Pros & Cons of Zero Based Budgeting (and a Flexible Alternative)

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If you have tried to budget and failed, you know what I mean when I say, budgeting can be so frustrating!

We are actually avid budgeters (and have been for years, ever since we figured out what works for us). Because our friends know that, they often say things to us like, “Oh man, I wish I could do the budget thing but yeah it’s not for me.”

I’m increasingly convinced that’s because everyone is trying to do zero-based budgeting, which doesn’t ultimately work for many people’s actual real life money management.

So, this post is going to explain the advantages and disadvantages of zero-based budgeting, and offer a realistic, flexible alternative.

Ready!? Let’s go!

What’s the Idea Behind Zero Based Budgeting?

When it comes to managing personal finances, there are a variety of budgeting methods that individuals and families can use to keep their spending in check and work towards their financial goals. The most common method I hear of is zero-based budgeting.

At its core, zero-based budgeting is a method of budgeting in which every dollar of income is assigned a specific purpose or “job.” This method is based on the idea that every dollar should be accounted for and that there should be no money left over at the end of the month. To create a zero-based budget, individuals or organizations typically estimate their income and expenses for the upcoming period and allocate their funds accordingly. (Key word: estimate)

Zero-based budgeting assumes a high degree of predictability and stability in financial circumstances. At it’s core, it’s more accurately called forecasting.

Though we’d been successfully budgeting for 10 years (7 of them with a program called YNAB), I only just thought about the difference between budgeting and forecasting, thanks to this book!

ynab and zero based budgeting
This book explains in depth why traditional zero based budgeting is actually better called forecasting, and how to make that knowledge work better for your own personal budget.

Zero based budgeting (what I’ll call forecasting) is when you write down your expected income and expenses and ballpark out what you think you’ll spend in which category.

Most people think of that as budgeting. It sort of is. You’re making a plan for your money.

Maybe you’re even one of those super saavy diligent types who enters all their receipts into a budget spreadsheet so you can track your spending and see if you’re sticking to the budget. (Most people don’t do that though.)

At the end of the day though, unless your spreadsheet gives you the option to move money around or course correct, you haven’t thoroughly budgeted. Because now you feel stuck!

I felt like this for years with budgeting and I hear it all the time!! I’m pretty sure it’s the #1 disadvantage of normal zero-based budgeting.

Advantages of Zero Based Budgeting

The main advantage of zero based budgeting is the ability to plan ahead. A lot of natural budgeting types like to know what’s coming. Understandable.

You get that first pay check at a new job and you’re like – okay this is my net take home pay every other week, so I know I’ll need to spend $X.00 on groceries and basic housing and my car which leaves my $Y.00 to save. Or whatever.

It feels nice to be able to plot that all out on a spreadsheet and get a big picture of where things are going.

And if you are willing to spend very little or use cash envelopes, zero based budgeting can work.

If you keep your life and spending very simple it can work. We did zero based budgeting first with a spreadsheet for a few years and then with the Everydollar app when it first came out.

But, as we had more income and less debt and more children and more random expenses to save up for, we found ourselves wanting something more flexible.

It felt hard to plan well for all the irregular but predictable things. Think – random gifts, Christmas gifts and holiday spending, car repairs, home repairs, a trip to urgent care. We used sinking funds (and those are great!!)

But much more recently, we really wanted something even more flexible.

Enter YNAB – You. Need. A. Budget.

YNAB is a budgeting app.

The funny thing about YNAB entering at this point in the story is it actually entered our lives 7 years ago.

We’ve been using YNAB with a zero based budgeting system for 7 years. We had no idea you were supposed to use it in an entirely different way until I stumbled on the YNAB podcast and read the YNAB founder’s book.

Zero Based Vs. YNAB Method

Here are the main differences.

Zero-Based budgeting assumes a consistent flow of income and expenditures, whereas YNAB recognizes that life is unpredictable, and that unexpected expenses or changes in income can quickly throw off even the most carefully crafted budget.

YNAB’s flexible approach allows users to adjust their budgets in real-time in response to changes in income or expenses, rather than relying on a fixed plan that may not be realistic or sustainable over the long term.

Another difference between YNAB and zero-based budgeting is the focus on goal-setting. While both approaches involve assigning every dollar a specific job, YNAB encourages users to set specific financial goals, such as paying off debt, building an emergency fund, or saving for a down payment on a home. The app then helps users track their progress towards these goals and adjust their spending and saving habits accordingly.

Zero-based budgeting, by contrast, may not necessarily involve setting specific goals beyond simply avoiding overspending or running out of money. You can build goal setting into zero based budgeting, but it all becomes muddier and less clear.

The #1 Reason to YNAB

Perhaps the most significant difference between YNAB and zero-based budgeting, however, is YNAB’s emphasis on allocating only money that is already in the bank. This approach is in contrast to some other budgeting methods that may rely on anticipated income or future earnings to guide spending decisions.

By only budgeting money that is already in the bank, YNAB helps users stay within their means and avoid overspending or relying on credit to make ends meet. This emphasis on allocating existing funds is part of YNAB’s broader philosophy of financial responsibility and living within one’s means.

The crazy thing about budgeting money you have on hand is it creates a sense of scarcity.

Regardless of how much money is in your checking account, you can create a sense of scarcity but budgeting/ assigning it all out.

For example, we connected our high interest cash savings account to YNAB (which we designate as our emergency fund) and actually allocated out that money for several months of future living expenses. So then instead of feeling like we’re sitting on a cushy pile of cash, we know that future expenses are actually already planned for. That’s what the account is for.

$100 Bi annual insurance payment coming up? Assign $16.67 per month to the “insurance” fund in Ynab. Set it on auto. In 6 months, that payment will be fully funded before it comes due.

If you can’t get ahead yet because you’ve been living outside your means, YNAB forces you to come face to face with that.

If you only have $500 in the bank, you have to decide what to do with the $500.

Suddenly, money feels scarce. You spend as little as possible until you get paid again. You manage to scrimp and save and hang onto $250 until your next paycheck of $2,000. Woohoo! Now you have to pay rent, but you still try to scrimp and save and pinch pennies. If you keep doing this – living on less than you make and allocating money you actually have to the most important things, you will build up a bank account that can pay for upcoming things instead of putting them on credit cards.

It’s actually amazingly freeing.

A budget is telling your money what to do instead of wondering where it went. Or as YNAB users say… “YNAB-ing it.” Yep, it’s a verb.

What Next? How to Get Started?

After YNABing for 7 years (and literally JUST learning how you’re actually supposed to use it, here’s what I’d recommend):

  1. Sign up for the free month of YNAB and give it a go! Poke around, connect your bank if you want, play with the app a little. The computer web based app is better than the phone app in my opinion. I use the phone app a lot now, but when you’re a newbie, computer is easier.
  2. Quickly binge read the YNAB book – audio or print will do. It’s a quick read. It’s the best option for learning the ins and outs of why the method is so different from what people traditionally think of as budgeting. The entire program is built around the philosophy in this book. It can work for ANYONE’S FINANCIAL SITUATION. (Sorry for shouting. I wish I’d read it 7 years ago haha.)
  3. Start listening to the YNAB podcast. Also, Hannah from YNAB has some amazing Youtube videos that are very helpful. YNAB also has budget coaches you can hire to look at your budget if needed.
  4. Give yourself time. Be patient. Stick with it. Contact me if you have questions.

Happy Budgeting… or should I say, YNAB-ing?