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So, you’ve heard about zero-based budgeting and you want to learn more. You’re in luck! Check out this guide on zero-based budgeting: what it is, how it works and how to use it.
Zero-based budgeting is a method where you take all of your income each month and allocate it toward expenses, debt and saving. It’s called “zero-based” because you make sure your income minus expenses equals zero every month.
This doesn’t mean you spend every dollar you earn. It means you’re giving all your money a purpose. Some dollars may go toward food and rent, while others go toward student loans and your emergency fund. In the end, every penny is accounted for.
Follow these steps to create your zero-based budget.
Start by adding up all your monthly income, including money you get from:
If you’ve never tracked your expenses before, this step may take some time. Start by reviewing your bank and credit card statements. Then, write down all your spending, including:
Once all your income and expenses are accounted for, it’s time to budget to zero. This is where you take all your income and funnel it into each budgeting category until you have no money left.
You may have to adjust your budget several times to get this right. For example, if you budget for every category and realize you’re $100 short, you’ll need to cut down on some optional expenses until you break even.
If you budget for everything and realize you have $100 left, congratulations! You’re spending less than you earn. Take that $100 and throw it toward your debt or savings goals.
The only way you’ll know if you’re sticking to your budget is to track your expenses. Use a spreadsheet to track your expenses manually or a budgeting app that automatically imports and categorizes your expenses for you.
Zero-based budgeting gives you control and flexibility to reallocate your money as needed.
For example, if you budget $250 for utilities and it ends up costing $300, you can pull an extra $50 from your dining out category to cover the difference. In the end, you haven’t overspent. You’ve simply readjusted your budget based on your needs.
Meet Corey and Cathy. Together, they bring home $4,000 a month after taxes. Here’s how they use the zero-based budgeting method to stay in control of their finances.
Our monthly income and expenses
Income: | $4,000 |
Expenses: | |
Rent | -$1,000 |
Utilities | -$250 |
Cell phone bill | -$100 |
Renters & auto insurance | -$125 |
Car fuel | -$200 |
Food | -$450 |
Entertainment | -$150 |
Pet expenses | -$75 |
Miscellaneous expenses | -$150 |
Debts: | |
Credit card payment | -$150 |
Student loan | -$200 |
Auto loan | -$300 |
Savings: | |
Emergency fund | -$250 |
Retirement | -$500 |
Vacation fund | -$100 |
Leftover money | $0 |
Before you decide to use the zero-based budgeting method, keep these pros and cons in mind:
You can create a zero-based budget the old-fashioned way or save time by using a budgeting app that does the heavy lifting for you.
There are two budgeting apps that reign supreme when it comes to zero-based budgeting. Those are You Need A Budget (YNAB) and Dave Ramsey’s EveryDollar. Use this table to compare the two:
Budgeting app | Annual fee | Features | Drawbacks | Platform | Learn more |
---|---|---|---|---|---|
YNAB | $84 |
|
| Desktop Mobile app for iOS or Android | Read review |
EveryDollar | Free plan: $0 Plus plan: $129.99 |
|
| Desktop Mobile app for iOS or Android | Read review |
There are several different budgeting methods you can use if you feel like zero-based budgeting isn’t for you:
If you want to automate your budgeting process, consider a budgeting app. Use this table to compare top-rated apps by monthly and service fees.
Zero-based budgeting shows you where every dollar is going — whether it’s to expenses, debt or savings. It may take a few months to get a realistic idea of how much you should budget in each category, but the payoff is worth it for those who stick with it. If you’re new to budgeting, check out our guide on budgeting for beginners.
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