How to Budget Your Money Using a Zero-Based Budget

Melinda Pettijohn

JANUARY 23, 2020

Have you ever been in a situation where you went to pay for your morning cup of coffee, only to realize there was less in your account than you thought? We’ve all been in that situation at one point or another – and a zero-based budget is one budgeting method you can use to help get yourself back on track.

The idea behind a zero-based budget encourages you to use every penny of income that you bring in. However, that doesn’t mean going on a shopping spree with every paycheck you receive after the bills are paid (although that does sound fun...) 

This article will walk you through exactly what a zero-based budget is, how to start one, as well as the advantages and disadvantages of this type of budgeting system.

How to Budget Using Zero - Based Budgeting

Key Takeaways

  • A zero-based budget assigns all of your dollars to a specific category
  • After you assign your income to each category, you should have $0 leftover
  • If you do have money leftover, it is best to save, or invest that money into something rather than spend the money on material goods 

What is a Zero-Based Budget?

A zero-based budget is one of many types of budgeting methods. With a zero-based budget, you assign every dollar a purpose – whether that is paying the rent, reducing your debt, or storing it in savings. It truly means developing a mindset of “how can my money work for me?” 

The goal for a zero-based budget is that all of your income minus your expenses for the month should equal zero. That sounds a bit crazy, but I’m definitely not recommending that you go out and spend every dime you make after your bills are paid. You can (and should) assign some of your money to savings categories as well. 

The expense categories and amounts are very flexible. It is very similar to the envelope system in that you can always move leftover funds to another category or to your savings account.

An example zero-based budget for someone with a monthly income of $3,000 might look like this:

Category

Amount ($)

Rent

$900

Groceries

$400

Utilities

$300

Car payment

$300

Insurance

$100

Gas

$150

Retirement Savings

$150

Credit Card Payments

$120

Student Loan Payments

$200

Emergency Fund

$150

Travel Fund

$50

Spending Money (Eating Out/Entertainment)

$180

Leftover

$0

According to a survey conducted by Dave Ramsey, people who utilize a zero-based budget save 18 percent more money and pay off 19 percent more debt versus those who don’t just by having a plan for their money.

So how do you create a plan for every dollar?

How to Start a Zero-Based Budget

Starting a zero-based budget is very similar to other budgeting methods in that it all begins with your monthly income and monthly expenses.


Step 1: Determine Your Monthly Income

To start a zero-based budget, you’ll need to understand your monthly income. Take your paycheck, benefits, and other sources of monthly income to figure out exactly how much money you are working with. Don’t forget about child support or any income you make from side gigs. This is typically the easy part of starting any budgeting system.


Step 2: Figure Out Your Monthly Expenses

In order to create categories that make sense for you, you’ll need to track what you typically spend and on what. This will help you create guidelines for moving forward. 

You can also identify areas where you are potentially overspending - such as going out for lunch every day - and therefore you can cut back in those areas. This will allow you to move money to areas where you might want to spend more money, such as your travel budget. 

If you primarily use a debit card or credit card to pay for your monthly expenses, simply categorize all for your expenses for the last three months to determine your average expenditures in those categories. It may be difficult to remember which category that Target purchase from 3 months fell into (did you buy soap or Christmas decorations – or both?) but you should be able to get a close approximation to start with for each category. You can always adjust later if needed.


Step 3: Estimate Your Seasonal Expenses

Seasonal expenses are a little more difficult to budget for if you have no idea what you normally spend on them. Seasonal expenses include things like back-to-school supplies, lawn care and maintenance, pool maintenance, routine car maintenance, and Christmas present purchases. 

Other things you might factor in could include traveling to weddings or replacing an old phone every few years. These are any significant purchases that you do not make regularly every month. 

If your bank provides statements for the past year or two, you might be able to get a good estimate by looking back at what you’ve spent previously (that is, if you can remember which Amazon purchase went to each category).

If not, you can always estimate what you expect to spend based on current prices and needs, and then start saving that amount for when you need it.


Step 4: Subtract Your Expenses from Your Income

Once you know your income and your expenses, you’ll want to subtract the expenses from your income. Any money you have left over should be assigned to savings, or some other responsible category such as investments  or retirement savings.

You might find that you’re spending more than the income you bring in. If that’s the case, you’ll need to cut from some categories until you can correct the overage.


Step 5: Track Every Dollar You Spend

Once you develop a guideline for each category, the next step is to stick to it! That means tracking every dollar you spend and trying not to overspend in any category. If you do find yourself repeatedly going over in some categories, that may be an indication that you’ll need to readjust your budget.

You can keep track of all of your expenses on your own with a pen and paper, or in a spreadsheet. You could also use an app such as You Need a Budget or Goodbudget, as both of those apps work on the zero-based budget system.

Advantages of a Zero-Based Budget

With a zero-based budget, you are highly focused on how much money you are spending. This can help keep you from spending money that you don’t have and result in you saving more money than you expected to.. 

A zero-based budget is also highly customizable for all of your goals, which can be really helpful if you are new to managing your money. It can also provide great motivation for those who have trouble saving money. 

Assigning dollars to a tangible goal – such as a big trip, a new car, a down payment, or another financial goal – tends to be much easier than lumping each amount into one “savings” account and hoping for the best.

One of the best advantages to a zero-based budget is how flexible it is. You can always move money from category to category if you need to.

Zero-based budgeting also encourages efficiency. When you start to see that you spend just as much on eating out as you do on your car payment, that can be a wake-up call. By examining every expense and assigning it to a specific category, it really does require an in-depth look at where you are spending your money, and whether that really is the best use of your income.

Disadvantages of a Zero-Based Budget

Zero-based budgets can be pretty time-consuming, since you do need to assign all of your dollars a “job.” In order to truly use the system effectively, you do need to closely monitor your spending on a regular basis. An app can make this easier, but it is definitely not a hands-off budgeting method. Since it is a bit time-consuming to keep up with, the zero-based budget may not be sustainable for you, unless you really enjoy looking over and tracking your expenses diligently.

Another issue with the zero-based budget is that it does not provide any guidelines. Unlike the 50/30/20 rule, for example, it does not help people get to a healthier financial picture. It is possible to set up a zero-based budget that will keep you in debt and without a savings account – and that is obviously problematic. 

The flexibility of the zero-based budget can also create problems. Since people can just move money from category to category, they might intend to save a certain amount each month, but end up moving all of their “savings” to spending categories by the end of the month. If you end up in this boat often, a physical envelope method might be a better starting place. While you can move money from envelope to envelope, it does require you to be more mindful of this.

Additionally, if people forget to factor in any variable expenses or seasonal expenses, the zero-based budget can create a situation where you don’t have enough money. That is why it is critical to factor them in when you set up your categories. You don’t want to drain your savings account for a friend’s wedding, only to have your car break down a week later.

Does a Zero-Based Budget Work for Irregular Income?

A zero-based budget can work for an irregular income, but it does complicate things. If you have a truly unpredictable income that fluctuates a lot, you’ll need to set yourself up to use the previous month’s income for the current month’s budget. In order to do that, you’ll need to save up a month’s worth of income as a buffer first, which can be a challenge to do.

If you’re reading this, chances are you want to get a better handle on your money now. So if you are interested in setting up a budget today with a variable income, a zero-based budget may not be the right option for you.

If you have a variable income, but can reliably predict approximately how much you’ll make, you could still set up a zero-based budget using that amount. I recommend starting with an amount you are sure to earn, or the average you typically earn. Then anything “extra” you can assign to other savings categories. 

This isn’t a “true” zero-based budget, but it is a close enough approximation that it can still work. The key is really to create a plan for all of your money – so you’ll just want to plan what you’ll do with anything “over” that set amount of income that you typically earn.


What to do With Extra Money?

If after you have assigned money to all of your bills, you have some left, you might be wondering what exactly to do with it. Or if you unexpectedly receive income from somewhere, such as a bonus. 

Consider your financial goals and put the money to use there. Do you want to travel more? Add a little extra to your travel budget. Do you want to get out of debt faster? Pay off a credit card with it. Did you recently pay for car repairs and now your emergency fund is spent? Use the extra money to build that account back up.


Final Word

The key to any budgeting method is to get a handle on your expenses, and really understand what you’re spending your money on. The zero-based budgeting rule is a great option to help you fully understand how your money is currently working for you, and how you would like it to work for you moving forward.

Even though it is one of the more time-consuming budgeting methods, which may make it unsustainable in the long-term, it can be a good shorter-term budgeting method to at least help you get started and have a better understanding of what your financial situation looks like.

If you try the zero-based budgeting method and it doesn’t seem like the right fit for you, or are just curious about the other methods out there, there are plenty of other options. The key to a good budget is to find the one that works best for you that helps you achieve your financial goals.


About the Author


Melinda Pettijohn

Melinda Pettijohn is an expert personal financial writer with more than 10 years of experience in the industry. She covers topics ranging from budgeting, additional ways to make money, credit cards, managing debt, paying for college, and more. As a mom of three kids, she especially loves sharing insights on how to make the most of your money while raising a family. 


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