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Why I don't like zero based budgeting

Warning

This page is entirely my personal opinion on personal finances. Feel free to disagree with me.

Zero based budgeting is a method of budgeting that focuses on giving each Euro a goal. All your budgets start at zero, and you fill them with money. Expenses deplete budgets until you make money to fill the budgets.

This approach is pretty terrible. Here's why.

Paycheck to paycheck

One of the reasons I started Firefly III was because I was living paycheck to paycheck. To break the cycle, I started managing my finances from month to month instead of... from paycheck to paycheck.

Now I decide for each month how much money I need to make it through that particular month. It could be an expensive month due to holidays or yearly bills, or it could be a (relatively) cheap month. Either way, I know this beforehand based on previous expenses and I set my monthly budgets accordingly.

Naturally, I budget less money for these expected expenses than I make in total. The rest of the money is put away for the next month or for large expenses like that new tablet I had my eye on (see also "piggy banks"). This approach disconnects your finances from your paychecks and allows you to build a healthy way of saving and spending money.

Contrary, zero based budgeting keeps the focus on your paychecks and forces you to divide it over your budgets. Your primary driver becomes how much money you make and not how much money you spend. This is an important distinction.

How to manage this

I keep all my money on my savings account. My checking account only has the money I need to spend what I budgeted. On the 1st of the month, that account has exactly my budgets in them. At the end of the month it's (close to) zero. Salary I received in the meantime is stored on my savings account.

Long-term vs short-term goals

In real life, long-term saving goals and short term budgets are two different things. I have five budgets every month. Not 30 or 40. Just five: "Bills", "groceries", "misc", "going out" and "work-related". I need no other budgets, because I have no other expenses outside of these budgets.

Of course, I can split "misc" into multiple budgets. I used to have a "going out"-budget, but that was before COVID-19. I should think about a "online"-budget because I spend money every month on games and apps.

Either way, these are my short-term goals, the money I need every month to live. Any other expenses are incidental and don't need a budget. At most, a category to group them in. But no budget.

How I manage this

For each (future) large expense I have a piggy bank connected to my savings account. This includes large bills and gadgets I want to buy. My liabilities like my student debt are stored as a liability and the money I need to pay my debt, is part of my monthly bills.

Conclusion

Skip the zero-based budgeting tools. They are easier to learn and easier to use, it's absolutely true. Most zero-based budgeting tools (especially the commercial ones) are also way better looking and more user friendly than Firefly III.

But also keep in mind: it's harder to spend less money with zero-based budgeting. It's harder to get a feeling for your financial situation with zero-based budgeting, and it's especially harder to change anything. And is that not why you started looking at these tools?

Use Firefly III. Use GnuCash. Use anything from this list. But skip the zero-based bullshit.


Last update: 2022-06-16