By Eric Rosenberg, WCI Contributor
A zero-based budget is a type of budgeting that assigns a purpose to every single dollar that you earn after tax. This approach sets the value of your income minus your expenses to zero. With a zero-based budget, every cent has a purpose in your budget, but that does not mean that you are spending all of your money from every paycheck right away.
A zero-based budget can work wonders for your financial standing if you are having trouble staying in the green each month. There are many ways to implement a zero-based budget, but is this approach right for you as a physician or other high earner? Read on to find out.
Zero-Based Budgeting Definition and Tools That Can Help
Zero-based budgeting, also known as zero-sum budgeting, involves allocating your funds to specific categories and assigning them to be used for different expenses. You might allocate a certain amount of your earnings to grocery expenses, gas payments, and utility bill costs, while another section of your earnings goes toward your entertainment fund.
There are many more categories to cover, and the broadest categories are normally labeled as “wants,” “needs,” and “savings/debt payments.” Setting aside a set amount for your savings upfront takes away the uncertainty of saving and incentivizes you to refrain from overspending each month.
One of the biggest positives of this zero-based budgeting is that it shows you how much money you have to spend on each expense, making you less likely to spend more than you have.
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What a Zero-Based Budget Template Looks Like
As a zero-based budgeting example, an individual that makes $2,500 every month might set up their budget as follows:
The total of all of these separate funds comes out to $2,500, the total amount that was earned. Many individuals prefer this kind of budget and prefer to know how every cent is going to be used. While this kind of budget can be heavily customized, it still may not be the right choice for everyone.
Pros and Cons of Zero-Based Budgeting
While zero-based budgeting has many draws for some, it leaves others wanting. The advantages of zero-based budgeting lie in the way that it assigns a certain amount to savings, preventing you from overspending in your most likely categories while allowing you to customize your budget to meet your specific needs.
One of the disadvantages of this kind of budget is if it is used by individuals with variable income each period, such as freelancers or those doctors who do locum tenens. These individuals will have to spend a lot of time figuring out their budgetary needs each time they get paid, and even then, they may experience variable expenses, such as funds for birthday gift purchases for others or the replacement of a laptop.
While individuals can create a separate category for these kinds of purchases, it is difficult to tell when it will need to be used like other categories.
Alternatives to Zero-Based Budgeting
The zero-based approach may not be right for everyone. For different approaches to budgeting, there are many options. For an option that requires less planning than the zero-based budgeting process, you can use the 50/30/20 method. This method allocates 50% of your after-tax income to your needs, 30% to your wants, and 20% to your savings goals or loan repayments. This option can reduce prep time for your budget, broadening the expense categories.
Another approach uses separate envelopes containing cash designated for use in different categories. As soon as your envelope runs out of cash, your spending ends. In today’s digital world, however, so much cannot be bought with cash. If you prefer to stay digital, you might prefer to use a zero-based budgeting app.
Some people are just natural savers and find they don't need to budget at all and still manage to save 20% or more of their income. Others may just pay themselves (savings) first, and then spend the rest. This is sometimes called an anti-budget.
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Is Zero-Based Budgeting Right for You?
If you are diligent enough to take the time to think through your monthly expenses and want to be aware of how every cent will be used, zero-based budgeting may be the right choice for you, especially if you're a medical student, a resident, or a young attending who is just getting started on their financial journey and want a simple way to start keeping track of your money. If you find yourself bringing in unpredictable amounts of income and making a lot of unavoidable, variable-cost expenses, however, this option may not provide the kind of benefit you are looking for. No one system of budgeting works for everyone.
Once you find a system that works for you, be diligent in following through with it, and you will experience the rewards of financial stability.
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