So, you’ve heard about zero-based budgeting and you want to learn more. You’re in luck! This guide explains 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.
Zero-based budgeting is best for you if you’re willing to put in the time to achieve financial freedom. It’s a great system for people who like to track things, such as their meals or workouts. But if you struggle to stick with new habits, or if you’re looking for a simple “set it and forget it” budgeting solution, zero-based budgeting might not be the best option for you.
Follow these steps to create your zero-based budget.
1. Break down your income.
Start by adding up all your monthly income, including money you get from:
- Your job
- Side hustles
- Real estate investments
- Child support
- Alimony
2. Add up all your expenses.
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:
- Mandatory expenses. These expenses include rent or mortgage payments, phone bills, Internet, utilities, insurance, groceries and gas.
- Optional expenses. These are items like dining out, shopping, subscriptions and entertainment.
- Irregular expenses. These expenses are easy to forget, but include things like property taxes, birthday presents, holiday gifts, and car maintenance.
- Debt. This could be credit cards, student loans and medical bills.
- Savings. This includes your emergency fund, vacation fund, retirement, a down payment on a house or any other savings goals.
3. Budget to zero.
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.
4. Track your expenses throughout the month.
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.
5. Prioritize your needs.
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.
Zero-based budgeting example
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:
Advantages
- Flexible. Zero-based budgeting can prevent you from overspending. If you overspend in one category, you can move money from another category to cover the difference.
- Proactive instead of reactive. With traditional budgeting methods, you guestimate your expenses at the beginning of the month and hope you don’t go over. With zero-based budgeting, you track expenses in real-time and adjust your budget as needed.
- Puts your spending in focus. If you don’t know how much you spend a month, zero-based budgeting highlights which areas you can cut back on and where to allocate more money.
Disadvantages
- Time-consuming. Unless you have a budgeting app, you’ll need to manually keep track of your expenses on a daily or weekly basis.
- You may not see results right away. If you’re new to budgeting, it can take up to three months to get a realistic idea of how much you spend. This is because there are usually irregular expenses you’ll forget to include in your budget.
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:
| YNAB | $84 | - 34-day free trial
- Connects to financial accounts
- Automatically imports transactions
- Budget syncs across all devices
- 100+ free online workshops
- Students get first year for free
| - Interface is clunkier than EveryDollar
- Has a sharper learning curve
| Desktop
Mobile app for iOS or Android | Read review |
| EveryDollar | Free plan: $0
Plus plan: $129.99 | - 15-day free trial when you sign up for Plus plan
- Plus version syncs with financial accounts
- Track financial progress using Dave Ramsey’s 7 Baby Steps
| - Free plan doesn’t sync to financial institutions
- Paid version costs more than YNAB
| 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:
- 50/30/20. This is a simplified budgeting method in which you allocate 50% of your income toward needs, 30% toward wants and 20% toward debts and savings.
- Envelope system. Traditionally used with cash, this method requires you to divvy your money up among different envelopes. Each envelope represents a different budgeting category. If you run out of money in one, you either pull funds from another envelope or wait until you get paid again.
- Line item budgeting. With this traditional budgeting method, you create a spreadsheet that lists out all your expenses. You estimate how much you’ll spend in each category, then compare at the end of the month to see if you were under or over budget.
- Reverse budgeting. With this method, you set aside a chunk of your income for savings first, then use the rest of the money for other things.
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.
