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A guide to zero-based budgeting

Take control of your finances with a zero-based budget. Make it easier to cover your expenses and achieve desired financial goals.

Anna Baluch
December 18, 2023

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A budget is a spending plan to manage your money wisely. With a budget in place, you can make the most of your earnings or achieve long-desired financial goals. Maybe you dream of saving for a house or want to find a way to navigate financial volatility — if you earn a consistent income, a zero-based budget can help you get there. 

Also known as a zero-sum budget, a zero-based budget is a budgeting method that ensures total mastery of your finances. Below, we’ll dive deeper into a zero-based budget, how to set one up, and how to determine if this strategy makes sense for your unique situation. 

What is a zero-based budget?

With a zero-based budget, you ensure your income minus your expenses equals zero. This way, every dollar you earn has a purpose and is accounted for. This strategy helps you manage your money to cover your living expenses and strive to improve your financial health. 

Let’s say you earn $6,000 per month. If you follow a zero-based budget, everything you spend, invest, or save should add up to $6,000. By understanding and controlling your cash flow, you’ll be empowered to make better financial decisions. 

Pros and cons of zero-based budgeting

Like all financial strategies, a zero-based budget comes with benefits and drawbacks, including: 

Pros of zero-based budgeting

  • Ensures full control over finances: With zero-based budgeting, you’ll have a good handle on how to use your money to support your needs and wants. When payday arrives, you won’t have to wonder where your money will go because you’ll account for it in advance. 
  • Provides clarity and accountability: When you assign each dollar a purpose, you’ll understand exactly where your money goes. You’ll be able to easily pinpoint where you may be overspending or underspending so you can make adjustments as needed. 
  • Supports prioritization and goal setting: A zero-based budget can help you develop and achieve financial goals and priorities. Whether you’d like to pay off debt, save for a down payment, or fund a kitchen renovation, it will encourage you to include each goal as a line item in your budget and set you up for success. 
  • Can be customized to your unique situation: Some budgets, like the  50/15/5 budget, for example, impose guidelines for allocating your money. The zero-based budget, however, is flexible. You can customize it each month to meet your ever-evolving income, needs, and wants.

Cons of zero-based budgeting

  • Requires frequent and detailed tracking: To succeed with a zero-based budget, you’ll have to invest some effort. It requires you to assess your current situation constantly, account for upcoming expenses, adapt your budget, and track your spending. It can be challenging to stick to it if you lead a busy life, as it is time-consuming. 
  • May not suit all financial situations: If you earn an irregular income because you’re a freelancer, small business owner, or self-employed, for example, a zero-based budget may not work. While you can try zero-sum budgeting and estimate your income, you may find it difficult. 
  • Doesn’t account for larger unexpected expenses: An expense, like a car repair or medical bill, can pop up when you least expect it. Unless you create a large enough emergency fund or “buffer” category in your budget, it may be tough to cover unforeseen expenses. 

How to create a zero-based budget

If you’re ready to build a successful zero-based budget, follow these steps: 

Assess your income 

First, determine your total income after taxes and other deductions — like retirement and health insurance — are taken out. It’s important to identify your gross take-home. Your income may come from a variety of sources, such as your:

  • Full-time job
  • Side hustle
  • Child support 
  • Alimony payments 
  • Investments

Determine and categorize your expenses 

Next, review your expenditures from a few months back; you can do so by looking at bank statements, credit card bills, and bank accounts. Note any fixed monthly expenses like a mortgage, rent, or subscriptions. Also, mark any variable or inconsistent expenses, such as credit card payments, dining out, travel, and entertainment. 

Then, begin creating your categories and itemizing your expenses. You should account for your needs, wants, and unexpected expenses. An example would be creating categories such as housing, groceries, transportation, childcare, debt, and savings. You can stick to broad categories or get specific with categories like “vacation fund” “or “retirement savings.” These categories will come to you naturally and stem from your unique goals and priorities. 

If you want to create a balanced budget, consider the 50/30/20. Per the 50/30/20 rule, 50% of your income goes towards needs, 30% towards wants, and 20% towards debts, investing, or savings.

Arrive at zero

Assign each category a dollar amount. For example, if your take-home is $6,000 per month, ensure your income minus expenses add up to zero. An example list might look like: 

  • Housing: $1,500
  • Groceries: $500
  • Transportation: $300
  • Debt: $1,500
  • Savings: $2,200 

Be sure to repeat this monthly so that your budget accommodates changes in your income, needs, and wants. 

Choose where to house your budget

There are a number of ways you can house your zero-based budget. You may go the old-fashioned route and jot it down in a notebook or spreadsheet. Another option is to use a calendar to store each month’s budget in one place. If you need support staying accountable, you can download a budgeting app, such as EveryDollar or You Need a Budget (YNAB), to have regular reminders sent to you. 

Tips for successful zero-based budgeting

Set yourself up for success by practicing these good financial habits:

  • Be honest with yourself: The main purpose of zero-based budgeting is to assign every dollar a purpose. It will only work if you’re realistic about your income and spending habits.
  • Account for unexpected expenses: To cover surprise expenses as they arise, you should build an emergency fund in a dedicated savings account. A general rule of thumb is to save three to six months' worth of your living costs. This can be a heavy lift if you're budgeting with a lower income, so starting with a $1000 fund is a great cushion. You can also keep extra money in a checking account as a buffer.
  • Set goals to motivate yourself: A specific goal is likely driving your desire to be more money-minded. If this is the case, set SMART financial goals rather than vague ones that will be easy to quit. Then, update your budget accordingly. You can rank your goals in order of importance and achievability so you know which ones to prioritize. 
  • Create consistency with a routine: Once you commit to zero-based budgeting, figure out a routine that will help you stay consistent. For example, you may sit down and create your budget for the upcoming on the 25th of every month. 
  • Stay up-to-date with changes in your finances: Income and expenses are not generally set in stone. In fact, they’re bound to change as your circumstances change. When these changes occur, remember to adjust your budget accordingly. 

Is a zero-based budget a good idea?

A zero-based budget helps you be intentional with your money. If you earn a consistent income or can accurately estimate your income from month to month, it’s a sound budgeting plan. 

It can ensure you have enough funds to cover expenses, pay off debt, and save for your goals. Additionally, a zero-based budget can help you avoid unnecessary spending or impulse buys. However, it does require a significant time commitment as well as a great deal of motivation. 


Final thoughts

With a zero-based budget, you’ll be more aware of how your money ebbs and flows each month. If you struggle to keep track of your expenses or want to achieve a specific financial goal, it’s certainly worth trying. While it may take a bit of time to create at first, the process gets easier and will help you establish a strong financial foundation — so long as you’re motivated and persistent. 

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