We’ve all heard the saying, “Every penny counts,” and a zero-based budget takes this idea and runs with it. By looking at every dollar in and every dollar out, a zero-based budget can help you take control of your finances using a fairly easy framework that anyone can implement.
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Zero-Based Budgeting
A zero-based budget (sometimes referred to as “ZBB”) is a relatively simple approach to personal finance where every dollar you earn per month is accounted for, and at the end of each month, your goal is to be left with a zero-dollar balance.
Zero-based budgeting does NOT mean you need to spend every last dollar each month so you have nothing left in your bank account. Instead, it simply means that every dollar is accounted for and has a “job” whether that’s being allocated for your basic expenses, discretionary spending, or savings and investing. Essentially, a zero-based budget means your income minus your expenses should equal zero each month.
Advantages of a Zero-Based Budget
- The budget is more customizable than 50/30/20 budgeting.
- It can help you save money if you struggle with figuring out how to spend less money.
- Is a good starting point for more complex budgets.
Disadvantages of a Zero-Based Budget
- Requires detailed monthly planning
- Harder to implement for those without a predictable income
- Can be hard to factor in variable expenses
How To Make a Zero-Based Budget
Starting a zero-based budget is fairly easy, but it will require following a few basic steps:
Step 1: Review your past income
If you’re going to look at your finances from top to bottom, you need to have a clear idea of what you normally make in an average month, and the best way to do this is by reviewing your pay stubs for the past few months. You’ll need to know exactly what your income is each month and what your average spending is.
If you don’t earn a regular paycheck or your income fluctuates, you may need to look back 6 to 12 months to get an average you can work with. Every single source of income should be accounted for here including part-time work, side gigs, government benefits, alimony or child support, and payouts on investments.
Step 2: Review your past spending
Likewise, you’ll need to look at every single dollar you spend from happy hour with coworkers to your gym membership to insurance premiums, and this is best done by pulling up your credit card and bank statements. You’ll want to write all this information down somewhere either in a spreadsheet or using a budgeting app like Rocket Money or YNAB (You Need A Budget). When recording your spending, it can be helpful to break it down into a few categories:
- Basic needs: These are your more-or-less fixed expenses that are essential for everyday living, and should not include anything that you can live without. This covers expenses like rent or mortgage, groceries, insurance, transportation, debt repayment, and utilities.
- Discretionary spending: This should be everything beyond your basic expenses like dining out, entertainment, subscription services, hobbies, and travel.
- Charitable contributions: This is any type of charitable contribution whether to a religious organization, non-profit, community resource, or your kid’s school.
- Saving and investing: This can include putting money aside into an emergency fund, saving for a large expense like a down payment on a house, or contributing to a retirement account like an IRA or 401K.
- Season-specific or month-specific expenses: This can include expenses like Christmas or birthday presents, summer camps, or celebrations.
Step 3: Do the math
Once you have a clear idea of your money coming in versus your money going out, you can now do the math to see what you end up with. Simply subtract your average monthly expenses from your income and see what you get! If you have some left over, you’ll need to decide where to put it (we’d recommend paying down debt, a savings fund, or giving some to a charity). Each month, you’ll need to make adjustments as you better understand your spending habits and as unexpected costs come up.
Since a zero-based budget is simple to understand, it’s ideal for those who may be new to the world of budgeting and are looking for a (relatively) easy way to test the waters.
Alternatively if you’ve recently experienced a change in your finances (either with newly added expenses, or an income increase or decrease), using a zero-based budget can help you get realigned and experiment with the best uses for your money. Many people who have been hit hard by inflation may need to rethink their monthly budget – and this tool can be very effective.
Who Is a Zero-Based Budget Best For?
Zero-Based Budget Example
The beauty of a ZBB when compared to other types of personal budgets is its simplicity. All you need to be able to do is add and subtract.
Let’s look at one sample budget below:
Income:
- Bi-weekly paycheck of $1,200: $2,400/month
- Part-time job: $600/month
- Child support: $350/month
Total monthly income: $3,350
Average monthly spending
Basic needs: $2,530
- Rent: $1,320
- Groceries: $600
- Utilities: $210
- Insurance: $120
- Transportation: $150
- Debt payments: $130
Discretionary spending: $765
- Dining out: $230
- Entertainment: $175
- Clothing and personal care: $130
- Streaming services: $30
- Piano lessons: $200
Savings: ~$0
Money Remaining: $55
With this average monthly budget, there is $55 left over each month that you could then put toward savings or to pay down debt faster to get the desired zero-dollar balance. There is currently nothing in this example budget for investments, so you may want to consider cutting discretionary expenses so you can use the money to invest.
How Does the Zero-Based Budget Compare?
| Type of Personal Budget | Description |
|---|---|
| Traditional Budget | Subtracts monthly expenses from income, ideal for beginners. |
| 50/30/20 Budget | Divides income into 50% for needs, 30% for wants, and 20% for savings/debt. |
| Zero-Based Budget | Allocates every dollar of income to specific categories until it equals zero. |
| Goal-Based Budget | Focuses on specific financial goals with some flexibility. |
| Spending Cap Budget | Sets a maximum cap on monthly spending to encourage savings. |
| Envelope System Budget | Uses physical cash in envelopes for different spending categories. |
| Pay Yourself First Budget | Prioritizes savings by setting aside money for savings first. |
| Sub-Savings Accounts Budget | Creates detailed savings goals within a primary savings account. |
| Anti-Budget Budget | A relaxed approach: save first, pay bills, and spend the rest freely. |
Does a Zero-Based Budget Really Work?
If you’re serious about getting control of your finances, you need some sort of budget. The zero-based plan is a great place to start. Its simple system lets you easily see where your money goes each month and allows you to customize your budget within this framework making minor adjustments as you go.
What about expenses I only pay once or twice a year?
Expenses like car insurance or taxes that you don’t pay monthly should be averaged out and included in your “basic needs” category. For instance, if your car insurance is $1,080 a year, you should allot $90/month to this.
What if my income fluctuates each month?
Always use a low-end estimate when figuring out your budget each month. By using the lowest average, you know you’ll always be able to meet your minimum expenses, and in months when you bring in more, you’ll have the good problem of having extra money.
What about emergencies?
Unexpected expenses like a lost phone, broken dishwasher, or if your kid needs braces are an inevitable part of life and will disrupt any budget. Some people like to cover these costs with their emergency fund, while others will want to shift their spending to other categories for the next few months until the expenses are covered.
