
I’ll give you an example. I’ll ignore inflation, taxes and interest for the time being. I just want to show you how this works. You can find financial calculators on the web to determine present and future value. Let’s say you’ll need $25,000 a year (on top of your other sources of retirement income) to live on when you retire in 10 years.
If you figure you can withdraw 5% of your money when you retire, that means you’ll need a total of $500,000 at that time.
If you already have $200,000 saved, that means you need an additional $300,000. You have 10 years to save that money so that means you must save $30,000 each year. To keep things simple, assume you will earn nothing on your savings over the next 10 years. You need to save $30,000 a year for each of the next ten years.
$30,000 a year is $2,500 a month. So for this plan to work, you must save $2,500 each month before you do anything else. If this is doable, do it. Then, spend everything else. No problem.
But let’s say you can only save $1,000 a month. No problem. Amend your plan by either reducing your cost of living, working (and saving) longer, working part-time or a combination of all three.
Can you see how such a plan might be far more powerful for you than a zero based-budget? With the zero=based plan, you might become a great accountant…but that doesn’t mean you’ll reach your goals.
I love this system because it has a great foundation:
a. It’s built on reality.
b. It’s focused on my goals.
c. I know immediately whether or not I’m on track.
d. It’s simple.
e. I pay myself first.
With this type of plan, you are goal-oriented. Plus, it’s a lot more fun. Once you reach your savings goal, you can do anything you want with any money left over. Blow it in Vegas? Go ahead. Buy that X-box? Be my guest.
Would this budget planning process work for you? Why or why not?
James says
finance are a unique item for most of us. you really have to learn what you are capable of in regards to earning and saving.
you want this to be fun not agonizing. I have seen success both ways, counting every dollar (when i was younger) and now a method that resembles your post as i have gotten older and build up my wealth a bit.
be firm with yourself and enjoy saving cus after all it is cool to have a nice savings account.
Abigail says
Zero-based budgeting would never quite work with my household.
There are two reasons:
1. We have health conditions. That is just a fun variable waiting to be explored — and it often is.
2. My husband has ADHD. I love him, and we are learning how to better communicate/help him remember things/remind him to be frugal. But. He’s still someone with ADHD. Which means he sees, he wants. He’s cut it down by about 90% which is extraordinary in 4 years’ time. Still, there will always be impulse purchases, no matter how hard he tries. I’ve accepted that and have made our budget more flexible to accommodate the fact.
Mike C says
Impulse buying is NOT ADHD. Lack of focus is.
This is not to say your husband doesn’t have a problem (Can’t postpone short-term pleasure for long-term goals) or that he doesn’t have ADHD, but what you described isn’t ADHD.
Anyway.
Have you tried having him RETURN his impulse purchase as soon as you are aware of it and discuss with him to get him to agree that that purchase was not included in that month’s budget?
After several times of having to go back and return the impulse buys, the conditioning will set in. He may consider that he will have to return each impulse by before me makes it.
If he won’t return his impulse buys or even recognize his impulse buys, he is telling you he is not on board. You either have to talk with him and get him to commit to being on board with the budget (I prefer to call it a Spending Plan) or you have to take away his spending privileges. Give him a cash allowance.
Take away his spending tools. No checks, ATM cards, debit cards, credit cards, or access to the online accounts.
If he spends online because he already has the numbers written down, you will have to get new cards and cancel the old cards.
If he gets to the mail before you, you will need a PO box or a mailbox from The UPS store. Then change the mailing address on all of the accounts and tell them not to change them again without YOUR ok (not his).
You’ll have to keep your account numbers locked up and hidden from him. If he can’t act like a responsible adult, then you’ll have to treat him like a child.
Hopefully, it won’t go nearly as far as I have described above. But if it does, you need to escalate it.
GoYanks says
How do you adjust your numbers after a year like 2008/2009??? Do you project that you will be working 15 more years???
Nick says
Umm what’s the difference here? I don’t see how using a zero based budget cannot also be goal oriented. I use YNAB, which is based on the zero based budget methodology. In your example if I need to save $2,500 a month I enter that into my budget, if my balance is negative I take away from other areas until I’m back to 0. What’s the difference?
What’s to say using your approach will not become too much hard work once you have a few months where you can’t pay yourself first?
a. It’s built on reality.
b. It’s focused on my goals.
c. I know immediately whether or not I’m on track.
d. It’s simple.
e. I pay myself first.
None of the points above cannot be done with a zero based budget. Sorry but I just don’t see the difference?
“I know that this system helps many people but it would drive me (and more important….my wife) nuts. It’s a bit too regimented for us”
Okay but then you said
“But let’s say you can only save $1,000 a month. No problem. Amend your plan by either reducing your cost of living, working (and saving) longer, working part time or a combination of all three”
How is that not regimented and how is working and saving longer because you weren’t disciplied enough to stick to a plan a good idea? Your not breaking any negative spending habits here
Thomas says
I fully agree. I don’t really see a huge difference here. Zero-based budgeting is all about setting goals and allocating your money in a way to help you reach those goals. YNAB is particularly good at this because you are living THIS month off of LAST month’s money. This means you are allocating money you already HAVE towards your goals and living expenses.
Karen says
I do struggle with the zero-based budget plan. But I’m having trouble seeing how the system you use would work for me. I have to pay attention to a LOT of variables that have nothing to do with long-term saving or retirement.
Husband and 2 teenagers…. so aside from all the usual utility bills, mortgage and the like, even things like groceries and gas can vary greatly. Sports and school fees are mostly known, but can pop up unexpectedly. (“What do you mean this year’s uniforms cost $105???”) Field trips, our part to help out our elderly mothers…. And if I don’t plan, in detail, for annual, semi-annual, or quarterly expenses (car insurance, trash/sewer, AAA membership, for example), the money will not be there.
Our debt is the mortage, a “second” mortgage for a basement renovation, 1 car, and new windows. Everything else gets saved for. Maybe we need to look even harder at the want/need ratio, I’m not sure. But one teen’s high school tuition is going to hit hard in a couple of months; it will be like 2 more car payments. So much for saving for college! Sometimes it feels like I’m making this more difficult than it has to be, but I’m doing this solo and no matter what I try, we have some success but it still seems overwhelming.
Nick says
“but I’m doing this solo”
That’s a problem for a start. You have to get your household onboard. The first thing I did when I began to turn our household around is explain to my wife and kids what the deal is and what part they have to play in it. But also explain if we can ALL do this we can be very wealthy, that part normally turns heads and also makes the tough times easier because you always have the end goal in mind
You sound like your doing the right thing though, tracking expenses, tracking spending, allowing for quarterly and annual payments, I just think you’ve got to stick to your game, get the spending down as much as possible and get a little emotional support from the family. For the unknown expenses make getting a small emergency fund ($1000 – $1500) a priority and then work those debts as hard as you can, when you have no more debt payments you will be amazed how much more freedom you have
Karen says
I appreciate your response, Nick.
Yep – keep trying to get husband on board. He is, in part, but not as fully as I need. (In his defense, he has started to change the oil on the cars himself, to save some $$ there. And he hates doing it.)
I usually let him know what expenses we’re looking at (for instance, right now we need a new stove), and we talk about how to get there. Mostly, his response is, “You’re doing fine, honey.” He thinks he’s supporting me, but I hate that response, actually. Because now I feel like a huge failure as a parent if we don’t have the money to send our son to the school where he really needs to be. And while we’re far ahead of many others our age with regard to retirement, we’re nowhere near where we should be.
The kids are on board, even if they whine. They know that once they’re working, the allowances stop. And the 15-year-old had better find a job fast or he won’t be able to afford to drive when he turns 16. Guess I’ll keep plugging along. I keep waiting for this moment of “enlightenment” when everything really makes sense and seems to fit together.
Thanks for the comments.