What is a Budget?
A budget is a statement of income and expenses covering a specific period. A budget lays out the money that goes in and out of your account(s), usually over a month or a year. If you’re the kind of person who already creates a budget each month, then the process of budgeting might seem relatively straightforward. If you’ve never budgeted in your life, then it may appear complex and overwhelming, but over time budgeting becomes easier.
There are multiple ways to create a budget, and you may find that one method will meet your budgeting needs better than another. The budgeting methods covered in this article are traditional and zero-based budgeting.
This blog will help you understand how each budget plan works and the differences between the two. You can then determine which budgeting method might be more suitable for your financial habits.
What Is a Traditional Budget?
With a traditional budget, you incorporate previous expenses into your budget for the upcoming month or year. This means that your previous expenses serve as a blueprint that will be used to build your monthly or yearly budgets. Depending on goals and situations, you can usually make adjustments from previous months, such as reducing the amount you spend on entertainment, or increasing the amount you put into savings each month.
The benefit of traditional budgeting is that the time spent working on your budget each month or year is much less, as the process for tweaking an existing budget is quicker than creating a new one. However, it doesn’t encourage cost-effectiveness as much as a zero-based budget. Traditional budgeting may be quick and simple, but it may not be the budget of choice if you continually want to improve spending habits.
What Is Zero-Based Budgeting?
A zero-based budget ensures you are having every dollar accounted for in your budget with nothing left over. Every time you sit down to adjust the budget, you will start with the expected income. The zero-based budget is an accountability tool to ensure you know exactly where all your expenses plan to go. If there are any adjustments, you may have to reduce variable items like your savings or your grocery bill. All of your activities will be reassessed each time the budget is created, requiring you to continuously update each expense.
For example, just because you spent $200 on entertainment last month doesn’t mean that you need to allocate that much for the following month. With a zero-based budget, the burden of importance is on you to justify spending money on each activity by weighing the pros and cons of the expense, causing you to explore how spending as much (or any) money on it will affect your budget. Although it is much more complex and time-consuming, a zero-based budget has the benefit of helping you stay on top of your spending.
A zero-based budget may be helpful for anyone who needs to get a clear view of their spending, as it forces you to see expenses that may not be worth it. For example, a zero-based budget may help you cut back on discretionary spending after the holidays. Instead of keeping your budget at the same level for holiday expenses, you can shift priorities in your budget to better fit your needs for the upcoming month.
Which Budgeting Method Is Right for You?
No matter which method you choose, budgeting is an essential and valuable process that can help you meet your financial goals. Whether you’re budgeting on a fluctuating income or just trying to manage a successful household budget, make sure you take the time to put your expenses on paper.
At ACE, we realize budgeting isn’t always easy, and your current savings might not be enough to help you cover emergency expenses. If you need help covering unexpected expenses, we can help. To see our loan options and availability, check out our emergency loans page to see how we can help you.
