Zero-based Budgeting

man holding u s dollar banknotes and black leather bi fold wallet

Zero-based budgeting is a system wherein your income minus your expenses equals zero. Creating one can help you better balance your household finances and show you areas where you can begin saving for retirement, a college fund, a down payment for a home, or to pay down your debts.

Zero-based budgets should be newly created at the start of each month, as your monthly expenses can vary. For example, your budget in August may include back-to-school supplies, while your December and January budgets may have larger line-items for heating your home.

Making Your Zero Based Budget

The basic idea is to note how much money you have to spend and then give each dollar a purpose.

Total Your Income

First, write down your post-tax income. For a couple budgeting together, add both of your incomes together. Your total income isn’t only what you get paid at your job. It’s any money coming in, including any “side hustle” income.

List Your Expenses

Next, write down everything you have to pay for each month. This list won’t change much month to month, and can generally be re-used. Start with the basics – food (estimated grocery bills), shelter (rent or mortgage payment), transportation (car payments, car insurance, or bus passes and ride-share fees), and utilities (gas, electricity, water, trash, and sewer payments).

Then, list every other expense, such as:

  • Cell phone and internet services
  • Cable packages or streaming subscriptions
  • Homeowners insurance or renter’s insurance
  • Clothing
  • Entertainment
  • Medical debt
  • Credit card bills

Finally, create a “miscellaneous” category that can cover one-time expenses, such as gifts.

Factoring In Savings

When you’re creating your “expenses” budget, don’t forget about adding a couple of categories for savings. One category could be contributions to an IRA or college fund, while another could be saving for an annual vacation or Christmas presents. If you’re able to put a little aside each month, then seasonal expenses such as holidays and birthdays, your annual car inspection and registration, Homeowner’s Association fees, or balloon insurance payments won’t be quite the financial hit.

Making Your Budget Equal Zero

The point of a zero-based budget is for your monthly budget to equal zero. This means that once you’ve added up your expenses and subtracted them from your income, you should end up with zero at the end of the month. To get there, adjust how much goes to each category.

Bear in mind, having a zero-based budget doesn’t mean that you have zero money, but rather that each dollar coming in has a place and a category.

If you have extra income left over once you’ve set your budget, then you can increase some of the categories, such as savings, adding to a holiday or vacation fund, paying down credit card debt, or adding a little extra to your retirement fund. If you have $100 set aside for takeout meals and end up with $50 unassigned, maybe you’ll up your takeout expectation to $150. Or maybe you’d rather start a coffee shop item at that point.

However, if you discover that you’re spending more than you make, then it’s time to “trim the fat” from your expenses. Consider using coupons and buying generic when grocery shopping, or paring down your cell phone and cable add-ons. Or, you may have to contribute less to savings until you can bring more income into the home.

Tracking Your Monthly Spending

To ensure that you’re sticking to the plan, track your expenses throughout the month. Add up grocery store receipts, entertainment receipts, compare your actual bills to the budgeted line item amount, etc. If you spend $120 on takeout after allotting $100, you need to decide where to “take” the extra $20 from. As you get a better feel for your spending, you’ll find this comes easier throughout the month.

Read next: Envelope Budgeting (coming soon!)


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