What is the difference between traditional budgeting and zero-based budgeting?

The difference between traditional budgeting and zero-based budgeting is that traditional budgeting focuses on using the previous month’s budget as a starting point, while zero-based budgeting emphasizes starting your budget from scratch and requires you to justify every expense. Each method offers different benefits.

Traditional budgeting can help make budgeting easier for those whose income and expenses largely stay the same, while zero-based budgeting can help ensure your budget matches up with your current spending and income, since you are starting from zero and assigning every dollar of your income to a specific expense.

Traditional budgeting is a term that is mainly used by businesses and government organizations. It is essentially synonymous with incremental budgeting. The strategy can still be applied to personal finance, though.

Zero-based Budgeting vs. Traditional Budgeting

Since zero-based budgeting requires you to give every dollar of your income a purpose, it forces you to be more intentional with your spending so you can avoid unnecessary purchases. Traditional budgeting may lead to wasteful spending since you are relying on the previous month’s budget and may not be reallocating your income to match your current needs. But the fact that you don’t have to review and justify every expense before adding it to your budget means traditional budgeting takes much less time than zero-based budgeting.

Zero-Based Budgeting vs. Other Popular Personal Budgeting Strategies

There are many different types of traditional budgeting strategies to choose from, and two of the most popular are the 50/30/20 rule and envelope budgeting. These methods may not be as involved as zero-based budgeting, so if you don’t have enough time to make a new budget every month, these strategies may be better for you.

• The 50/30/20 rule requires you to allocate 50% of your income to necessary expenses, 30% to discretionary spending and 20% to savings.
• With envelope budgeting, you group your expenses into categories and set a limit for how much to spend on each category for the month. Envelope budgeting gets its name from the practice of putting cash in physical envelopes to use for each of your spending categories, but you can do it digitally instead.

What sets zero-based budgeting apart is that you have to set up your budget so that subtracting your expenses from your income will always equal zero. Other strategies don’t have this requirement, so you may spend more or less than you budgeted for and have some funds left over or exceed your budget at the end of the month.

To learn more, check out WalletHub’s guides on zero-based budgeting and the best budget apps. WalletHub offers multiple strategies to choose from to create your budget, unlike most other budgeting apps. You can choose to do simple budgeting with your income and expenses only or base your budget on the 50/30/20 rule, the pay-yourself-first method, envelope budgeting, or micro-envelope budgeting. You can also do zero-based budgeting by referencing the “Remaining” field in your WalletHub budget summary.