What Is Zero-Based Budgeting?

african american couple budgeting together in their house
kate_sept2004 / Getty Images

Managing your money is tricky. 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 helps you decide where each dollar goes, so you’re not left scratching your head at the end of the month wondering where your money went. Here’s what you need to know to start using zero-based budgeting to manage your money.

What Is Zero-Based Budgeting?

The premise of the zero-based budget is that every dollar has a job, so that “your income minus expenses equals zero,” said Rachel Cruze, personal finance expert, author of several bestselling books, including, “Know Yourself Know Your Money” — and daughter of personal finance superstar Dave Ramsey.

“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.”

Make Your Money Work for You

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.

how zero based budgeting works

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.

“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,” Cruze said.

Disadvantages of Zero-Based Budgeting

The truth is that budgeting is time-consuming work. Zero-based budgeting, in particular, requires you to track each dollar and make each expense a line item, which can be tedious and feel restrictive.

Zero-based budgeting can be especially difficult for people with unpredictable income. In this case, Ramsey Solutions recommends funding the most important expenses first and then picking up where you left off the next time you receive a check.

Consider This

“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.”

Make Your Money Work for You

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. “Start with the essentials like food, rent and utilities, basic clothing and transportation.” Once those are covered, list other expenses, including savings, gifts and seasonal expenses you only pay during part of the year.

“Your income, minus these expenses, should equal zero,” Cruze said. “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!”


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, 30% toward things you want and 20% on savings and paying off debt. Although this is an easy budget to follow, it doesn’t allow for much flexibility or prioritizing debt repayment and savings.

2. Pay-Yourself-First Budget

The first thing you do with the pay-yourself-first budget 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. Cash Envelope

Similar to zero-based budgeting, the cash envelope system gives you a place for every cent that comes in. You create an envelope for each category, assign each category a dollar amount, and then distribute your cash among the envelopes. When an envelope is empty, you can’t spend any more money in that category until next month — unless it’s a necessity envelope, in which case you’ll move money from another category.

Is Zero-Based Budgeting Right for You?

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.

Karen Doyle is a personal finance writer and a former financial advisor. Daria Uhlig also contributed to the reporting for this article.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

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.

Untitled design (1)
Close popup The GBR Closer icon

Sending you timely financial stories that you can bank on.

Sign up for our daily newsletter for the latest financial news and trending topics.

Please enter an email.
Please enter a valid email address.
There was an unknown error. Please try again later.

For our full Privacy Policy, click here.