What's The Difference Between Traditional Budgeting And Zero-Based Budgeting?
It seems like there's always some new tip, trick, or strategy for how to budget. From the 50/30/20 budgeting rule to deciding whether or not to pay off debt or invest in savings first, deciding just how to tackle a budget can be a confusing process that leads to a lot of financial questions. While the best budget for you and your family or business will entirely depend on your specific priorities, having a general understanding of budgeting types can be important in making sure you're using the method that's best for your, or your business's, specific financial goals. This can be especially true when it comes to deciding between traditional budgeting methods or zero-based budgeting (ZBB).
Perhaps the biggest difference between traditional budgeting and ZBB comes down to justification. Zero-based budgeting focuses on justifying every single expense you or your business might make. It's named after the idea that you start at zero, and must justify each purchase up from that financial point. This includes treating all expenses (regardless of whether they're old, recurring, or new) in the exact same way. This strategy is rooted in not only meticulous organization but also in placing the burden of justifying every expense on your shoulders as a way to slow down spending and/or avoid unnecessary purchases altogether. This is a stark contrast from traditional budgeting in which you typically only look at new expenditures and also generally include incremental increases in your spending with every year.
Advantages of each budgeting approach
For starters, both traditional budgeting and zero-based budgeting are technically intended for business and/or corporate use. However, both budgeting approaches offer unique perspectives that can ultimately be beneficial to home and family budget planning, as well as business budgeting. Zero-based budgeting is detail-intensive, which can make it a great way to also ensure you stay organized with your budgeting and expenses. By accounting for every single expenditure, you're more likely to have a complete, thorough understanding of your expenses and spending habits.
A common by-product of ZBB is lower overall costs/expenses since justifying each purchase can quickly shed light on overspending and/or unnecessary purchases. Similarly, keeping track of each individual expense can help to ensure there are no duplicate purchases or misallocated money. For instance, discovering you have two Netflix charges every month or discovering your business is being overbilled by a vendor.
Traditional budgeting, meanwhile, offers a certain flexibility that's not present in ZBB. Mainly, the ability to grow your budget annually rather than starting from scratch at the beginning of every new year (fiscal or otherwise). Given that traditional budgeting is rooted in using past data and expenses to forecast future expenses, it has a solid foundation based on your current expenses. This means you likely have a good estimation of what your expenses will look like for the next year from the very beginning of the year. This can make it a simpler option for those who might not have the time or energy to tackle the burden of justification inherent in zero-based budgeting.
Disadvantages of ZBB vs. traditional budgeting
Zero-based budgeting's required detail can be a double-edged sword. While it can absolutely keep you on track with expense goals and even lead you to save money, it's also a very detail-intensive process requiring justification and approval for every single purchase your family or business might make. Holding a budget that tightly can present its own issues depending on how much extra time you might have to implement ZBB properly.
ZBB also doesn't allow for the time-saving tactic of using past budgets for projections or planning. Since your budget will always start at zero, you effectively start your budget over from scratch at the beginning of every year. From a business perspective, zero-based budgeting also tends to underfund and underappreciate areas that might have longer-term turnarounds for the business. For instance, a research and development team that can't show immediate gains from their work is more likely to end up underfunded in a zero-based budgeting model.
One big consideration with traditional budgeting can be the lack of interest in new or innovative additions to your budget. By using and relying on past budgets as models for future expectations, there can be little room for new expenses, departments, and/or ideas. Similarly, bad decisions from previous budgets are more likely to carry over due to traditional budgeting's reliance on previous models. This can lead to a continuation of mismanaged, duplicated, or even incorrectly applied expenses that will continue to drain resources on a budget.