During the Covid lockdown, I learnt a new term called Zero based budgeting. Here is how Investopedia defines it:

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a “zero base,” and every function within an organization is analyzed for its needs and costs. The budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

– Investopedia

Normally company budgets are made with last year’s budgets for reference. Department A which got $1 M and spent all of it, would get $1.1 M; Department B which also had a budget of $1 M but spend $0.9 M may get only $0.9 M this year and so on. (I have never been in on a budgeting exercise but I am building a picture based on hearsay.)

But when you apply Zero based budgeting, it is assumed that both will get $0 M. And then they have to justify why they need a higher budget. For example, if A says I need $ 200 K for trainings, then A will be asked if it can instead do it online at a lower cost. Likewise if B says, it wants $200 K for travel, it will be questioned if it can cut down travel drastically by meeting virtually instead.

We all tend to anchor to one thing or another. In a normal year, departments are anchored to past year’s budgets without much questioning. But in Zero based budgeting – the anchor is $ 0; all assumptions are out and every items of the budget will be questioned and only those items that can provide strong justifications will be in.

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Recently my wife and I decided to clear our loft. It was just coincidence that we were doing this cleaning during spring. Normally, we would just climb up on a ladder and look around and make a decision on what items can be disposed off. Imagine, standing atop a ladder and looking at a bunch of old boxes and trying not to breathe too deeply (or breathe) and having to make a decision. In most cases, only the standout items would be disposed. Rest everything would stay.

I suggested to her that we instead do Zero based budgeting. So, we emptied the entire loft. And then I told her that we have to assume that every single item here would be disposed off unless we can come up with a good justification for why it needs to stay. Kind of the inverse of what we would have done normally.

So by anchoring to 0 i.e. assuming that every item needs to go, we were trying to be less emotional. Normally we would look at an item and say this was gifted to us by a dear uncle and hence it has to stay; now we were thinking like it may have been a gift from an uncle but we haven’t used it in 5 years and are unlikely to do so in future too and hence it’s better that the gift finds another home. It was not easy at first to bid goodbye to such items, but it had to be done.

And we ended up disposing off about 70% of the items. We weren’t completely rational either…some dear uncle’s dear gifts were very hard to part and so they stayed and formed some part of the 30%. We are all work in progress. But still…it felt nice to have a clean loft with minimal things.

Latest update: It’s been 30 to 40 days and we haven’t missed the items that we disposed off. So I would say it was a success.

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I am not the first one to think of this idea. There is a series on Netflix featuring Mary Kondo. She helps people tidy up their homes and she uses the same idea- she gets them to empty their wardrobe completely and put back ONLY THOSE that still evoke special feelings. Emptying out your wardrobe or your loft is a great mental trick where by doing that one task, you are shifting the assumption from “this item stays unless…” to “this items goes unless…”.

This same idea applies to your portfolio of investments too. Every 6 months, look at your portfolio and ask – would I buy it today knowing what I know. If you are unable to justify it, you know you should get rid of it.

This same idea applies when you are looking at your daily habits too. Assume you are starting with a clean slate and add only those habits that would be beneficial. For e.g. – You may want to justify to yourself why checking Social Media first thing in the morning or last thing before bed, as a ritual needs to stay.

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Long back, I used to reach such articles and feel inspired but do nothing about it. If you enjoyed this article, chances are you’ll enjoy applying this idea even more. Go ahead, give it a try!

Cheers!