What Is Zero-Based Budgeting?

See the budgeting technique that can help you manage your money.

Managing your money is tricky. You need to have enough to pay your bills, but you want to have some left over for fun, too. And, of course, you’ll need to set aside funds to achieve your short- and long-term financial goals. Having a budget can help — but with all of the options out there, it can be hard to find a system that works for you.

Zero-based budgeting is a technique that shows you where you can spend your money so that you can reach your goals. It helps you decide where each dollar goes, so you’re not left scratching your head at the end of the month, wondering, “Where did all my money go?” Here’s what you need to know to start using zero-based budgeting to manage your money.

This guide to zero-based budgeting will cover:

What Is Zero-Based Budgeting?

Make Your Money Work for You

A zero-based budget accounts for every dollar you earn and starts from a zero base. “A zero-based budget is when your income minus expenses equals zero,” said Rachel Cruze, personal finance expert and author of “Love Your Life, Not Theirs: 7 Money Habits for Living the Life You Want” and “Smart Money Smart Kids: Raising the Next Generation to Win with Money.”

“Every dollar coming in has a name,” Cruze said. “So if you cover all of your expenses for the month and still have money left over, you’re not done budgeting yet. You need to tell that extra money where to go so that your money is working for you. Whether it goes toward debt, investing or building your emergency fund, it needs to have an assignment.”

The premise of the zero-based budget is that every dollar has a job. Assign any money you might have left over at the end of the month to a category like savings or debt repayment. And in the event of a budget shortfall, you can trim spending in a discretionary category like dining out or entertainment to make up the difference.

Make Your Money Work for You

Related: How To Save Money on All Your Monthly Expenses and Bills

Advantages of Zero-Based Budgeting

When you’re mindful about where your money is going, you create opportunities to meet your short-and long-term financial goals, which is the secret to a successful financial future.

“Your income is your biggest wealth-building tool,” Cruze said. “If you’re not telling your money where to go, you’ll wonder where it went. A zero-based budget will help you to gain control over your money because you are being intentional with every single dollar. And people who are intentional win with money.”

Disadvantages of Zero-Based Budgeting

Some people think budgeting is too much work — or that they don’t have time to do it right. The truth is that budgeting is time-consuming work. But just like your full-time job, it’s work that pays off.

Zero-based budgeting, in particular, requires you to track each dollar and make each expense a line item, which can be tedious. But like many chores, the more you do it, the better you get at it. And eventually, budgeting will become part of your routine.

Make Your Money Work for You

“A lot of people feel like a budget limits their freedom, but a budget actually gives you freedom,” Cruze said. “It allows you to spend your money and make your money go further because you have a plan. Whatever your money goals are, putting a budget in place is going to help you get there quicker, so I don’t see any downside to that.”

Related: 10 Most Effective Ways To Budget Your Money at Any Age

How To Create a Zero-Based Budget

“Before each month begins, write down your monthly income and list out all of your expenses,” Cruze said. “You can do this on paper or use an app like EveryDollar, which is what I use. As you list your expenses, start with the essentials like food, rent and utilities, basic clothing and transportation. Once those are covered, you’ll list out your other expenses, and be sure to account for savings and giving.”

“Expenses will change month to month, so that’s why you do this before each month begins,” Cruze continued. “Your income, minus these expenses, should equal zero. You may not get it perfect right off the bat, so show yourself some grace the first few months. And remember, with a budget, you do not set it and forget it. You have to track expenses as you go!”

Make Your Money Work for You

Related: 9 Best Budgeting Tools

Zero-Based Budgeting vs. Other Budgeting Methods

Zero-based budgeting isn’t your only option. There are other types of budgets that you might find useful, depending on your preferences.

1. 50/30/20 Budget

The 50/30/20 budget recommends spending 50% of your income on necessities like housing, food, clothing and transportation, whereas an additional 30% of your budget goes toward things you want, such as vacations and dining out. The remaining 20% of your income should go in savings. Although this is an easy budget to follow, it doesn’t allow for much flexibility.

2. Pay-Yourself-First Budget

The pay-yourself budget focuses on saving first, debt repayment second, and then spending. The first thing you do when you get paid is put money into savings. Next, you pay debts like credit cards and student loans. After that, you pay for necessities, and finally, you make discretionary purchases.

3. The ‘No’ Budget

The “no” budget is not so much a budget as a lifestyle. You track your checking account balance and keep track of all your automatic debits. You also account for savings and debt repayment. Only when all these things are covered can you spend any money that’s left over. This type of budget may sound easier than a zero-based budget that requires more paperwork and planning, but you may find it difficult to say “no” to going out with friends or buying that new sweater.

4. Budgeting App

A budgeting app can help you record your expenses and allocate your income. Finding the best app for the budget you prefer can take some trial and error. Some apps require you to log every expense and categorize every purchase and then determine what you’re spending in each category. And although some apps are compatible with a zero-based budget approach, others feature an alternative budgeting style.

How Much Should You Spend? See: Recommended Budgeting Percentages

Is Zero-Based Budgeting Right for You?

A zero-based budget can work well if you are serious about taking control of your money, and you’re willing to put in the work that’s required to maintain it.

“A zero-based budget is for anyone with an income,” Cruze said. “Whether you’re a millionaire — and yes, millionaires budget, too — or a college student with irregular income, a zero-based budget will help you make the most of your money.”

Remember that the right budget for you is the one you will actually use. If a zero-based budget works for you, use it. If not, find another budget option that does. The important thing is to make sure you are spending your money according to what is important to you and that you know where your money is going.

More on Budgeting

Karen Doyle is a personal finance writer and a former financial advisor. 

About the Author

Karen Doyle

Karen Doyle is a personal finance writer with over 20 years’ experience writing about investments, money management and financial planning. Her work has appeared on numerous news and finance websites including GOBankingRates, Yahoo! Finance, MSN, USA Today, CNBC, Equifax.com, and more.

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