diff --git a/README.md b/README.md
index 3f1a833..7c7a24d 100644
--- a/README.md
+++ b/README.md
@@ -26,6 +26,7 @@ contextzip eliminates that entirely. Run it from your project root, it detects y
 - **Smart framework detection** : automatically identifies Node.js, Next.js, Python, Django, FastAPI, Rust, Go, Ruby and applies the right exclusion rules for each
 - **Respects your `.gitignore`** : patterns from your existing gitignore are honoured automatically
 - **Git-aware packaging** : package only modified, staged, unstaged, and untracked files with `--git-changes` — perfect for AI review sessions, incremental debugging, and PR workflows
+- **Persistent workspace** : all generated ZIPs land in a `.contextzip/` directory at your project root, not a random temp folder — discoverable, reusable, and git-ignored automatically
 - **Warns before it's a problem** : flags large files (≥ 1 MB) and binary files that AI tools can't read, before you waste an upload
 - **Handles the messy stuff** : dangling symlinks, unreadable files, and files outside the project tree are all caught and reported, never silently dropped
 - **Full CLI control** : `--include`, `--exclude`, `--dry-run`, `--verbose`, `--output`, all composable
@@ -69,7 +70,7 @@ That's it. contextzip will:
 1. Detect your framework (e.g. `Next.js + Node.js`)
 2. Apply the appropriate exclusion rules
 3. Scan and summarise what will be included
-4. Create a compressed ZIP in your system temp directory
+4. Create a compressed ZIP in `.contextzip/` at your project root
 5. Open your file manager with the ZIP selected and ready to copy
 
 ---
@@ -88,7 +89,7 @@ contextzip [OPTIONS]
 | `include` | Subcommand: include only specific paths. `contextzip include src/ app/` |
 | `--git-changes` | Only include files reported by git as modified, staged, or untracked. |
 | `-n`, `--dry-run` | Preview what would be included, no ZIP created. |
-| `-o`, `--output FILE` | Custom output path for the ZIP file. |
+| `-o`, `--output FILE` | Write ZIP to a custom path. Bypasses the `.contextzip/` workspace entirely. |
 | `--no-clipboard` | Skip the clipboard / folder-open step. |
 | `--no-gitignore` | Ignore the project's `.gitignore` file. |
 | `-v`, `--verbose` | Show every included and excluded file with sizes. |
@@ -134,7 +135,7 @@ contextzip include src/ app/
 contextzip --git-changes
 ```
 
-**Save ZIP to a specific path:**
+**Save ZIP to a specific path (bypasses workspace):**
 ```bash
 contextzip --output ~/Desktop/my-project-context.zip
 ```
@@ -151,6 +152,51 @@ contextzip --include src --exclude "**/*.test.ts"
 
 ---
 
+## Workspace directory
+
+contextzip stores all generated packages in a `.contextzip/` directory at your project root, keeping your AI context artifacts persistent, discoverable, and out of the way.
+
+### Location
+
+contextzip looks for a `.git/` directory walking up from your current working directory and places `.contextzip/` alongside it — the true project root. If no git repository is found, it falls back to the current working directory.
+
+### Output naming
+
+The output filename is determined by how you invoke contextzip:
+
+| Command | Output |
+|---|---|
+| `contextzip` | `.contextzip/codebase.zip` |
+| `contextzip --git-changes` | `.contextzip/changes.zip` |
+| `contextzip --output PATH` | `PATH` (workspace bypassed entirely) |
+
+All other flags (`--include`, `--exclude`, subcommands) do not affect the filename — they refine what goes into `codebase.zip`.
+
+Each run overwrites the previous file of the same name, so `.contextzip/codebase.zip` is always your latest full snapshot and `.contextzip/changes.zip` is always your latest git-diff context.
+
+### `.gitignore` management
+
+contextzip automatically keeps `.contextzip/` out of version control:
+
+- If `.gitignore` exists → `.contextzip/` is appended if not already present
+- If `.gitignore` does not exist and a `.git/` directory is found → a minimal `.gitignore` is created containing `.contextzip/`
+- If no git repository is detected → `.gitignore` is left untouched
+
+The `.contextzip/` directory is also always excluded from packaging itself, regardless of `.gitignore` state.
+
+### Workspace structure
+
+```
+project/
+├── .contextzip/
+│   ├── codebase.zip      ← latest full snapshot
+│   └── changes.zip       ← latest git-changes snapshot
+├── src/
+└── ...
+```
+
+---
+
 ## Framework detection & auto-exclusions
 
 contextzip detects your stack from config files in the project root and stacks the appropriate rules.
@@ -173,7 +219,7 @@ Detection is **additive**. A monorepo with both `package.json` and `pyproject.to
 ### What gets excluded
 
 **Always (every project):**
-`.git/`, `.env`, `.env.*`, `*.log`, `logs/`, `.cache/`, `tmp/`, editor files (`.vscode/`, `.idea/`), OS files (`.DS_Store`, `Thumbs.db`), common binary formats (images, audio, video, archives)
+`.git/`, `.env`, `.env.*`, `*.log`, `logs/`, `.cache/`, `tmp/`, `.contextzip/`, editor files (`.vscode/`, `.idea/`), OS files (`.DS_Store`, `Thumbs.db`), common binary formats (images, audio, video, archives)
 
 **Node.js / Next.js:**
 `node_modules/`, `.next/`, `.nuxt/`, `dist/`, `build/`, `out/`, `.turbo/`, `package-lock.json`, `yarn.lock`, `pnpm-lock.yaml`, `*.min.js`, `*.d.ts`, `tsconfig.tsbuildinfo`
@@ -227,10 +273,10 @@ contextzip/
 │   ├── detector.py        # framework/language detection engine
 │   ├── filters.py         # pathspec-based file filtering + ResolveResult
 │   ├── git.py             # git status parsing + changed-file detection
-│   ├── packager.py        # ZIP creation, compression stats, PackageResult
+│   ├── packager.py        # ZIP creation, workspace management, PackageResult
 │   ├── clipboard.py       # tiered clipboard strategy (all platforms)
 │   └── rules/
-│       ├── base.py        # universal exclusions
+│       ├── base.py        # universal exclusions (includes .contextzip/)
 │       ├── node.py        # Node.js / Next.js / Vite
 │       ├── python.py      # Python / Django / FastAPI
 │       ├── rust.py        # Rust / Cargo
@@ -304,4 +350,4 @@ Please open an issue before submitting a large PR so we can discuss the approach
 
 ## License
 
-MIT - see [LICENSE](https://github.com/akadeepesh/smart-context-packager/blob/main/LICENSE) for details.
+MIT - see [LICENSE](https://github.com/akadeepesh/smart-context-packager/blob/main/LICENSE) for details.
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