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What is Zero-Based Budgeting (ZBB)?

Zero-based budgeting vs. traditional budgeting, advantages of zero-based budgeting, disadvantages of zero-based budgeting, final thoughts, additional resources, zero-based budgeting.

A budget starting from scratch

Zero-based budgeting (ZBB) is a budgeting technique that allocates funding based on efficiency and necessity rather than budget history . Management starts from scratch and develops a budget that only includes operations and expenses essential to running the business; there are no expenses that are automatically added to the budget.

All expenses must be justified in order to qualify to be placed   in   the budget. For ex ample, if a company expects to incur $100,000 in salaries and wages expenses and believes that the full $100,000 is necessary to operate the business smoothly, then it will be included in the budget – however, each individual allotment of salary/wages has to be examined and justified in order to be included.

If, instead of paying some salaries, the company’s management determines that it can substitute technology at a lower cost, then adjustments to the budget are made accordingly.

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All businesses use budgets to keep track of spending and improve ways to minimize costs and maximize profit. Budget planning for the current/next year is usually based on budgets from previous years. In fact, traditional budgeting begins with the previous year’s budget and usually implements incremental percentage increases or decreases to meet new goals. These percentages usually range anywhere from 1% to 10%.

Sometimes, budgets can get out of control, or in some years, may show significantly higher or lower costs, depending on the overall market outlook and other external factors. In such scenarios, it does not make sense to look at last year’s budget because significant changes in the company’s situation have taken place. The entire budget needs to be redone from scratch – hence, a zero-based budget.

In a zero-based budget, the company analyzes every expense/aspect of the business one by one. This is referred to as starting from a “zero base.” While zero-based budgeting examines all expenses, traditional budgeting only examines proposed new expenses.

• The final output is well justified and is aligned with the company’s overall business strategy or business plan.
• Encourages more collaboration throughout the company
• Improves performance and operating efficiency by challenging assumptions and examining expenditures
• By avoiding traditional budgeting percentage increases, there is a significantly better chance of making cost reductions.
• Implementing a zero-based budget requires qualified personnel and specialized training, which can be time-consuming and costly.
• May harm the company’s overall culture or brand image
• May be cost-prohibitive (because of time, research, and analysis required) for companies with minimal available funding
• It is substantially more complex and tedious to start from a zero base. Traditional budgeting is much simpler, faster, and easier to implement.

To sum up, although zero-based budgeting is an option that can create numerous benefits, there are also some potential drawbacks.

Implementing zero-based budgeting is not solely an accounting decision and must be considered in conjunction with the company’s overall business strategy and goals. While a zero-based budget may help companies better reduce costs, they may completely change the value of the company and its culture.

For example, if companies rely heavily on maintaining a positive, vibrant, and accessible environment for their employees but all the expenses to maintain this environment were eliminated due to the zero-based budget process, the company’s overall culture may change. This change may lead to higher turnover rates and negative changes in brand perception.

According to a study by Accenture , only about 50% of companies can sustain cost savings for more than one to two years, and in such cases, traditional budgeting becomes ineffective.

Zero-based budgeting must be a collaborative, unanimous decision within the company after careful consideration of its relative advantages and disadvantages.

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Zero-based budgeting (ZBB) is like solving a financial puzzle. Instead of relying on the previous year’s budget, ZBB requires you to evaluate and justify every expense from the ground up, justifying its necessity and alignment with strategic goals.

It’s like starting with a blank canvas and carefully selecting each budget item based on its value and contribution to your financial objectives. This approach ensures that every piece of your budget fits together harmoniously to create a clear and purposeful financial picture. In this blog post, we will delve into the concept of zero-based budgeting, exploring its definition, advantages, disadvantages, implementation steps and tools needed.

The zero-based budgeting process is a strategic budgeting approach that mandates a fresh evaluation of all expenses during each budgeting cycle. Unlike traditional budgeting, where previous spending levels are typically adjusted, ZBB requires individuals or organizations to justify every expense from the ground up. The aim is to optimize resource allocation by ensuring funds are allocated to activities that align with strategic objectives and generate the highest value. 

Peter Pyhrr, an accountant and consultant, is credited with developing the concept of zero-based budgeting (ZBB) in the 1970s. Pyhrr recognized the limitations of traditional methods of budgeting that relied on incremental adjustments to previous budgets. He believed that organizations needed a more rigorous approach to budgeting that would ensure resources were allocated efficiently and aligned with strategic objectives.

Pyhrr introduced the idea of starting the budgeting process from a “zero base,” meaning that every expense had to be justified from scratch. This approach challenged the assumption that previous spending levels were automatically justified, requiring individuals and departments to provide a detailed rationale for each expenditure.

By requiring a fresh evaluation of all expenses, Pyhrr aimed to eliminate unnecessary costs, identify inefficiencies, and promote a more focused use of resources. His goal was to instill a sense of accountability and ownership among budget holders, encouraging them to critically analyze and justify their budget requests.

Zero-based budgeting offers several advantages for both businesses and individuals. Some key benefits include: 

• Cost savings: ZBB requires a thorough evaluation of all expenses, challenging the assumption that last year's spending levels are justified. By scrutinizing each line-item expense from scratch, ZBB helps identify unnecessary or redundant costs, preventing overspending. This process allows for cost-cutting and setting savings goals, leading to lower costs and improved financial efficiency. 
• Enhanced efficiency: ZBB encourages resource reallocation towards high-impact activities. By evaluating expenses based on their value and alignment with strategic objectives, ZBB ensures that resources are allocated to areas that generate the highest return on investment. It promotes a more focused and effective cost management.
• Increased accountability: With ZBB, individuals or departments must justify their budget requests and align them with organizational financial goals. This fosters a culture of accountability, as each expense must demonstrate its purpose and value. ZBB creates a sense of ownership and responsibility among budget holders. 
• Flexibility and adaptability: Traditional budgeting systems often rely on historical data and incremental adjustments. ZBB, however, is not bound by past spending patterns. It allows for better adaptation to changing circumstances, emerging priorities and new opportunities. ZBB promotes agility in resource allocation, enabling organizations to respond effectively to evolving market conditions. 
• Cost-conscious culture: ZBB can foster a cost-conscious culture within an organization. By instilling a mindset of questioning and justifying expenses, ZBB encourages employees to think critically about costs and seek more efficient alternatives to cut back. This culture of cost-consciousness can lead to continuous improvement and a focus on value creation. 
• Improved decision-making: ZBB provides a comprehensive view of expenses and their impact on organizational goals. By evaluating each expense category, decision-makers gain better visibility into the cost structure of the organization. This enables informed decision-making, as leaders have a clearer understanding of the trade-offs involved and can make strategic choices based on reliable data.

Implementing zero-based budgeting (ZBB) in an organization involves careful planning and execution. Here are the key steps to follow:

• Identify objectives: Clearly define the organization’s goals and strategic direction to establish the foundation for the budgeting process. Ensure that budget allocations align with these objectives and prioritize them accordingly.
• Evaluate expenses: Review each expense category, including recurring expenses such as subscriptions, and question their necessity and relevance. Scrutinize both fixed expenses like rent and utilities and variable expenses such as marketing and travel. Identify areas where costs can be optimized and potential savings can be made.
• Build budgets: Create new budgets from scratch, ensuring that each item serves a clear purpose and directly supports the organization’s strategic goals. Consider the importance of each expense category, allocating resources accordingly to maximize their impact. Set up an emergency fund to ensure sufficient funds are available for unforeseen circumstances.
• Prioritize resources: Allocate resources based on their importance and their contribution to the organization’s objectives. Prioritize high-value activities and projects that align with strategic goals. Take budget constraints into account and make informed decisions on resource allocation.
• Monitor and review: Regularly monitor the budget implementation, track expenses and assess performance against objectives. Keep a close eye on spending and make adjustments as necessary to maintain alignment with the organization’s goals. This ongoing monitoring and review process ensures that the budget remains effective and adaptable to changing circumstances.

By following these steps, organizations can successfully implement zero-based budgeting, optimize their resource allocation and achieve greater financial efficiency while aligning with their strategic objectives.

While zero-based budgeting can be a powerful tool for organizations, there are several important considerations and potential challenges to be aware of:

• Time and effort: Implementing zero-based budgeting can be a time-consuming process, especially short-term during the initial stages. It requires a significant investment of effort to thoroughly evaluate and justify every expense from scratch. Adequate planning, data collection and stakeholder involvement are crucial for a successful implementation.
• Change management: Adopting a new budgeting method like zero-based budgeting often requires a shift in organizational culture and mindset. Employees may need to adjust to a more rigorous and detailed approach to budgeting, which can lead to resistance or discomfort. Change management practices, such as communication, training and engagement, are important to facilitate a smooth transition and ensure widespread adoption.
• Complexity: Zero-based budgeting can be more complex than traditional budgeting, especially for large organizations or individuals with diverse financial obligations. The process requires meticulous documentation and tracking systems to ensure accurate evaluation, allocation and monitoring of expenses. Managing the complexity of ZBB may require additional resources, expertise and technology to support the budgeting process effectively.
• Resource allocation challenges: Zero-based budgeting may pose challenges in resource allocation, particularly when dealing with competing priorities and limited resources. The thorough evaluation of expenses from scratch can sometimes lead to difficult decisions and trade-offs between different activities, projects or departments. Balancing strategic objectives, budget constraints and the need for cost optimization requires careful consideration and decision-making.
• Initial disruption: Implementing zero-based budgeting may cause initial disruption within the organization as existing budgeting practices and processes are replaced or modified. This disruption can impact the workflow, roles and responsibilities of individuals involved in the budgeting process. Adequate communication, training and support are essential to minimize disruption and ensure a smooth transition.

By understanding and addressing these potential challenges, organizations can better prepare themselves for the implementation of zero-based budgeting and mitigate any potential negative impacts on the budgeting process and organizational dynamics.

• Spreadsheets: Traditional spreadsheet applications like Microsoft Excel or Google Sheets can be used to create and manage zero-based budgets. They provide flexibility in organizing budget data, performing calculations and generating reports. Spreadsheets allow for customization and can be a cost-effective option for smaller organizations.
• Financial planning and analysis (FP&A) software: They offer dedicated features for budgeting, forecasting and financial analysis. These tools provide a centralized platform for top-down and bottom-up budgeting creation, collaboration, scenario modeling, data integration and reporting. They often come with advanced analytics capabilities, enabling organizations to make data-driven budgeting decisions.
• Enterprise resource planning (ERP) Systems: ERP systems integrate various financial processes, including budgeting. These systems offer modules specifically designed for budget creation, tracking and reporting. They provide a comprehensive view of financial data, facilitate data integration and support collaboration among different departments.
• Budgeting and planning software: Dedicated budgeting and planning software are designed to streamline the budgeting process. These tools provide features like budget templates, workflow automation, data consolidation, scenario modeling and reporting. They often offer user-friendly interfaces and enable collaboration among budget stakeholders.
• Data visualization tools: Data visualization tools enable organizations to visualize budget data and financial insights. These tools create interactive charts, graphs and dashboards that enhance the understanding and communication of budget information. Data visualization tools can help identify trends, patterns and anomalies in the budgeting process.
• Project ,anagement software: Project management tools like Asana, Trello or Jira can be utilized to track budgeting tasks, deadlines and milestones. These tools help manage the workflow, assign responsibilities and ensure accountability during the budgeting process. They enhance collaboration and provide transparency into the progress of budget-related activities.

IBM Planning Analytics is an  integrated business planning  and  analysis  solution that can greatly assist with zero-based budgeting (ZBB) initiatives. Here’s how IBM Planning Analytics stands out and provides value in implementing ZBB:

• Advanced functionality: IBM Planning Analytics provides robust features specifically designed to support ZBB, such as data collection, analysis, scenario modeling and budgeting capabilities. It also offers integration with spreadsheets, allowing organizations to leverage existing spreadsheet data and seamlessly transition to a more sophisticated budgeting solution.
• Collaborative environment: IBM Planning Analytics fosters collaboration among stakeholders involved in the budgeting process. It allows teams to evaluate expenses, allocate resources and justify budget requests based on strategic objectives. This collaborative environment enhances transparency and accountability and ensures that budget decisions align with organizational goals.
• AI-infused capabilities: IBM Planning Analytics utilizes artificial intelligence (AI) and machine learning capabilities to provide advanced analytics and forecasting. These AI-infused features help organizations gain deeper insights into their budget data, identify trends and make more accurate predictions, enabling them to make data-driven budgeting decisions.
• Integration capabilities: IBM Planning Analytics integrates seamlessly with other systems and data sources, such as accounting platforms or ERP systems. This integration ensures the availability of accurate financial data for budgeting decisions, eliminating the need for manual data entry and reducing errors.
• Scalability and flexibility: IBM Planning Analytics is highly scalable and suitable for organizations of all sizes. It can adapt to changing business needs and accommodate complex budgeting requirements. Whether it’s a small organization or a large enterprise, IBM Planning Analytics can effectively support the ZBB process.
• User-friendly interface: IBM Planning Analytics offers a user-friendly interface that simplifies the budgeting process. Its intuitive design and interactive dashboards allow users to navigate through budget data, perform analyses and generate reports with ease.

While there are other tools available for zero-based budgeting, IBM Planning Analytics stands out due to its powerful and flexible platform that allows for comprehensive functionality, AI-infused capabilities and user-friendly interfaces. These factors make IBM Planning Analytics a preferred choice for organizations seeking to implement ZBB effectively and achieve cost optimization and accountability throughout the budgeting cycle.

Zero-based budgeting is an innovative type of budgeting that challenges conventional financial practices. By reevaluating expenses from scratch and aligning them with strategic objectives, ZBB promotes cost optimization, efficiency, and accountability. While implementing ZBB requires significant effort and change management, the benefits of this approach can outweigh the challenges.

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Zero-Based Budgeting: Spend Every Penny but Meet Your Financial Goals

In zero-based budgeting, your income minus your expenditures should equal zero. Savings goals, debt paydown and fun are all included.

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The zero-based budgeting method encourages you to use every penny of your monthly income. But that doesn’t mean blowing it on a shopping spree. Important goals such as saving money and paying off debt — as well as spending on fun stuff — are all part of the plan.

The idea behind the zero-based budget, sometimes called the zero-sum budget, is to give every cent a purpose. Here’s how it works.

» MORE: How to choose the right budget system

What is zero-based budgeting?

Zero-based budgeting is a method that has you allocate all of your money to expenses for needs and wants, as well as short- and long-term savings and debt payments. The goal is that your income minus your expenditures equals zero by the end of the month.

The difference between zero-based budgeting and living paycheck to paycheck is that all of your financial goals are met.

You can repeat expense categories and amounts every month or mix it up. If you come in under budget in a certain category at the end of the month, add the remaining amount to next month’s budget or move it to another category, such as your emergency fund . It’s the same concept as the envelope system , which involves distributing money for different expense categories into envelopes.

Let’s say you make $3,000 per month. Your budget might look like this:

Zero-based budgeting example

Note that once you've budgeted for the essentials, the other spending categories can be for anything else. Want to pay off a credit card in six months? Build it into your budget. Buy a house? Set aside money for the down payment. Big vacation? Pad that travel fund with a few more bucks.

Build your zero-based budget with a budget app — such as You Need a Budget or Goodbudget — or a spreadsheet or pen and paper.

How to start a zero-based budget

Before implementing this budget, take a few steps to ensure you're realistically planning your spending:

Know your income. Total your paycheck, benefits and other sources of monthly income to find out how much money you have to work with.

Track your expenses for a few months. Knowing what you typically spend — and on what — creates a framework you can use going forward. You’ll spot areas in which you can cut back and in which you want to allocate more.

Categorize your expenses. Identify all of your priorities and expenses, including your needs and wants, emergency fund and other savings goals , plus your debt repayments.

How much should you allocate to each category? NerdWallet recommends the 50/30/20 rule. With this approach, 50% of your income goes to needs, 30% to wants, and 20% toward debt repayment and savings.

The pros and cons of zero-based budgeting

The zero-based budget keeps you aware of how much money flows in and out. This can prevent you from spending what you don’t have.

“If you haven’t tracked where your money is going or if you feel like you don’t have control of your money or spending, then I think that this is a really good method,” says Catherine Hawley, a certified financial planner in Monterey, California.

This system is also customizable, which can be especially useful if you're new to managing your money .

Following a zero-based budget eats up quite a bit of time. To hold yourself accountable, you’ll have to closely and consistently monitor your spending. And that’s not the only challenge you may experience.

“I think one thing that can be problematic with it is that there are a lot of variable expenses,” Hawley says. “If you don’t account for your irregular expenses, the zero budget is going to potentially not leave you with enough money on average.”

These variable expenses might include holiday purchases, traveling to a friend’s wedding or replacing a broken phone.

But there’s a way to solve this: Set aside money specifically for these costs. Create a savings fund, separate from your emergency fund and other savings goal funds, and contribute to it each month.

The zero-based budgeting method might also pose a problem if you have an irregular or unpredictable income; say, if you’re a freelancer or an hourly worker whose schedule fluctuates. If you don't always know how much money you’ll have to allocate, consider using the previous month’s income for the current month’s budget. Note that you’ll need to save up a month’s worth of income as a buffer first.

See if zero-based budgeting is right for you

Now that you know what the zero-based budgeting system is all about, you’re ready to give it a shot. If it doesn’t work for you, try another budgeting method. And if your financial situation is complex, you might benefit from speaking to a financial planner .

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What Is Zero-Based Budgeting?

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Zero-Based Budgeting: Benefits and Drawbacks

Zero-based budgeting is an accounting practice that forces managers to think about how every dollar is spent in every budgeting period. It can have both benefits and drawbacks.

Pete Pyhrr developed the idea of zero-based budgeting in the late 1960s to early 1970s while he was an account manager at Texas Instruments. Many Fortune 500 and private equity companies have since adopted this budgeting technique.

Key Takeaways

• Zero-based budgeting differs from traditional budgeting in that the companies using it create a budget for each new period.
• Potential drawbacks of this method are that it can reward short-term thinking and be resource-intensive.
• Zero-based budgeting can be manipulated by savvy managers.
• The benefits can include lower costs by keeping old and new expenses in check.

Understanding Zero-Based Budgeting

A study from Accenture Strategy on zero-based thinking was published in 2018. It found that this budgeting method grew exponentially among the world's 85 largest companies at a rate of 57% each year from 2013 through 2017. The companies included Kraft Heinz Co., Mondelez International Inc., and Unilever PLC.

Companies start with the previous period's budget as a template in traditional budgeting. They then build upon it. Each new budget usually increases incrementally compared to the previous period's budget. Companies only have to justify new expenses.

Zero-based budgeting deviates from traditional budgeting in that the budget for each new period is created starting from a "zero base." Companies must justify each expense before adding it to the new budget, even old and recurring expenses.

Benefits of Zero-Based Budgeting

The major advantages of zero-based budgeting are flexible budgets, focused operations, lower costs, and more disciplined execution.

Managers Must Justify All Operating Expenses

Zero-based budgeting ensures that managers must think about how every dollar is spent and they must do so every budgeting period. This forces them to justify all operating expenses and to consider which areas of the company are generating revenue .

It Keeps Legacy Expenses in Check

Legacy costs might not be examined for years in traditional budgeting until there's some sort of economic shock that forces the company to take extreme actions. Expenses tend to grow over time with each department protecting its budget from cuts.

This can lead to significant misallocation of resources over time. Zero-based budgeting can prevent this from happening if it's done correctly.

Managers must justify all expenses with zero-based budgeting. It generally doesn't matter if the new budget is higher or lower than the one preceding it.

Drawbacks of Zero-Based Budgeting

The drawbacks of zero-based budgeting include the possibilities of resource intensiveness, being manipulated by savvy managers, and bias toward short-term planning.

It Can Reward Short-Term Thinking

One of the major drawbacks of zero-based budgeting is that it can reward short-term thinking by shifting resources toward areas of companies that will generate revenue over the next calendar year or budgeting period. Some areas of companies that are typically viewed as long-term investments that aren't directly tied to revenue may be left with smaller budgets than they need as a result.

These long-term investments can include research and development or worker training. This could potentially hurt a company because these areas are often key to remaining competitive over the long term but they won't be generating revenue in the near term.

It's Resource Intensive

Zero-based budgeting takes a lot more time and effort to closely review and justify every budget element rather than simply modify an existing budget and review only new elements. Some critics argue that the benefits of zero-based budgeting don't justify its time cost due to this factor.

It Can Be Manipulated by Savvy Managers

The process of zero-based budgeting can be gamed by savvy managers to get more resources into their departments. This can lead to a change in culture. There can be a decreased spirit of cooperation in the company because workers feel expendable.

What Are Operating Expenses?

Operating expenses are costs that a company incurs just to keep up and running. They don't include financing or investing. They produce revenue. They're either fixed such as rent or mortgage payments or they're variable, such as salaries paid to workers. Salaries can be tweaked if necessary. Mortgage payments are more carved in stone.

What Are Legacy Costs?

Legacy costs are expenditures that are associated with providing retirement and health benefits to a company's workers. They're a common expense for government employers but they're common among corporate employers as well.

Can a Zero-Based Budget Be Applied to Personal Finances?

It can and the math is really simple. Add your monthly expenses to the amount of money you'd like to save each month. Subtract the total from your monthly income. You have a zero-based budget if the result is zero or very close to it. You'll want to make adjustments if your budget is less than zero. You're in pretty good shape if it's more. Decide where you want to put that extra money.

Zero-based budgeting effectively creates a new, start-over budget for each accounting period. Each budget begins at zero as the name suggests. A focus like this can keep costs and expenses under a microscope and it can give managers more control. Opponents argue that this type of budgeting doesn't keep an adequate eye on future needs.

Business owners might want to do a trial run on paper first, at least for a little while, before jumping in with both feet and committing to the process of zero-based budgeting.

Public Administration Review. " The Zero-Base Approach to Government Budgeting ." Page 1.

Accenture Strategy. " Global Companies Are Saving Up to $1 Billion to Fund New Growth by Adopting a Zero-Based Mindset, According to Accenture ."

CFI Education. " Operating Expenses ."

City of Battle Creek. " Legacy Costs Committee ."

Quorum Federal Credit Union. " Is Zero-Based Budgeting (ZBB) Right for Your Household? "

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What is zero-based budgeting and how does it work.

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When your paycheck hits, do you put every dollar to use? If not—and you have money sitting idly in your checking account—you may want to consider zero-based budgeting. Also called zero-sum budgeting, this method entails giving every single cent of your take-home pay a job.

While this budgeting strategy may be a bit more time consuming than others, it can help you reach long- or short-term financial goals such as securing a comfortable retirement, buying a home or going on vacation, all while you pay for routine essentials.

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How does zero-based budgeting work.

Zero-based budgeting requires allocating every dollar of your income to a specific purpose. First you’ll cover your basic needs, such as housing, utilities, and groceries. But once you subtract those expenses from your income every month, you can start to give your remaining dollars another job: paying off debt, building your emergency fund , investing for the future , or just covering dinners out and movie tickets.

Like most budgeting strategies, the best way to use zero-based budgeting is to tweak it for your specific needs. If you don’t have student debt, you won’t include that line item in your plan. Instead, maybe you designate that money to saving for a down payment.

The purpose of zero-based budgeting is that you meet your needs while working towards your financial goals. By the end of the month, you should have zero (hence the name) dollars left without a job.

Example of zero-based budgeting

Let’s look at an example. Say your monthly income is $4,500 and you rent an apartment, have student loans, want to build up your emergency fund, and are planning a wedding within the next two years. Here’s what a breakdown of your budget may look like.

Who is zero-based budgeting for?

A zero-based budget can make sense for anyone who wants to get their finances in check. But it may especially be beneficial to people who let any excess money sit in their checking account each month. If you have financial goals beyond paying for your short-term needs—as most people do—a zero-based budget can help you get organized so you can consistently put money to work, even if it’s for years down the line.

This strategy works best for people who like to plan ahead and are prepared to put time and energy into their budgeting. While zero-based budgeting doesn’t have to be extremely time consuming, it can be a bit more complicated than other budgeting strategies.

Zero-based budgeting can work for anyone willing to do the work, but it can especially make sense for people who have a consistent income from one month to the other.

Why is zero-based budgeting important?

Zero-based budgeting can be important for savers who struggle to make the most of their money. If there is cash in your checking account, zero-based budgeting would require you putting it to work—a smart move considering checking accounts tend to not earn interest .

Even if you move money into your savings account each month, doing so without intention may mean you’re missing out on money. While traditional savings accounts earn 0.45% on average as of July 2024, allocating that money to a goal via an investment account or high-yield savings account will give you a better rate of return.

Zero-based budgeting: Pros and cons

As with most budgeting strategies, zero-based budgeting comes with pros and cons:

Puts every dollar to work

Can help you meet short- and long-term goals, can help you save more, customizable, can implement with a budgeting app, requires organization and planning, time consuming, challenging with inconsistent income, advantages of zero-based budgeting.

When every dollar of your take-home money is allocated to meeting a certain goal, you don’t risk missing out on years of earning interest or market returns by having your money sit idly. The strategy can also help you meet goals you may not have thought you had the money to save for, since you’ll see exactly how much money you have at the end of the month and can designate it to a milestone, such as buying a car or eliminating debt.

When you get paid, it can be easy to focus on the essentials like housing and groceries and feel free to spend the rest of your earnings. But doing so can hurt your potential to reach both short-term goals that aren’t needs—such as a vacation with friends—or goals like retirement that are years, or even decades, away. Zero-based budgeting forces you to think about those goals when looking for a place to park your extra cash each month.

Organizing your money can help you save more. Instead of looking at “extra” cash after you cover your basics as spending money, giving it a job can help you spend less and save more.

Your take-home pay and goals will look much different from another person’s, and zero-based budgeting accounts for that. While some strategies, such as 50/30/20 budgeting , give you specific figures for your savings, zero-based budgeting can be adjusted to fit anyone’s income.

The strategy also makes room for anything that you want to save for, whether that be an investment property or a new blender.

You don’t have to budget on your own. Nowadays there are a plethora of budgeting apps that can help you and some, such as ​​ YNAB (short for You Need a Budget) are based on the zero-based budgeting strategy.

Disadvantages of zero-based budgeting

Zero-based budgeting requires you to plan for the month ahead and also revisit your budget at the end of the month to ensure that every dollar has been put to work. Like most budgeting strategies, this only works if the saver is willing to organize their finances.

Because of the organization and planning required, zero-based budgeting requires you to spend some time with your budget. Costs and goals are likely to change over time, which means you should plan to consistently sit down each month and ensure your budget is still in line with your needs.

If you’re an hourly worker, freelancer, or have another job that comes with an inconsistent income, zero-based budgeting can be difficult. It requires adjusting your budget every month so that each dollar is still used. This can mean making some major changes if your take-home pay is $2,000 one month and $4,000 the next, for example.

How to make a zero-based budget

Start implementing a zero-based budget with these five simple steps:

1. Determine your monthly income

The first step to zero-based budgeting requires looking at your monthly income. It’s important to note that this is your take-home pay, not your pre-tax income.

2. Identify your expenses

Review your recent spending history to identify your expenses, including your housing costs, utilities, groceries, and debt payments. Once you have those essentials out of the way, estimate how much you plan to spend on other expenses over the next month, such as dining out or on gifts if it’s around the holidays.

3. Pinpoint your goals

Consider what you want to save for the short term—whether it be increasing your emergency fund, getting a dog, or throwing a party. Then, think about such long-term goals as retirement. Fidelity Investments recommends having the amount equal to your salary saved by the time you're 30, six times your salary by age 50, and 10 times by age 67. Don’t neglect to include retirement savings in your budget, no matter how far off it feels.

4. Subtract your expenses and savings goals from your income

Once you’ve forecasted your spending and saving, subtract that total from your take-home pay. The result should be $0.

5. Make adjustments

If you completed step four and the result isn’t $0, adjust your budget. Perhaps this means lowering the amount of money you set aside for long-term goals or making a debt payment beyond the minimum (if your plan allows).

Zero-based budgeting vs. traditional budgeting

Traditional budgeting involves allocating a certain amount of money for your various needs. It differs from zero-based budgeting in several key ways.

Best practices for zero-based budgeting

Be specific.

A major benefit of zero-based budgeting is that it requires you to allocate a certain amount of money for every spending and saving category. While you can make adjustments throughout and at the end of the month, including as much detail as you can in your forecasts will help ensure you don’t overspend or have a lot of extra cash left over at the end of the month.

Be flexible

Just because you put a plan in place doesn't mean it can’t—and shouldn’t—change as your life does. In the summer you may want to spend extra on happy hours with friends and outdoor concerts, and that may require decreasing the budget line for savings that month. Being flexible means you’re more likely to stick to your budget.

Review your progress

Everyone makes mistakes when it comes to budgeting, but those lessons learned can help you put a better plan into place for the next month. Take a few minutes at the end of each month to reflect on how well your budget fits your life and goals, and consider what you may want to change going forward.

Alternatives to zero-based budgeting

50/30/20 budgeting.

The 50/30/20 budgeting rule involves splitting your take-home pay into the following three categories:

• 50% on your needs, including housing and bills.
• 30% on your wants, such as dining out.
• 20% on savings.

Envelope budgeting

Envelope budgeting is similar to zero-based budgeting in that you're giving your dollars a job. With envelope budgeting, you designate your cash to certain envelopes with labels like “groceries” or “entertainment” and only spend what you’ve allocated for that expense.

Expense tracking

Expense tracking entails keeping a close tab on all the money you spend. This can be done by hand, via a spreadsheet, or with a budgeting app.

TIME Stamp: Give every dollar a job with zero-based budgeting

Zero-based budgeting is a strategy that requires giving every dollar a job, whether that be for expenses, wants, or long-term goals. You implement this strategy by identifying your basic costs, debt payments, short- and long-term savings goals each month and subtracting them from your monthly take-home pay.

This type of budgeting especially makes sense for people with regular income, but it can be adjusted for those with inconsistent income as well. While you can do this by hand or digitally, budgeting apps can also take some of the work off your plate.

Frequently asked questions (FAQs)

What is the major feature of zero-based budgeting.

The major feature of zero-based budgeting is allocating all your money to a certain expense or goal so at the end of the month, you’re left with $0.

Can someone with an irregular income create a zero-based budget?

Yes. Irregular income isn’t a barrier to creating a zero-based budget, but it will involve more adjustments to the budget each month.

Why is the zero-based budget the most effective type of budget?

The most effective type of budging for one person may not be the most effective type of budgeting for another. Zero-based budgeting can be very effective for people who want to ensure that they’re putting every dollar to work either for expenses or goals.

The information presented here is created by TIME Stamped and overseen by TIME editorial staff. To learn more, see our About Us page .

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Zero-based budgeting revisited: Why this time is different

In this episode of the McKinsey Podcast , McKinsey partner Kyle Hawke and senior McKinsey external adviser Jan Perkins speak to Simon London about why zero-based budgeting (ZBB)—an idea that’s nearly 50 years old—is having a bit of a renaissance in companies looking to reset their resource-allocation methods.

Podcast transcript

Simon London:  Hello, and welcome to this edition of the McKinsey Podcast with me, Simon London. Today, we’re delving into the world of finance and budgeting—specifically, the set of practices known as zero-based budgeting. Now, zero-based budgeting is making something of a comeback . There are a few reasons for this, but probably the biggest is companies are realizing that, when done well, zero-based budgeting can be a very effective way to free up cash for reinvestment.

In other words, it can underpin a more dynamic approach to reallocating resources across the company. However, as we’ll hear, zero-based budgeting is not for the faint hearted . To discuss the issues, we’re joined today by Jan Perkins. Jan is a senior adviser to McKinsey and a former senior executive in the consumer sector. We’re also joined by Kyle Hawke, who’s a McKinsey partner based in Washington, DC. Jan and Kyle, thanks so much for joining today.

Kyle Hawke:  Thanks for having us, Simon.

Jan Perkins:  Good to be here.

Simon London:  Zero-based budgeting is definitely one of the more quasi-technical topics that we’ve tackled on this podcast. Kyle, if you don’t mind, maybe start by giving us a quick overview of what zero-based budgeting is.

Kyle Hawke:  The concept of zero-based budgeting is not a new concept. It was actually introduced in 1970 but is experiencing a bit of a renaissance in recent years. If you go back and you look at the definition of it in 1970, it was purely about the budgeting process and breaking down the budget into small pieces so that management can make decisions on where to invest. But it was purely a budgeting technique.

In the last five years, it has experienced a bit of a renaissance because it’s become much more than that. It’s really a new way of working that allows companies to put their money where it matters most , align resources with their business priorities, and do that on a repeatable basis.

It’s a process that’s embedded in the normal financial-planning and management routines. It’s a set of systems that, first, give you visibility to where you’re spending money and where your resources are today and allows you to compare that to where they should be [Exhibit 1]. Then it provides better visibility to where you’re spending, so that you can have better dialogues with the management team.

It’s a [form of] governance that makes cost management and resource allocation really part of everyone’s job rather than just finance.

Simon London:  The obvious follow-up there is why the renaissance? Like you say, as a concept this has been around for quite a long time. What makes it especially relevant today?

Kyle Hawke:  Resources get stuck where they have always been, and we’ve done a lot of research on this. We studied the resource reallocation of 1,500 companies over a 20-year period, and what we found is that 90 percent of the dollars stay where they were the year before. So only 10 percent was actually reallocated across business units, geographies, or brands.

However, some companies are moving dollars more fluidly. If you look at those companies with [a] more dynamic resource reallocation, they actually grow their total returns to shareholders by 10 percent, whereas the more dormant reallocators grow at only 6 percent. What that means, over that same 20-year period, is that the market cap of the more dynamic resource reallocators is actually twice that of the dormant reallocators. It sounds good, right? But the question is how do you unlock that tight grip that managers have over their budgets? We believe a large part of that lies in zero-based budgeting.

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Jan Perkins:  I would add to the rationale behind the renaissance: companies have years of productivity initiatives trying to unlock those resources. And I believe there’s a portion of companies that became quite successful at zero-based budgeting, making it more than just a cost-reduction or a budgeting exercise and getting some pretty outstanding results. That caught the attention of your external financial analysts, in addition to some of the other competitive companies [Exhibit 2]. People became more excited about what is the magic to zero-based budgeting and can we use it? Will it work for us?

Simon London:  And the criticism was that to do this well, you need a level of granularity—where costs fall, who the “owners” are, where the possible efficiencies are, and so on in a more manual finance world. That was a huge level of effort. But in a world where we’ve got very good cloud-based finance systems, a lot of that infrastructure is there to track all this. Is that, broadly, the way to think about it?

Kyle Hawke:  If you look at some of the criticisms of zero-based budgeting, one of them is that it’s not a repeatable process and is something that you can only do on a periodic basis. What we’ve seen is that digital tools actually facilitate the process end to end and make it easier for companies to make it part of the way that they work rather than this one-time or periodic event.

Historically, budgeting from zero is very manually intensive and required thousands of spreadsheets from across the organization, both to build the budget and then to monitor performance at the required level of granularity. But now there are cloud-based solutions that—off the shelf, for the most part—can support the majority of the process and be ingrained in the normal way that you work and replace those thousands of spreadsheets that existed before.

Jan Perkins:  And they enable more than just the budgeting. They’re also enabling the ability to govern it, and governance, I think, is a key piece of the sustainability of this sort of initiative.

Simon London:  Just say a little bit more about that, Jan. What do we mean when we talk about governance in this context?

Jan Perkins:  Governance is the opportunity to really maintain that level of visibility and ensure that you are spending according to the transformational targets and the policy revisions that have been put in place. [The failure to do] that, I think, would be, in my experience, one of the key faults of some of the prior initiatives. You make the changes. You post them. You communicate them. You put it in the budget, and then over the months, the quarters, and the years to follow, you lose visibility as to whether people are adhering to the policies, and the spending starts to creep back up.

The governance, when you’re using the tools to lock into the budgeting, can also connect to other tools that help you report against what you’re spending. Are you adhering to policies? And are there other opportunities to look at?

Simon London:  Can we put some numbers around what’s the upside? And what sort of results have we seen for companies putting in zero-based-budgeting processes and doing it well?

Jan Perkins:  So companies have achieved between 10 and 25 percent reductions in aggregate. As you drill down into certain cost categories—and depending on how aggressive and transformational you want to be—you can certainly see 50 to 60 to 75 percent cost reductions in particular cost categories.

But these results are pretty immediate. You can see them hit the P&L [profit-and-loss statement] in four to six months. Some of them that are transformational can take longer. It can take a couple of years. And you can see the savings on any type of costs. Overhead, of course, organizational supply-chain manufacturing costs, marketing, distribution, within cost of goods sold, capital expenditures. You can apply this approach to any type of cost category.

Most importantly—beyond unlocking these resources, though—a key contributing factor is a new way of working. And it’s going to build a culture of cost management and an ownership mind-set so people are thinking very much along the lines of “why should I spend this dollar?” versus historically saying, “where can I cut?”

Simon London:  You talked at the top, Kyle, about incentives. What’s the role of incentives in this, and what do we mean? Is that giving department managers incentives to really take this seriously and building that into compensation?

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Kyle Hawke:  Every company has a few metrics in the incentive calculations for executives. And there’s always something around growth, and there’s always something around profit. But there’s rarely something around cost as an explicit metric. The assumption is that if we have growth and we have profits, then cost is in the middle of those two, and it takes care of itself. In zero-based budgeting, the mind-set or the approach is that cost is the one thing that managers have complete control over—especially fixed costs. And therefore we should incentivize managers, or measure the performance of managers, based on that as an explicit metric rather than an implicit metric by measuring the other two.

The clarity of ‘what we report and what we measure, we deliver’ is an aspect of accountability that you cannot do this without.

Jan Perkins:  Kyle, your comments on the operating profit are exactly right. Most P&L owners would say, “If I hit my operating-profit target, clearly I have met my cost targets also in overhead costs.” To hold us accountable to how much we’re spending, and the assessment of “is this dollar spend necessary,” you need to have cost built in as a separate metric.

The incentives can be tied to the operating profit or to the annual bonus. There are several ways to do it. But the clarity of “what we report and what we measure, we deliver” is a message and an aspect of accountability that you cannot do this without.

Simon London:  What are the other success factors, do you think, Kyle? When you look at the key things you have to get right here to do this well, what would you pick out?

Kyle Hawke:  I can think of five success factors. One is that you need to align the approach to the organization’s culture and objectives. This is not a one-size-fits-all approach, and there are many dimensions on how to customize it. For example, the level of focus that you have on reinvestment versus target setting or the degree of granularity in the budgeting are all choices that a company can make to make it fit for purpose.

A second success factor would be to have an intelligent approach to target setting. Not every dollar is created equal, and there are areas that you want to protect and invest in, which are aligned with the value drivers of the business. There are others that you want to eliminate completely or cut to the bone. And you need to be able to distinguish good dollars from bad dollars, or productive costs from unproductive costs, so that you can address them intelligently.

The third would be to have an equal focus on where to invest as there is on where to reduce. If you overemphasize the cost-reduction or the target-setting aspect, you have the risk of losing the organization along the way and having them believe that you’ve gone too far and you’ve swung the pendulum and you’ve forgotten about growth.

You need to have a serious and visible commitment from top management as you’re embedding the new ways of working.

But if you can engage the organization in identifying where to reinvest those dollars, it’s an incredibly inspiring moment for them to say, “That was hard, but it was worth it because we are able to do these things that we weren’t able to do before.” A fourth would be to focus on changing the mind-sets and behaviors in the frontline operators and not making it just a financial exercise or a productivity initiative. And then, finally, you need to have a serious and visible commitment from top management, especially during the activation phase as you’re embedding the new ways of working.

Simon London:  Say a little bit more about senior-leadership commitment. It’s something that we hear is necessary, of course, in any big transformational change. But for zero-based budgeting, what does it mean in practice?

Jan Perkins:  My experience was that the leadership commitment and role modeling were a critical success factor. You lead by example. Where that became very visible and impactful to the organization to start the cultural shift and the realization that things would be different, there would be a new way of working—it begins in the target-setting. Having a leadership team that’s committed to being decisive and aligned on where you’re going. Transformational on where they want to see things differently. Being committed to the idea that if it’s one policy, it fits and applies to all of us. So that’s walking the walk or leading by example.

We didn’t write policies where you had the haves and the have-nots—if you were this level or above, you could still retain this benefit or this service, and if you’re this level and below, you could not. If we really are going to be serious about the idea that every dollar matters, it matters no matter what level you’re at in the organization. It could be something as simple as the commitment, as with [one company’s] ZBB initiative, to use fewer printers and go paperless as much as possible. I would see executives come into the meetings and say, “Make sure you bring your laptop or put a projector in the room because we’re not printing out copies.” And as soon as you had an executive once or twice say, “No, thank you, I don’t want that copy,” it didn’t take long at all before everybody got that message. Just small examples like those would contribute to showing that we’re serious in a new way of working. And it’s going to take some of the monies we used to spend and redirect them or allow us to redirect them and grow the business.

Communication also was critical. Leaders needed to continually communicate to employees, talking to them along the way. “Here’s what we’re looking at. Here’s what we’re changing. Here’s what it means.” Having the leadership be seen as the ones committed to that and sharing the message. People would hear that message being shared by the leadership and say, “Wow, they are serious about this, and this is going to be a new way of working. If they’re going to adhere to the policy, I guess I shouldn’t ask for an exception to the policy.”

That was not an easy thing for them to swallow and say, “Yeah, OK, we’re going to give up all of these benefits also because we’re on the team.” If there was a particular cost category that we were going after really aggressively, there was the ability to say, “Let’s collect data. Let’s stay fact based. Let’s accumulate information on whether we think this is inhibiting us to be successful. So if after nine months, 12 months, this policy is punitive or it’s not supportive of where we’re going, let’s agree that we can change it.” Once we did that, you had more leaders saying, “OK, I can get on board with that. Let’s try it. Let’s do it. Let’s collect the data.”

Zero-based budgeting—The dos and don’ts of lasting change

Kyle Hawke:  It sounds like there was a willingness to test and learn that may not have existed in other programs.

Jan Perkins:  Yes, and to be fact based about it. It wasn’t hearsay and sound bites; the willingness to do it was based on “collect the data. Let’s see the real facts. And then let’s continue to be decisive moving forward.” That was a significant cultural shift and very eye opening, on several cost categories, to get us to where we needed to be.

Kyle Hawke:  Are there other ways that leaders can role-model—just in terms of the questions that they ask, for example?

Jan Perkins:  Part of the success of the total zero-based-budgeting transformation is to help them be strong leaders so that they can learn how to approach things differently and then teach their teams and their managers how to approach things differently. How do you handle all these constant confrontations and conflicts in negotiations? When you go about assessing a cost category or looking at it, what are the right questions to ask? How do you assess whether this spend is necessary? What do I do with a very strong-willed manager who says, you know, “Life will end if we can’t have this spend”?

And sometimes just giving the managers the words, or even the sales reps. “How do I talk to my clients and my customers now when I have this new meal allowance I have to adhere to?” You can say to them, “Let’s role-play a little” and talk about how do you explain to them that “this is where the company’s going. And here’s why. It’s because we will now have this money to invest in these things that will grow both our businesses.” Openness and willingness to have those dialogues were huge learning opportunities and gave us the foundation to build on to shift the culture.

Simon London:  Something I read about in the literature is around having dual cost ownership or dual category ownership. I think that’s a really interesting idea. So, Jan, what does that mean in practice? And how does it help?

Jan Perkins:  The dual ownership of cost categories is extremely interesting, and it’s hard, initially, to get your head around how that’s going to work. As you talk to the leadership that owns a P&L, not only are you now, from a ZBB standpoint, analyzing all of the dollars being spent, you’re also introducing another layer of governance looking over leaders’ shoulders, making sure that they are adhering to the targets and the spend.

My experience was that dual ownership was met with some resistance initially, and it didn’t work as well as we had hoped. Trying to understand the culture of the company and where the leadership was in the acceptance and acknowledgment of it, we stepped back and redesigned it. The leadership team needed to step right in and be the ones who did the cross-category ownership.

You would have a president of a business unit who had a complete P&L that they were accountable for but also oversaw the spending in a certain category. Inventory write-off is a cost category and something that, transformationally, you were looking to make some significant headway in the processes to, over time, reduce it dramatically.

That particular business-unit president would oversee that across the organization. They would have conversations with other business-unit owners, other supply-chain leaders, and anybody who was contributing to that overall spend as to how they were progressing, why they were off target, what things were being done to address getting back on target, and what help they might need to get there. Once we got to the point where the leaders were the ones accountable for help in overseeing, by cost category, it was much more impactful. Plus, they knew they had the resources under them to support that from a visibility and a governance standpoint.

Kyle Hawke:  I talked earlier about this idea of adapting the approach to the company’s culture and objectives. One of the ways to adapt the approach is to design this cost category on a role to be fit for purpose. So there’s a spectrum of ownership that we see with our clients that can vary over time, and it can also vary by area of the business or cost category.

On the far left, you have this individual playing the role of a coach. And on the far right, you have this individual playing the role of a co-owner. A coach is there to inform or guide and help share best practices. A co-owner is designed to do all that but also to have joint accountability for, and a say in, the spend decisions in that area.

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Simon London:  This whole part of the conversation has brought home to me again that zero-based budgeting is not for the faint hearted. It does involve quite significant changes in the way that people work, including the executive team. So, Kyle, you must talk to a lot of companies about zero-based budgeting. How do you know, and how do they know, that they’re ready to commit to something like this?

Kyle Hawke:  So I definitely talk to a lot of clients on this topic. And I would say that, for every client I have the opportunity to serve, there are probably ten where we have the conversation and we explore it, and then we mutually agree that a ZBB approach is not for them. And this can be for many reasons, but oftentimes it is because there is just not the leadership commitment at the moment to drive it. That’s OK because there are other approaches that you can take that are probably more fit for purpose, and they don’t need to go all-in to really focus on changing the ways of working.

You have to engage not just the senior leadership but also these influencers who are not necessarily at the top levels of the organization.

Simon London:  For the one in ten where you do decide jointly to move forward with a commitment to zero-based budgeting, what can you do? And what can the executives do themselves to get ready to get this off the ground successfully?

Kyle Hawke:  The first is to help senior leaders write their own personal change stories. This is their own interpretation or words of why the company is embarking on this journey and what it means for them personally. They can then use this change story to communicate and cascade with their team in a much more personal way rather than taking a script that somebody else gave to them.

The second is identifying other influencers across the organization. So you have to engage not just the senior leadership but also these influencers who are not necessarily at the top levels of the organization.

The third thing is something we’ve talked quite a bit about today, which is helping leaders role-model the new, very visible behaviors . Whether that’s dropping the gold-plated IT service desk that was previously exclusive to the leadership team or just simply asking the right questions to the organization around what would it take to get there, it’s helping them role-model those behaviors because we have seen that to be so critical.

Then, fourth would be cocreating the answer with employees rather than simply handing it down as a mandate. And this is incredibly important to drive conviction in the targets and that, yes, there is a way to get there. So that when you go start to build up from zero, you actually have a path on how you’re going to achieve it rather than a bunch of plugs in the budget that you need to figure out throughout the year.

Simon London:  Anything you would add to that list, Jan?

Jan Perkins:  The other piece, once you do agree to go into this journey—and as Kyle mentioned, giving each senior leader a personal message—is incorporating in that a knowledge and a foundation on where the organization has been. There’s no organization out there that hasn’t already been through some productivity initiative and isn’t going to be skeptical coming into this right off the bat.

So helping them relate to that, why would this initiative be different? Also, taking into consideration the company’s culture and what is it that’s going to help make this successful? And how you can get them to that point of being fact based and addressing some of the emotional reactions are really key.

Simon London:  So I think that’s all we have time for today. But, Kyle and Jan, thank you so much. That was really interesting.

Jan Perkins:  Absolutely. Thank you for the opportunity.

Kyle Hawke:  Thanks, Simon.

Simon London:  And thanks to you, our listeners, for tuning in. To learn more about our work in zero-based budgeting, finance, growth, and organizational change, please visit us at McKinsey.com.

Kyle Hawke is a partner in McKinsey’s Washington, DC, office, and Jan Perkins is a senior adviser to McKinsey. Simon London, a member of McKinsey Publishing, is based in the Silicon Valley office.

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Why zero-based budgeting makes sense again

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What Is Zero-Based Budgeting?

If you’re looking to save money, you may be interested in what’s known as the zero-based budget (ZBB), or zero-sum budget. This means allocating all of your monthly income to various expenses, including basic needs like food and rent, as well as savings and paying off existing debt. Allocating 100% of your monthly income doesn’t mean spending all your money every month, nor does it mean you have to put it all in savings either. It just means you have a plan for every cent you make. Learn more about this method of budgeting and how it can help you improve your finances.

• The zero-based budgeting approach allocates all your income towards various expense, spending and saving categories. This approach may be easier for those who have predictable, regular incomes.
• In a zero-based budget, your expenses, spending and savings should add up to 100% of your take-home income. (All of your income should be accounted for, you shouldn’t have “left-over” money.)

LESSON CONTENTS

What does a zero-based budget look like.

Using this system means all your expenses must be justified. Instead of spending without a plan, you will plan out every expense ahead of time so that every cent is accounted for. Aside from your regular monthly expenses, you get to decide where you put your money. You may allocate 10% of your earnings to entertainment, shopping and eating out, while putting 10% in savings. This helps you manage your finances, so you don’t spend too much or forget to save for the future.

You can break down your earnings as follows:

• 30% on rent or housing.
• 20% on food.
• 5% on transportation.
• 5% on utilities.
• 10% on entertainment.
• 10% in savings.
• 10% on debt.
• 5% on spontaneous spending.
• 5% for emergencies.

You can also try the 50/30/20 model. This means spending 50% of your income on essentials like housing and food, leaving 30% for your wants, such as fun and entertainment and putting 20% in savings or towards existing debt.

How to Make the ZBB Budget Work for You

As you can see, you can design a zero-based budget that works for your unique lifestyle. All these categories should add up to 100% of your monthly earnings. Place each category on a separate line item. Leave yourself some wiggle room in case things change from month to month. For example, if you think utilities normally account for 10% of your monthly income, you may want to allocate 15% of your income to utilities in case you use more, or utility costs increase.

Under this model, you will have a certain amount of money set aside for fun and indulgences. You don’t have to second-guess yourself when going out for dinner or deciding whether to go to the movies. Once you surpass this self-imposed cap, it’s time to stop spending in this category until the next month.

You can transfer a certain portion of your monthly paycheck into savings or pay off your debts at the beginning of the month, so you’re not tempted to spend more than your budget allows.

Some people prefer to take out cash for fun and spontaneous expenses. This limits the amount of money you can spend when going out on the town or hanging out with friends.

You can also try the envelope model, which means putting cash in a series of envelopes earmarked for different purposes. This forces you to physically separate your money, so you don’t spend more than you should.

Don’t forget about seasonal expenses, holiday celebrations, gifts and other expenses that can come unexpectedly. You may want to put more in savings or create a special category for these items.

If you are looking to save up for a car or house, to go back to school or some other major purchase , create a special sub-category when putting your money into savings so you can track how much you’re saving every month.

How Zero-Based Budgeting Starts

If you decide that the zero-based budgeting process is right for you, use this guide to get started.

First, go through your finances to find out how much you make every month. If you do freelance work or don’t receive a steady paycheck, add up how much you made over the last 12 months and divide that number by 12 to calculate your average monthly earnings.

Once you have your monthly earnings, create a list of all your required monthly expenses, including rent, food, utilities, cell phone, internet, health insurance and other basic necessities. Leave out anything unessential until the very end. Ideally, these required expenses add up to around 50% of your monthly income.

Next, you’ll need to decide how you want to use your remaining income. Dedicate a certain portion to paying off your existing debt, such as student loan payments and credit card debt. These payments should be your first priority after your basic necessities.

Now, add the things you like to do every month, such as going out to eat, Netflix and other recreational expenses.

Try to put at least 15%-20% of your earnings into a savings account , retirement account, 401(k) or emergency fund.

You can always adjust these percentages and categories from month to month, as they’re not set in stone. The ZBB process is designed to keep you in control of your finances, so tinker with them as you see fit or as your finances change.

Pros and Cons of the ZBB Budgeting Approach

The zero-based model isn’t right for everyone. As you can see, it can be time-consuming compared to traditional budgeting. You can always use Excel   and other spreadsheet programs to simplify the process. The ZBB also leaves little to the unexpected. It may start to feel a bit monotonous, but you can always budget more for the unexpected if you like to go with the flow. This model is also designed for those with predictable income models. You may have trouble keeping pace with your budget if you get paid at different times and varying amounts.

You don’t have to be rigid with your ZBB by calculating the exact dollars and cents. Use estimates and rough percentages to save time every month. The budget will start to become routine over time, so it may not require as much work as you think.

Use this approach to stay in control of your finances. The ZBB model can be as flexible or rigid as you want. It’s all about making your money work for you.

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Money Tips & Education

Zero-based budgeting

Feb 22, 2024

Rebecca Lake

Reviewed by

James Heflin

Key takeaways:

Zero-based budgeting gives every dollar of income a job.

The goal is to be intentional with your money, no matter how you choose to use it.

A zero-based budget could help you direct more dollars to debt repayment before you spend them on things that are less important to you.

Leveling up your money management is a great thing, especially if you've got goals. 

Zero-based budgeting could help you optimize your finances (that’s a fancy way of saying that it makes you the boss of your bucks). You get to decide which expenses serve you—and put all of your money toward those things. You’re not just watching the game. You’re making strategic plays with the goal of winning.

Let’s dive into how it works.

What is zero-based budgeting?

Zero-based budgeting is a system that applies your income to one of three categories: expenses, savings, or debt repayment. The goal of a zero-based budget (sometimes called a “zero-base budget”) is to have nothing left over at the end of the month. 

This kind of budget can help you be more intentional with your money. Since you have to give every dollar a job, you’ll know where all of your money goes. 

Traditional ways of budgeting usually don’t require you to account for every dollar. The flexibility can be nice, but it’s easier to spend leftover income instead of saving it or paying down debt. Zero-base budgeting avoids that, because after subtracting expenses, savings, and debt repayment from your income, you should be left with zero. 

That's not the same thing as living paycheck-to-paycheck (as in, you only have enough money to cover expenses until you get paid again). Zero-based budgeting means planning out what to do with your paychecks, so that you meet all your needs and work toward your goals. 

Benefits of zero-based budgeting

Following a zero-based budget could help you take control of your money , because you have to find the best way to use your income. If there's only so much money coming in, you have to be deliberate about prioritizing expenses. Needs come first, then savings and debt repayment, then wants. 

A zero-based budget can help you cut down on impulse purchases and unnecessary spending. You can take the money you would have spent and put it toward basic needs, allocate it to savings, or chip away at credit cards or other kinds of debt. 

If you've struggled with sticking to your budget , a zero-base budget system could help you take charge of your finances. Zero-based budgeting might not work for everyone, but if you like to dig into the numbers and set rules for spending, it can be a good fit. 

Step-by-step guide to zero-based budgeting

Making a zero-base budget is usually the most challenging when you're doing it for the first time. Once you get into the habit, it becomes easier. 

Here's how the budgeting process works. 

Add up your income. Zero-based budgeting starts with knowing how much money you’re working with. “Income” includes any money that comes in regularly. You might make money from a part-time or full-time job, side hustles, or gig work. Child support and alimony could also go here.

List your expenses. List everything you spend money on, including necessities like rent or mortgage payments, utilities, and groceries, as well as non-essentials like clothes or dinners out. You’ll rank your expenses, with needs at the top. You’re not just scrutinizing your expenses to make sure you can afford them. You’re also deciding whether each expense moves you closer to where you want to be.

Pro tip: If you need to know what you're spending each month, consider using a free budgeting app to keep track. You can sync the app to your bank account to easily record where your money goes. 

Decide how much to apply to savings. The zero-based budget method includes room for saving, so think about your financial goals. If you want to build a $10,000 emergency fund, for example, figure out how much you could put toward that goal each month. 

Calculate how much should go to paying down debt. Look at what you're already paying. Then ask yourself how much you need to pay to hit your goal. For example, say you want to pay off a credit card that has a $10,000 balance and a 17% APR over the next 12 months. You would need to budget about $912 per month to reach that goal. Whether that's realistic depends on how much money you've already allocated to expenses and savings in your budget. 

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Pro tip: A debt consolidation loan could be a good strategy to get rid of your debt, especially if you can get a lower interest rate. 

Assign each dollar of income. Once you've identified your expenses, savings goals, and debt repayment goals , the last step is allocation. Here, you take the income number you calculated in step one and decide where every dollar of it goes. This is usually the most time-consuming part of making a zero-based budget, because you go through each budget category in detail. 

Tips for a successful zero-based budget

Making a zero-based budget is pretty straightforward, but often, the challenge is sticking to it. Here are a few tips for a successful budgeting journey. 

Review your expenses before getting started. Switching to a zero-based budget will only take you so far if you don't know what you're spending money on. It's helpful to go over your spending for the previous three to six months. That can give you a good idea of how you spend, so you know which budget categories to include. 

Account for irregular expenses. Some expenses might get paid periodically, rather than monthly. For example, you might pay car insurance premiums twice a year. The best way to account for those expenses is to include saving for them as a line item in your budget. That way, you’ll have the cash to cover them when they're due. 

Get a month ahead. If you can, getting a month ahead on bills can give you some breathing room, in case your income drops or you run into a higher-than-expected expense. If you have money in savings, you could use that to pay bills ahead. If not, you might tweak your zero-base budget to apply extra money to bills and a little less to savings or wants. 

Plan budget dates. Zero-based budgeting isn't “set it and forget it.” Review your budget at least monthly to make any adjustments to your spending plan if needed. You might schedule your budget dates around the times you get your paychecks to make dividing up your income easier. 

Reward yourself. Last but not least, remember why you're budgeting in the first place, and reward yourself when you get a win. If you come in under-budget, for instance, you could give yourself a small treat with some of the leftover cash, and put the rest toward your financial goals . That can help you stay motivated to stick with your zero-based budget plan. 

Author Information

Rebecca is a senior contributing writer and debt expert. She's a Certified Educator in Personal Finance and a banking expert for Forbes Advisor. In addition to writing for online publications, Rebecca owns a personal finance website dedicated to teaching women how to take control of their money.

James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.

Frequently asked questions

Can I do a zero-based budget with irregular income?

Making a zero-based budget work with irregular income is possible, but it might take a little more work since you have to adjust to changes. For example, say you have $7,000 in income one month and $3,000 the next. You might need to adjust your savings and debt repayment goals the second month to cover basic expenses.

Can zero-based budgeting help if I'm in debt?

Zero-base budgeting can help with debt, since you include debt repayment in your budget as a line item. You can decide how much of your income should go to debt each month, based on what you need to cover your basic expenses and how much you plan to save. Zero-based budgeting can also help you avoid adding to your debt since there's less room to overspend. 

How hard is it to do a zero-based budget? 

Though it isn’t extremely hard, making a zero-based budget takes more work than other methods since you have to analyze everything you spend money on. But if you don't mind taking a little extra time to map out your spending each month, it can definitely be worth the effort.

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• August 10, 2021

A Comprehensive Guide to Higher Education Budgeting Models

• --> Written by Lena Eisenstein

Since the 1980s, college tuition and fees have risen nearly twice as fast as inflation. That fact might lead some to believe tuition funds are the driving force behind budgets for higher education institutions, but that’s false. Tuition costs only cover about 20% for public institutions and 32% of college costs for private nonprofit schools. Private for-profit higher education institutions fare better, however, tuition costs only cover 91% of the total college costs.

Higher education institutions have always struggled to balance income and expenses. In recent times, our unstable economy and COVID-19 have exacerbated problems further. Despite what’s generating the financial challenges, higher education boards are accountable for the institution’s financial health.

Higher education budgeting models are rarely pure and simplistic. More often, boards opt for a hybrid model that offers a range of ways to allocate funds for different sources of revenue and expenses. Whichever budgeting model your board chooses, it forms the basis for making high-stakes decisions.

To that end, we’re providing a comprehensive guide to higher education budgeting models for your review.

Understanding Higher Education Budgeting

Budgeting for higher education institutions provides a way for boards to align their resources with their priorities. A budget brings all the institution’s income and expenses into a central place to give the board the full scope of revenue and spending.

Higher education budgeting models outline how institutions organize their costs and revenues. A budget highlights an institution’s ambitions and exposes its limitations. What’s more budgeting also enables boards to calculate overhead and apportion funds for expenses responsibly.

Various higher education models have a few things in common. At the same time, some very important things separate them. Regardless of the budgeting model or models a college or university chooses, it’s essential to align the budgeting model with its mission.

The following six budgeting models in higher education provide an overview of the various ways of managing the higher education institution budget.

Six Higher Education Budgeting Models

Centralized budgeting.

With the centralized budgeting model, upper-level administrators have the decision-making power. It’s common for boards to use centralized budgeting along with decentralized budgeting.

One of the benefits of a centralized budgeting system is it’s easier for boards to address difficult financial circumstances. It’s a good system for managing known costs for necessary expenses. An example of this would be using the budget to control costs for purchasing computer equipment, software, printers, etc. which are known expenses. The downside to centralized budgeting is that some departments may be less motivated to generate revenue via grants and other revenues to cover some of their own expenses.

Performance-Based Budgeting

Colleges and universities that use a performance-based budgeting model award funds based on performance. This type of budget outlines how the institution allocates day-to-day tasks and activities. The plan describes how those same activities should generate specific outcomes, as well as what the expected outcomes need to be to receive funding. The benefit to this model is its transparency. Yet, some boards may give it a thumbs down because it requires them to spend a good deal of time reviewing performance measures.

Incremental Budgeting

Incremental budgeting is a traditional college budgeting model where the board bases budget proposals and allocations on the figures from the previous year. The board only allocates revenue from new sources. When budget cuts are imminent, board committees typically recommend making budget cuts across all departments. Many boards like the incremental budgeting model because it’s stable and easy to implement. Due to its predictability, it’s a good choice for boards that like to plan for future year budgets. If there’s a downside to incremental budgeting, it can be hard for boards to know where costs are coming from and how those costs contribute to revenue and value creation.

Zero-Based Budget

A zero-based budgeting model is much like it sounds. Before planning the new budget, the board wipes away the previous year’s budget. Every year, all departments make a bid for their funding needs and they’re required to justify their expenses. One of the biggest positives of a zero-based budget is that it helps the board to control unnecessary costs. University departments have to be intentional about their spending and prevent waste as much as possible. On a negative note, zero-based budgets take a lot of time to prepare, and they can be too unwieldy for some boards.

Activity-Based Budgeting

With activity-based budgets, the goal is for boards to get the greatest return on revenue for the institution. This model works to separate some of the indirect costs from direct costs. Indirect costs refer to basic higher education activities such as library services, educational technology, advising, etc. This approach can make it difficult to allocate for general activities such as security, disability services, etc. On a positive note, activity-based budgeting enables boards to strategically align resources to their overall objectives. The negative aspect of the activity-based budgeting model is it requires input from campus leaders and constituents, and it takes up a significant amount of the board’s time and resources. These issues make it less attractive for some boards than other budgeting models.

Responsibility Center Management

In some ways, Responsibility Center Management (RCM) more closely resembles a management philosophy rather than a budgeting strategy. By design, this model promotes academic achievement within an institution. The budget is designed to support that goal. This model gives operational authority to various divisions, schools, or other units within an institution and charges them with prioritizing their academic goals. Each unit receives its own income and tuition, enabling it to compete for student enrollment. Also, each unit is required to pay its own expenses and contribute a portion of its income to the university’s general operating expenses.

The board distributes government support for each unit. Since each unit has to be proactively involved in budgeting, some advocates of this model believe that it motivates deans to hunt down new sources of revenue which helps the institution overall.

Just as students struggle to manage college expenses, higher education institutions struggle with how to budget for the best outcomes for students. In a nutshell, the right budgeting model is mission-focused and helps higher education institutions reach their goals.

BoardEffect ’s board management system is a valuable tool for managing all higher education institution board activities including the budget. BoardEffect provides a secure platform for budgeting committee work and board approvals. Board members can access all documents and communications related to the budget and all other board business using their secure login credentials. It’s an efficient board management solution for higher education boards and nonprofits.

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What is Zero-based budgeting?

For school districts looking for a more comprehensive method to decide whether to maintain, build, eliminate or introduce programs that support student achievement, ZBB can help align funding to students and programs.

In most districts, the budget process begins with a roll-forward of the current budget and is adjusted for any known changes (i.e., employee compensation, benefit and pension rates, planned contract increases). In short, the budget of tomorrow is a product of the budget of today. With traditional budgeting strategies, there is often less scrutiny during the budget process as the numbers are merely tweaked to meet the needs of the next fiscal year without a comprehensive review.

One of the increasingly adopted methods is that of “zero-based budgeting” (ZBB). The premise of ZBB is that each individual budget in the district is built from scratch; forcing decision leaders and budget owners to justify their existing and new spending according to district criteria. This budgeting strategy allows department heads to identify alternative ways to utilize resources and is often used as an opportunity to reflect on district goals, programs, and needs that require improvement or support.

With this method, every expense is justified and every function within an organization is analyzed for its needs and costs. It can help districts provide context and detail to their expenditures, and lead to significant improvement in both spending and student achievement. However, this method requires a considerable amount of staff time and planning for development, and can be tedious and time-consuming for large districts with thousands of budget items.

Pros of ZBB

• Greatly reduces overspending because considerable thought is put into each request
• Site-level participation can be increased to include additional stakeholders
• Budget justification increases transparency and public confidence
• Outdated allocation methods are discarded
• Programmatic spending can be linked to student achievement or district success

Cons of ZBB

• Time and research intensive
• Lack of financial expertise at the school level
• School and department leaders may feel great pressure to spend less than needed
• Requests for funds are often denied based on lack of research or adequate justification

If the task of building every budget from the ground up seems too overwhelming, consider implementing a rotational ZBB process whereby budgets are divided into 3 to 4 cohorts. Every 3 to 4 years each cohort goes through a full zero-based budgeting process and during the “off years” budgets are planned in a more traditional way. This approach still allows district stakeholders to reap the benefits of a detailed budget review, while significantly reducing the burden of reviewing and prioritizing every line in every budget.

As districts look for financial models to budget for student and site-level success, it’s critical to vet each model and decide which one works for you and your constituents. Zero-based budgeting is a proven model that requires a profound level of financial understanding, school board buy-in, and stakeholder support.

ABOUT THE AUTHOR

Allovue works with districts and state departments of education across the country to allocate, budget, and manage spending. Allovue's software suite integrates seamlessly with existing accounting systems to make sure every dollar works for every student. Allovue also provides additional services such as chart of accounts and funding formula revisions.

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Are You Retirement Ready?

Table of contents.

Zero-based budgeting is a method of budgeting that starts each department's budget at "zero"and requires each line of a business's expenses to be justified.

This budgeting method stands in contrast with traditional budgeting, which relies on past budgets and only justifies changes to historical budgets.

The term "zero-based budgeting" originated from Peter Pyrrh's 1970s book, Zero Based Budgeting: A Practical Management Tool for Evaluating Expenses, however the term has taken on a new meaning in personal finance in recent years thanks to Dave Ramsey.

When used in a personal budgeting setting, ZBB means that every dollar of one's income must be assigned, bringing the total unassigned dollars to "zero."

If there is money left over after all of the essentials are budgeted for, this money needs to be diverted to debt repayment, savings, or investment account .

The Steps of Zero-Based Budgeting

While zero-based budgeting is a useful tool for both businesses and personal use, the steps to implementing it are a little different. Companies should follow these steps:

• Step One - Start with Zero: Don't look at last year's or last quarter 's spending as a guide.
• Step Two - Set Goals: Which costs will help your company reach their income and growth goals for this new year?
• Step Three - Prioritize and Justify Spending: Not only does each expense need to have a purpose, but a business needs to give priority to expenditures that will have the most impact on their goals.

Personal Budget Steps

For a personal budget, the steps would be:

• Step One - Start with Your Income: Begin with the funds that you are guaranteed to start your zero-based budgeting plan.
• Step Two - Prioritize Essentials: Your rent or mortgage , food, utilities, and transportation expenses should be the first items deducted. Remember to plan for the new month. For example, if the holidays are coming, expect to spend more on food or transportation, depending on your plans.
• Step Three - Justify Other Spending: Once your essentials are covered, decide which other expenses are a good fit for your lifestyle and financial goals. If you love your costly gym membership, you don't necessarily have to get rid of it. However, if you do not have money to pay debt minimums or to add to savings, a costly gym membership might not be justified.
• Step Four - Don't Forget to Plan Ahead: Some months come with predictable spending increases, such as when your property tax is due or buying gifts and decor for a holiday. Don't let these predictable expenses derail your budget. Plan to set aside a little bit of money into a separate fund each month when you justify your expenses.

Zero-Based Budgeting vs. Incremental Budgeting

Many businesses rely on the past year's expenses to establish a budget for the new year.

They also account for a small percentage increase to cover employee wage increases and inflation . While traditional budgeting is faster than ZBB, it can also leave gaps for business growth and savings.

Incremental or traditional budgeting would blankly say, "We spent $50,000 on advertising last year, that is how much we are going to spend this year."

This might be a futile way of spending if the company's growth goals would benefit from spending on an app or product development more than advertising.

Similarly, traditional personal budgeting looks at past spending to determine future expenditures. With a traditional budget, a person might say, "I always spend $500 on food, that is how much I will spend this month."

However, this person did not consider that they would have increased food expenses this month due to hosting guests for an extended time.

Example of Zero-Based Budgeting

Let's use a locally-run coffee shop as an example of how zero-based budgeting can work with small businesses and large businesses.

Some yearly expenses a small coffee shop might have include:

Products: $12,000 5 Part-time Employees: $90,000 Rent and Utilities: $40,000 Advertisement: $4,000 Insurance: $4,000 Total: $150,000

If this business just repeated its budget each year based on past spending, it would miss many savings and growth opportunities.

For example, maybe this coffee shop got more involved with social media with the help of an eager employee, or they agree to give away coffee coupons to listeners of a local radio station. This could drive down their advertising cost to $2,000.

Similarly, a new local bakery opening up in town might give this coffee shop an opportunity to reduce product costs while displaying new baked goods for sale .

While this is a simplified zero-based budgeting example, the principles are the same for all businesses.

It is the practice of researching and justifying how much to spend on specific business needs rather than blindly assigning a number to them.

Zero-Based Budgeting Pros and Cons

Not sure if zero-based budgeting is right for your business or personal finances?

Here are the top advantages and disadvantages of ZBB.

• A Thorough Look at Spending: Since ZBB looks at every expenditure on a granular level, it is easier to find which expenses have been misclassified or misspent in the past.
• Savings Potential: While the primary goal of ZBB is to give every dollar a job, budgeting this way can save money since no funds are wasted. Unlike traditional budgeting, companies and individuals aren't left wondering where the money went and how they can cut back expenses.
• Growth Potential: Zero-based budgeting allows individuals and businesses to prioritize goals and devote the right funds to these goals.
• Time-Intensive: Whether creating a zero-based budget for yourself or your company, this type of budget will take longer to produce. You will also be researching cost-saving and income-growing methods before you assign a budget to each spending category.
• Focuses on Short Term: Ideally, businesses would be able to implement ZBB while hitting growth goals. However, it is possible to get stuck in short-term spending versus long-term investing and growth with this budgeting model.

Zero-Based Budgeting Final Thoughts

Zero-based budgeting is not the perfect solution for every business or individual, but it is a reliable tool that can help many save money and better allocate their funds.

Zero-Based Budgeting (ZBB) Method FAQs

What does the acronym zbb stand for.

ZBB stands for zero-based budgeting.

What is Zero-Based-Budgeting?

Zero-based budgeting is a method of budgeting that starts each department’s budget at “zero” and requires each line of a business’s expenses to be justified.

Where did Zero-Based-Budgeting come from?

The term “zero-based budgeting” originated from Peter Pyrrh’s 1970s book, Zero Based Budgeting: A Practical Management Tool for evaluating expenses. The term has taken on a new meaning in personal finance in recent years thanks to radio personality Dave Ramsey.

What are the steps for a company to implement Zero-Based-Budgeting?

For a company, zero-based-budgeting should follow these steps: 1) Start with zero and don’t look at last year’s or last quarter’s spending as a guide; 2) Set goals to determine which costs will help your company achieve them; 3) Prioritize and justify spending in order that each expense has a purpose and there is a priority on expenditures that will have the most impact.

What are the steps for an individual to implement Zero-Based-Budgeting?

For a personal zero-based-budget, here are the steps: 1) Start with your income; 2) Prioritize essentials like rent or mortgage, food, utilities, and transportation expenses; 3) Justify other spending once your essentials are covered, decide which other expenses are a good fit for your lifestyle and financial goals.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Models for Planning and Budgeting in Higher Education

• First Online: 10 September 2021

Cite this chapter

• Zilla Sinuany-Stern 5  

Part of the book series: International Series in Operations Research & Management Science ((ISOR,volume 309))

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The budget of an organization reflects its plan in monetary terms over a given period—usually for a year. This chapter is devoted to planning and budgeting in higher education (HE). We present various budgeting procedures, such as incremental budgeting, along with costing methods in HE institutions (HEIs). A variety of optimization models with budget constraints and bounds on the allocations to organizational units are given, where the bounds are a result of the planning process and past budgets. We present linear and nonlinear objective functions (quadratic), with and without constraints, intertwined with a simulation scheme in an HEI. The optimization models are presented in a single and multilevel hierarchy, and over time. Moreover, several aggregative long-run financial models are presented. We conclude that the quadratic model fits HE better than the linear model since it provides allocations around the midpoints of the upper and lower bounds of the allocations rather than the extreme linear model’s allocation. We determine that the quadratic model procedure is preferred, as its optimal solution is intuitive and does not require mathematical formulation and skills. Moreover, the relationship between the mathematical models and known budgeting procedures are analyzed, and we conclude that the optimization/simulation scheme described here results in a combination of several budgeting procedures—as actually happens in practice.

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Zilla Sinuany-Stern

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Appendix 1: Summary of the Literature on Planning and Budgeting in HE

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Appendix 2: Example for Linear and Quadratic Budget Allocation Modes

Assume we have 6 schools in a university. The first 3 columns of Table 9.4 present the number of students, the upper and lower bounds of the allocations to the schools, where the lower bounds are based on cost analyses, where the upper bounds are the requests of the schools. The schools are ordered according to their number of students.

Under budget constraint and bounds constraints : the linear model allocates to the first four schools their upper bound and to the other schools, with a lower number of students, only their lower bound is allocated, as shown in the fifth column, according to model 1c in Table 9.1 . First, the lower bounds are allocated to each school, afterwards the first schools get addition to their upper bound are reached till the budget is finished, the rest of the schools do not get any additional budget beyond their lower bound.

While the quadratic model allocates between the bounds according to model 2c in Table 9.2 not exactly in the middle of the midpoint, as shown in the seventh column. After initial allocations in the midpoints, the leftover added to each school proportionally to their number of students.

When there are no budget constraints, but there are bound constraints , then in the linear model, each school receives its upper bound, according to model 1d, as shown in Column 6.

While the quadratic model allocation to each school is in the midpoint between the bounds, as shown in Column 8. To simplify the calculation the president of the university can set the budget to be allocated according to the eighth column with a total of $73,800,000, and leave the leftover $200,000 (74,000,000 − 73,800,000) for unforeseen costs.

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Sinuany-Stern, Z. (2021). Models for Planning and Budgeting in Higher Education. In: Sinuany-Stern, Z. (eds) Handbook of Operations Research and Management Science in Higher Education. International Series in Operations Research & Management Science, vol 309. Springer, Cham. https://doi.org/10.1007/978-3-030-74051-1_9

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