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Sep 15, 2023

What Is Zero-based Budgeting?

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A budget can be an indispensable tool in managing your finances. There are many different budgeting methods, and if you’re craving a strong sense of control, the zero-based budgeting strategy may be right up your alley. With this approach, you assign every dollar of your income to a specific budget category, making sure you end up with zero left over for the month. This laser-focused planning can help you control your spending, work toward your long-term goals, and make the most of your money now and in the future.

In this article, we’ll cover:

How zero-based budgeting works

Think of zero-based budgeting as putting each dollar you earn to work. You give the dollar a job, sending it off to help fund one of your expenses. Some dollars will go toward paying for necessary costs, like rent, utilities, and health insurance. Others will go toward longer-term goals, like going on a trip or buying a home. And some money will be dedicated to discretionary spending, like entertainment or treats. 

For example, if your take-home income each month is $4,500, you’ll plan how you’re going to spend that entire amount on all of your expenses. After allocating the amount you need for necessities, you’ll distribute the rest among categories for discretionary expenses and savings based on your priorities and goals; all those expenses will add up to $4,500. 

The key rule is that every single dollar must be assigned to a specific spending category so that when you subtract your planned expenses from your income for the month, the difference is zero.  

Pros and cons of zero-based budgeting

Zero-based budgeting can be a highly effective method for keeping close track of your spending, but no budget method is for everyone. Here are some pros and cons to keep in mind.

Zero-based budgeting benefits

The zero-based budget method can allow you to gain a deep knowledge of your income, your spending, and how the two relate. By employing the system and sticking to its rules, it’s possible to make better decisions and move more efficiently toward your financial goals. 

  • Gives you tight control over your spending: When all your money is assigned to specific categories, you have a clear plan for how you’ll spend it. This precision can help you avoid overspending, impulse buying, and using your money in other ways that don’t align with your priorities.
  • Can help you increase savings: Saving for larger purchases, retirement, or other long-term aims calls for consistent contributions over a long period of time. By making saving part of your monthly financial plan, it can be easier to stick to your goals and enjoy the sense of accomplishment that comes from seeing your savings build.
  • Provides clarity and control: A zero-based budget requires that you make a detailed plan each month and keep close track of your spending. This process gives you an opportunity to really think through your needs, learn to anticipate expenses more accurately, and see exactly where your money is going. If managing your finances is stressful, you may find that level of control and visibility reassuring. 

Zero-based budgeting downsides

Despite the advantages of zero-based budgeting, it can also pose its own set of challenges. Consider the following before you decide to move forward with this method.

  • Can be time-consuming: Not everyone has an abundance of time to focus on their finances. Zero-based budgeting requires an initial investment of time to set up and careful tracking of your income and spending on an ongoing basis. You can relieve some of that burden by using a budgeting app or online banking tools that automatically categorize your spending, but you’ll still need to check in on your budget frequently throughout the month.
  • Provides less flexibility: With every single dollar allocated to a specific category, it can be difficult to adapt to an unplanned expense or when the cost of something exceeds what you’d anticipated. Building a rainy-day fund for smaller expenses and an emergency fund for bigger ones can provide the cushion you need to stay on budget. 
  • Variable expenses are harder to plan for: Since zero-based budgeting is so precise, costs that change from month to month can make planning more challenging. You can’t predict if gas prices will go up or anticipate your grocery bill down to the penny. The longer you stick to your budget, the better you’ll get at estimating how much money you’ll need for expenses, but it’s better to overestimate and have a bit left over in a category at the end of the month than to find yourself short.   
  • Difficult to adapt to variable income: If your income is different each month or you’re paid on an unpredictable schedule, precision planning can be challenging. So freelancers and hourly workers whose schedules fluctuate might struggle with a zero-based budget. You can overcome this by using your previous month’s income for your current month’s expenses, but you’ll need to save up a month’s worth of income before you can put this into action. 

How to build a zero-based budget in 6 steps

If you’re ready to give zero-based budgeting a try, you can get started in just five steps. 

1. Calculate your total monthly income

The first step toward zero-based budgeting is adding up your total monthly income. You’ll need to account for every dollar, so be sure to include any money you take in beyond your paycheck, such as money from a side gig, child support, passive income from investments, payments from government programs, etc. 

2. Identify all your monthly expenses

Once you’ve accounted for the money you make, it’s time to examine your spending. Review your expenses over the last year and take note of what you’ve spent money on, how much you spent, and how often expenses recur. Don’t forget to account for expenses that come up infrequently, like annual magazine subscriptions, quarterly oil changes, and holiday gifts. 

Add up all your monthly expenses to get a sense of how much money you generally spend each month. For periodic expenses, you can calculate how much money they cost on a monthly basis by dividing the total cost by the frequency. For instance, if you pay $600 for your car insurance every six months, that comes out to $100 a month. 

3. Compare money in and money out

Now, compare your total income to your total expenses. If you have excess money, you’ll want to figure out how to put it to good use, such as investing it in one of your long-term savings goals. If you don’t have enough to cover your expenses, you’ll need to adjust your budget until your income and expenses balance out to zero. Ask yourself what you can spend less on or eliminate, look for better deals on services, and consider whether you want to boost your earnings through a side hustle. 

4. Create categories and allocate your income

Now that you understand your income and expenses, you can start to plan for future spending. Create a budget category for each expense. Aim to be detailed enough that you can be precise in your planning and tracking, but not so granular that your budget is cumbersome to use. You might want to group some things together, like having one line item for all your streaming services or combining groceries and take-out meals into one general “food” category. But you might not want to lump all your date nights, happy hours, and movie rentals into a general “entertainment” category; that would make it tricky to really watch your spending.  

This is also the time to think about how you want to spend your money and plan accordingly. Is the amount you usually spend on each category aligned with your goals? Would you want to use your new budget to change the amount you spend on some things? In addition to your common expenses, consider your long-term goals and add these to your budget. These can include getting out of debt, saving toward a big purchase, building your emergency fund, or investing for retirement. 

Once you’ve defined your categories, allocate your income across them for the coming month, ensuring every dollar gets a job and your income minus your expenses equals zero.

5. Set up a system to plan and track your spending

With your newfound understanding of your complete financial picture and a solid plan for the future, the only thing left to do is maintain your budget from month to month. Some people go the DIY route and make a spreadsheet. That’s a simple approach that lets you customize things to your liking, but it does require manually entering all of your expenses on a regular basis. You can also automate the process by using a budgeting app; your online bank account might also have built-in features for creating budget categories and tracking your spending. 

Whether you create your own tracking or use an automated tool, check in on your spending frequently. At least once a week is recommended, but a few times a week or even every day may be helpful when you first get started. Keeping a close eye on money going in and out will ensure you always know how much you can spend on things and help you stick to your budget.  

6. Revisit your budget each month

Zero-based budgeting depends on consistent maintenance. You don’t have to reinvent the wheel each month, but you’ll want to sit down with your budget before the first of each month and make adjustments as needed. For instance, you may need to put a bit more in your “car maintenance” category when you know it’s time for an oil change and less in your “gas bill” line item when the weather starts to warm up.  

In addition, your financial goals can change over time, and what was important to spend money on in January might not be so critical come summer. That’s why it’s important to look at your budget with fresh eyes each month and make sure it still makes sense for your current financial outlook.

Tips for making a zero-based budget work for you

Zero-based budgeting can provide precision in planning for expenses and tracking your spending, but it might not be right for everyone. If you decide to use this system, here are a few tips for ensuring you stay on track.

  • Give every dollar a home: Make sure all your money is accounted for once you’ve built your budget. That means pushing leftover funds into your categories (perhaps savings or other long-term goals). If you have extra money at the end of the month, carry that over into the next month as income. For example, if your take-home income is $5,000 a month and you only wind up spending $4,800 one month, you have $200 left over. Include that $200 in your income when you set up your budget for the following month. 
  • Make a monthly budgeting date night: It’s important to remain both watchful and adaptable with your zero-based budget. Plan for regular maintenance by setting aside time each month to review your income, expenses, and goals, and set up your specific budget for the coming month.
  • Analyze and improve your spending habits: Zero-based budgeting is all about tracking what you’re spending money on and using it to stay on course with your priorities. Use your budgeting date night to reflect on how the previous month went. What categories had money left over? Which ones wound up in the red? If you’re often overspending on something, this is your chance to either adjust your habits or make decisions about what you really want to prioritize. 
  • Spend from one bank account: Centralizing your incoming and outgoing transactions in a single checking account can help you more easily keep track of your cash flow. If you have savings as part of your budget, you may want to open a separate high-yield savings account and transfer money into it each month, just like you would pay a bill, but don’t use that account to pay for your expenses.  
  • Build up your emergency fund: The zero-based budgeting strategy doesn’t leave you with extra cash to spend on unforeseen expenses. Make sure you’re ready for the unexpected by creating an emergency fund category in your budget and allocating money to it every month. 

Alternatives to zero-based budgeting

There’s no one right way to budget. If you try the zero-based approach for a few months and it’s not working for you, consider whether one of these alternatives may be a better fit.

The 50/30/20 rule

The 50/30/20 rule is a general strategy for budgeting that allocates your income based on three broad categories: 50% goes to pay for your needs, 30% funds your wants, and the remaining 20% is dedicated to savings and investing.

Envelope budgeting 

In envelope budgeting, you allocate money to expense categories by actually placing cash in envelopes. As the month progresses, the amount in each envelope is what you have to spend on that category. This method can also be taken digital by using a budgeting app and debit card.

Is zero-based budgeting right for you?

Learning how to make a budget can be the first step in taking control of your finances in the present and building toward your long-term goals. Zero-based budgeting can be an effective strategy if you want to stay in control of your spending and carefully plan how to make the most of your money. And if you’re new to managing your own finances, this approach could give you useful insights into your spending habits and how to live within your means.  

Whatever budgeting strategy you choose, Stash’s online banking features make it easy to stay on track with customizable expense categories and automatic tools for tracking your spending and building your savings. 

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Written by

Tara Blaine

Tara Blaine draws on over 20 years of experience as a writer to translate seemingly complex financial ideas into insights readers can put to work in their everyday lives. She’s written personal finance education materials for numerous institutions, helping customers learn smart techniques for budgeting, overcoming debt, saving money, and planning for their long-term financial health.


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