What is Zero-Based Budgeting?
Zero-based budgeting (ZBB) is a budgeting method that requires all expenses to be justified for each new period, starting from a "zero base." Instead of relying on previous budgets, each department or individual must build their budget from the ground up, ensuring that every dollar is accounted for and allocated efficiently.
Key Principles of Zero-Based Budgeting
- Justification of Expenses: Every expense must be rooted in necessity and require approval, reducing unnecessary spending.
- Focus on Goals: It encourages aligning spending to specific financial goals and priorities.
- Flexibility: ZBB can adapt to changes in business needs or personal circumstances as budgeting is reviewed regularly.
Benefits of Zero-Based Budgeting
- Enhanced visibility into spending patterns and resource allocation.
- Improved decision-making with a focus on cost-effectiveness.
- Encouragement of strategic thinking about financial priorities.
Zero-based budgeting can be applied to personal finance as well. Individuals can track their income and allocate every dollar to specific expenses or savings goals, ensuring that they live within their means. By adopting this budgeting method, you can gain better control over your finances and make informed decisions about where to cut costs or invest.