Zero-based Budgeting: A Budget That’s Easy to Stick to
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Whether you’re trying to get a better hold on your spending habits or hoping to start aggressively paying back some debt — having a good budget can help. Budgeting can be a helpful financial strategy for just about anyone interested in being more aware of their money and where it goes.
Unlike other budgeting methods, zero-based budgeting (ZBB) is an incredibly simple way to manage your income and meet your financial goals simultaneously. It doesn’t require special cost management tools or skills, just a reliable way to record your spending and a willingness to try something new.
Ready to see if zero-based budgeting might work for you? Let’s find out.
In this article
What is the zero-based budgeting method?
The zero-based budgeting (ZBB) method is a traditional budgeting approach that accounts for every single dollar you earn. Unlike other budgeting processes, which allow you to allocate your funds into various categories of spending and savings as you go, the ZBB process requires every dollar to be categorized upfront and immediately after you get paid.
While the categories you choose to put your money in can change from month to month, the overall goal of ZBB is that your income is divided into various expenditures so that your monthly balance is zero (hence the name).
When starting the ZBB method, you’ll typically want to account for your bills and essential items first. This will include things like rent, utilities, and the cost of groceries. Whatever’s leftover can then be placed into savings accounts, put towards paying back your debts, and even used on miscellaneous things like wishlist items or a night out with friends. Regardless of how you allocate your funds in this budgeting approach, the point is to thoughtfully decide how every dollar of your income will be spent in advance. Let’s look at how you can start with this unique budgeting method.
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How to zero-base budget
There are many ground rules to remember when creating a new budget using the zero-base approach. When creating your budgeting system, these are the steps you will need
Record your income and expenses
Recording your monthly income and expenses helps you understand exactly how much money you’re making and where it goes every month. Get in the habit of writing down your income each time you get paid, then jot down your expenses for that pay period. This way, you’ll see what extra money you have or where you might be able to cut costs further to meet your financial goals.
Make your allocations upfront
One of the biggest rules when using the zero-based budgeting method is to make your allocations upfront. This should happen right after you get paid, whether once a month, twice a month, or more frequently. Whenever money comes in, designate it into your categories immediately, starting with the most essential items. By not allowing your money to sit around, you’ll have a clearer plan for how you spend it. The ZBB method helps ensure everything important is paid for first and that you put your leftover funds towards meeting financial goals (like savings and paying back debt) before tapping into it for miscellaneous items.
Put income towards the essentials first
As I said earlier, a key rule to practicing zero-based budgeting is putting your income toward essential items first. This will help ensure that all the important things get paid for before anything else and long before your budget balance becomes zero. Essentials you’ll want to pay first include your rent or mortgage, various insurance coverage (health, car, and home), utilities, and groceries. After these must-haves are spoken for, you can start deciding what to do with the rest of your budget.
Give every dollar a purpose
One of the reasons I like this budgeting method is that it gives every dollar you earn a purpose. Rather than wasting away in a checking account or being tempted to buy something random you really don’t need, the ZBB method forces you to put your money towards your goals. After designating funds for your essential items, you can decide where to put the rest of your hard-earned cash. This might include setting up a retirement account, savings accounts, or even paying more towards your debt.
However, you decide to spend your money on this budgeting method, leave yourself with a little extra for things like takeout and treat yourself to anything you may want or need. This will help ensure the budgeting method isn’t too strict and allows you to enjoy your income while meeting important long-term financial goals.
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How to use the zero-based budgeting method
Record your expenses
To get started with zero-based budgeting, you’ll need to get in the habit of recording your income and expenses. This can be done in various ways, but probably the easiest is just by using an Excel spreadsheet or a notebook and writing out your income and expenses line item by line item.
Depending on how often you get paid and how different your paychecks and expenses are, you may want to record your income and spending a few weeks before getting started. Once you have a better idea of exactly how much money is coming in (and going out), you’ll be able to decide exactly how you’d like to spend it.
Categorize your expenses
Now that you have a clearer idea of how much money is coming in and going out, it’s time to start labeling your expenses. One of the easiest ways to do this is by simply categorizing things into four categories. You might call them essentials, goals, needs, and wants. Comb through your expenses, write a letter next to each, and label them.
If you have many expenses in one category, consider numbering them as well in order of importance. Now that you have a clearer picture of which categories need your money and how often, it’s time to set up your budget.
Set goals
Start by ensuring all of your essential bills can be met. This includes housing, food, and even your health and car insurance. Then, set a few goals for yourself. These might include things like paying down your credit card balance or saving more money to buy a new car. It might also mean saving money for your various retirement accounts or putting aside more money to repay your student loans.
Rather than putting exorbitant amounts towards these goals, try to pick amounts you can actually stick to. For example, if you know you can afford to put $50 a month towards something, that’s much better than trying to put $100 and then lowering that category back down to zero. Regarding budgeting, slow and steady progress is better than making goals you can’t keep.
Needs vs. wants
Last, it’s time to look at your “needs” and “wants” categories. This is a great place to reward yourself for your budgeting efforts by saving money for fun extras, like a new bike helmet or a takeout fund. While you might be tempted to shirk these categories to stash more aside toward your goals — don’t.
Again, having a budget that makes slow, reliable progress toward meeting goals is much easier to stick with than if you try to deprive yourself of everything. Always remember that having money for personal spending is important in any budget.
Account for odd expenses
Another thing to keep in mind is that budgets can change, especially with the seasons. For example, your heating bill might cost more in the winter, or you might have multiple birthday presents to buy next month than this month. Whatever the case, don’t be discouraged if your budget is changing — especially as it relates to minor changes in your “needs” and “wants” categories.
Pros and cons of the zero-based budgeting method
Pros
- Prevents overspending. It helps prevent overspending by ensuring that all income is allocated to specific categories, reducing the likelihood of frivolous expenses.
- Detailed tracking. By assigning every dollar a job, individuals gain a clear understanding of where their money is going, which enhances financial awareness and control.
- Aligns spending with priorities. Helps ensure that spending aligns with personal financial goals and priorities, such as saving for a house, retirement, or paying off debt.
- Focus on goals. By clearly allocating funds to specific goals (e.g., emergency fund, vacation, new car), individuals are more likely to achieve their financial objectives.
- Debt reduction. Helps prioritize debt repayment by ensuring that funds are allocated to pay off debt systematically.
Cons
- Requires detailed planning. The process of justifying each expense and planning for each dollar can be tedious, especially for those not accustomed to detailed budgeting. It might not be suitable for those with irregular income.
- Variable expenses challenge. It can be challenging to predict and allocate funds for variable or unexpected expenses, such as medical bills or car repairs.
- Tedious. The process of justifying each expense and planning for each dollar can be time-consuming, especially for those not accustomed to detailed budgeting.
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Who should try zero-based budgeting?
- Anyone with limited expendable income. If you don’t have that much extra income to work with (after paying for rent and groceries), then this budgeting method could be great for you. The ZBB method will help you prioritize your spending and allow you to visualize how much you can afford to put towards various categories of spending after those big-ticket items are paid for.
- Someone struggling to save money or pay off debt. Another person for whom this budgeting style is great is anyone struggling to save more money or aggressively pay down their debt. Again, because of the visualization component of the ZBB method, you’ll easily be able to see how much you can realistically afford to put towards these goals every month while still being able to pay for anything else you may need.
- Anyone new to budgeting. Because of how clear-cut this budgeting style is, it’s also good for anyone who's new to budgeting and unsure where to start. With zero-based budgeting, you can easily prioritize your spending and savings without the need for any complex budgeting strategies or applications.
Who shouldn't try zero-based budgeting?
- Someone with a lot of expendable income. While this type of budgeting can technically work for anyone, it seems easier for those with limited expendable income. If you have a lot of extra income after your essentials are paid for, other budgeting methods (that don’t require a zero balance) may make more sense for you.
- Someone whose primary interest is cost-cutting. Although this type of budgeting does many things well, helping you cut costs isn’t necessarily one of them. If cost reduction is a primary objective in your budgeting goals, a more traditional budget or spending management tool may be best.
- Someone who needs more flexibility. If you’re the type of person whose budget (and income) changes regularly, you might find zero-based budgeting challenging. While this budgeting style does afford some flexibility (on a month-to-month basis), it still requires you to set certain spending categories and stick to them. Doing this can be a pain for anyone whose income or spending needs change more frequently than once at the end of the month.
- Anyone who wants more support budgeting. If you have a hard time starting new things on your own or would just like a little more guidance when it comes to budgeting, this might not be the best method. Because of just how basic this type of budgeting is, it’s better for someone comfortable doing the leg work solo.
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The bottom line
While it might not be for everyone, using ZBB is a great way to get started with a more traditional budget style — and one that simply helps you gain visibility into your spending. Because it gives purpose to every dollar you earn, this method is a great one for those looking to get the most out of their limited expendable income or even just to gain some clarity into how much they can reasonably afford to put towards their goals every month. Decision-making becomes easier when you have a budget in front of you. If ZBB doesn’t sound like the best fit for you, don't worry. There are a lot of great budgeting methods out there, and this is only one of them.
Curious to learn more about different ways you can maximize your budget? Check out the 50/30/20 Budgeting Method.
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Writer
Larissa Runkle divides her time between a cabin in the San Juan Mountains and traveling in a converted van with her partner and pup. She writes for finance, real estate, and lifestyle publications, and is also at work on several fiction projects.
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