What is zero-based budgeting?
Zero-based budgeting is a popular strategy for achieving your savings goals and minimizing overspending. Using this method to proactively assign every dollar a job at the start of each month can help you clearly understand where your paycheck goes.
Here’s what to know about zero-based budgeting and how it works.
How does a zero-based budget work?
Zero-based budgeting (sometimes called ZBB) is one of the most hands-on money management strategies. To put it in action, you’ll assign your savings and spending tasks to each dollar of your take-home pay until you reach $0 in unassigned income.
While this budgeting strategy can be relatively time-consuming to set up and monitor, it’s more likely to help you spend and save more efficiently than simpler strategies. As a result, you can achieve your financial goals and see visible progress sooner.
Zero-based budgeting example
To start with zero-based budgeting, you’ll assign tasks to each dollar of your take-home pay. Here’s an example of how this budget system might look if you have a total of $4,000 in monthly net income:
| Expense category | Monthly amount |
|---|---|
| Rent | $1,400 |
| Utilities (e.g., electric, water, gas) | $200 |
| Cell phone | $60 |
| Internet | $80 |
| Insurance (e.g., renters, health, car) | $250 |
| Groceries | $350 |
| Dining out | $200 |
| Gas | $250 |
| Clothing | $50 |
| Streaming subscriptions | $80 |
| Miscellaneous entertainment | $100 |
| Car payment | $300 |
| Student loan payment | $330 |
| Travel fund | $100 |
| Investments contribution | $100 |
| Savings (including emergency fund) | $150 |
| Amount left | $0 |
Over time, you might decide to create an in-depth spreadsheet that breaks down your expenses further. For example, consider having line items for each insurance policy type, setting aside money for car repairs, or designating specific savings goals.
How to create a zero-based budget
If you’re ready to create a zero-based budget, follow these four steps:
1. Calculate your monthly income
First, you’ll want to calculate exactly how much you get in monthly take-home pay. If you work a traditional job, you can reference your pay stubs to determine your combined after-tax income. While the money doesn’t technically reach your bank account, count any employee-side deductions for health insurance and retirement contributions as income, too.
You should also include any of these supplemental income streams that you have:
- Interest
- Dividends
- Rental income
- Side hustles
- Alimony
- Child support
If you earn an irregular or variable income, base your monthly income on your lowest expected amount. For the months you earn more, you can use the surplus to cover the gaps during slower periods.
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2. List all expenses
After you’ve added up your monthly income, gather your bank and payment card statements to track all of your transactions (including any automated ones). Itemize your fixed and variable expenses by category, such as housing, transportation, entertainment, and debt payments.
Creating sub-categories within each expense type might make it easier to stay organized. It’ll also be easier to see precisely how you spend your money so you can identify opportunities to either cancel unnecessary bills or switch to cheaper services.
3. Assign every dollar a job (and adjust until you hit zero)
Once you have your full list of expenses, allocate each dollar of your net income to all spending or savings categories until you reach $0. Start with your essential expenses first, and make adjustments as needed along the way to cover your priorities and goals.
Also, estimate how much you need to save each month to cover your average annual costs in variable or one-time expenses, such as travel or car repairs. You can put this money in a dedicated savings account so the funds are there when it’s time to pay the bill.
4. Track and update regularly
Set aside some time each week to track your progress and make any mid-month adjustments. For example, you could categorize your transactions weekly, then schedule a monthly comparison of your actual and planned spending.
This consistency can lift your confidence, which will make it more likely that you’ll follow through with your budgeting plans.
What expenses to include in a zero-based budget
Include every expense and savings contribution you make during the month. Start with fixed expenses, such as rent, insurance, and minimum credit card and loan payments. Then add your variable and infrequent expenses, such as groceries, dining out, and entertainment. You can base your monthly allocation for these variable payments on the average of previous months' prices or by researching costs.
In addition to fixed and variable expenses, include how much you want to save and invest each month for your short- and long-term goals. If you have a 401(k), also include any contributions that your employer automatically deducts from your paycheck.
Pros and cons of zero-based budgeting
While the zero-based budgeting method can be helpful, it isn’t right for everyone. Here are some pros and cons to think about if you’re considering this budgeting strategy:
Pros and cons
Pros
- Know how every dollar is spent
- Can help accelerate debt payoff and savings
- Adaptable for month-to-month changes
Cons
- Can have a steep learning curve for beginners
- Rigidity might cause frustration
- Time-consuming to set up and track
Zero-based budgeting vs. other budgeting methods
Zero-based budgeting can be a great fit if you want a hands-on budget to achieve your goals and enjoy financial transparency. However, other strategies are likely better if you prefer a simpler method or need a different way to stay motivated.
Here’s how zero-based budgeting compares to other popular methods:
| Budgeting method | How it works | Best for |
|---|---|---|
| Zero-based budgeting | Assigns every dollar a job until income minus expenses equals $0 | Detailed planners with tighter budgets |
| 50/30/20 rule | Splits income into 50% needs, 30% wants, and 20% savings | Beginners who prefer simple, flexible budgeting |
| Envelope method | Uses cash envelopes for spending categories | People who overspend |
| Values-based budgeting | Aligns spending with your core priorities and long-term goals | Balancing in-depth planning with flexibility and fulfillment |
| Pay yourself first | Saves a set amount before spending on anything else | Savings-focused individuals |
| 80/20 rule | Save 20% and spend the remaining 80% as you see fit | People who want minimal structure |
Tips for making zero-based budgeting easier
While the zero-based budgeting strategy can require notable upfront effort, it becomes easier over time. Here are some tips that can help you get a head start and increase your effectiveness:
- Use apps or spreadsheets. Both free and premium options are available with premade templates, which can help you avoid overlooking any expense or savings categories. They also make it easier to track transactions and run reports, saving time and frustration.
- Automate fixed expenses and savings. Consider setting up autopay for expenses that stay the same each month. You can also schedule recurring transfers to your savings and investing accounts.
- Review your transactions regularly. Set aside some time at least once a week to categorize your transactions. This will make the monthly review less time-consuming and more accurate. You can also track your progress to make real-time adjustments.
- Adjust categories. Consistent tracking might reveal that your actual needs differ from the initial plan. You can increase and decrease allocations as needed to align with new goals and improve your budgeting efficiency.
- Keep it realistic. Be honest with yourself when it comes to your income and fixed expenses. This will help you set practical goals for your savings and discretionary spending.
- Check in regularly. As your finances improve and settle into a routine, you might not have to spend as much time reviewing your budget. However, you’ll want to continue conducting monthly or quarterly reviews to make sure your spending and savings still align with your plan and goals.
- Adapt to any income changes. Assign jobs to any pay increases so each dollar has a purpose. If your pay drops, review your goals to make sure they reflect your new income.
- Don’t aim for perfection. The zero-based budget has a steeper learning curve than other methods, so give yourself room to make initial adjustments. The long-term results will likely be more apparent once you work out the kinks.
- Celebrate small wins. Getting started can feel overwhelming. Take the time to celebrate short-term financial milestones to help keep your momentum rolling.
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Zero-based budget FAQs
Is a zero-based budget realistic?
Yes, the zero-based budget technique can be highly effective in many situations that require a specific plan, such as getting out of debt by a certain date or reining in overspending. However, it can also be overwhelming if you don’t have the time or desire for ongoing monitoring.
Is zero-based budgeting the same as living paycheck to paycheck?
No. Since you have a specific role for every dollar, you’re living within your means. Intentionally saving and spending in specific categories can help you manage your money more effectively and build a cash buffer to cover unplanned expenses and surprise bills.
Does zero-based budgeting include savings?
Yes, you can save anything you don’t need for essential expenses and tailor this amount to your interests and goals. Further, this strategy encourages you to save and invest for specific purposes, such as an emergency fund, major purchases, and retirement.
Can you use zero-based budgeting with irregular income?
Yes, this method works with irregular income, such as commission- and freelance-based incomes. Review your take-home pay for the past three to six months, and use your lowest month’s earnings as a baseline when allocating for savings and expenses.
