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What Is Zero-Based Budgeting?

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If you’re looking to save money, you may be interested in what’s known as the zero-based budget (ZBB), or zero-sum budget. This means allocating all of your monthly income to various expenses, including basic needs like food and rent, as well as savings and paying off existing debt. Allocating 100% of your monthly income doesn’t mean spending all your money every month, nor does it mean you have to put it all in savings either. It just means you have a plan for every cent you make. Learn more about this method of budgeting and how it can help you improve your finances.

zero based budgeting
Yellow notepad with pen svg icon Lesson Notes:
  • The zero-based budgeting approach allocates all your income towards various expense, spending and saving categories. This approach may be easier for those who have predictable, regular incomes.
  • In a zero-based budget, your expenses, spending and savings should add up to 100% of your take-home income. (All of your income should be accounted for, you shouldn’t have “left-over” money.)

What Does a Zero-Based Budget Look Like?

Using this system means all your expenses must be justified. Instead of spending without a plan, you will plan out every expense ahead of time so that every cent is accounted for. Aside from your regular monthly expenses, you get to decide where you put your money. You may allocate 10% of your earnings to entertainment, shopping and eating out, while putting 10% in savings. This helps you manage your finances, so you don’t spend too much or forget to save for the future.

You can break down your earnings as follows:

  • 30% on rent or housing.
  • 20% on food.
  • 5% on transportation.
  • 5% on utilities.
  • 10% on entertainment.
  • 10% in savings.
  • 10% on debt.
  • 5% on spontaneous spending.
  • 5% for emergencies.

You can also try the 50/30/20 model. This means spending 50% of your income on essentials like housing and food, leaving 30% for your wants, such as fun and entertainment and putting 20% in savings or towards existing debt.

How to Make the ZBB Budget Work for You

As you can see, you can design a zero-based budget that works for your unique lifestyle. All these categories should add up to 100% of your monthly earnings. Place each category on a separate line item. Leave yourself some wiggle room in case things change from month to month. For example, if you think utilities normally account for 10% of your monthly income, you may want to allocate 15% of your income to utilities in case you use more, or utility costs increase.

Under this model, you will have a certain amount of money set aside for fun and indulgences. You don’t have to second-guess yourself when going out for dinner or deciding whether to go to the movies. Once you surpass this self-imposed cap, it’s time to stop spending in this category until the next month.

You can transfer a certain portion of your monthly paycheck into savings or pay off your debts at the beginning of the month, so you’re not tempted to spend more than your budget allows.

Some people prefer to take out cash for fun and spontaneous expenses. This limits the amount of money you can spend when going out on the town or hanging out with friends.

You can also try the envelope model, which means putting cash in a series of envelopes earmarked for different purposes. This forces you to physically separate your money, so you don’t spend more than you should.

Don’t forget about seasonal expenses, holiday celebrations, gifts and other expenses that can come unexpectedly. You may want to put more in savings or create a special category for these items.

If you are looking to save up for a car or house, to go back to school or some other major purchase, create a special sub-category when putting your money into savings so you can track how much you’re saving every month.

How Zero-Based Budgeting Starts

If you decide that the zero-based budgeting process is right for you, use this guide to get started.

First, go through your finances to find out how much you make every month. If you do freelance work or don’t receive a steady paycheck, add up how much you made over the last 12 months and divide that number by 12 to calculate your average monthly earnings.

Once you have your monthly earnings, create a list of all your required monthly expenses, including rent, food, utilities, cell phone, internet, health insurance and other basic necessities. Leave out anything unessential until the very end. Ideally, these required expenses add up to around 50% of your monthly income.

Next, you’ll need to decide how you want to use your remaining income. Dedicate a certain portion to paying off your existing debt, such as student loan payments and credit card debt. These payments should be your first priority after your basic necessities.

Now, add the things you like to do every month, such as going out to eat, Netflix and other recreational expenses.

Try to put at least 15%-20% of your earnings into a savings account, retirement account, 401(k) or emergency fund.

You can always adjust these percentages and categories from month to month, as they’re not set in stone. The ZBB process is designed to keep you in control of your finances, so tinker with them as you see fit or as your finances change.

Pros and Cons of the ZBB Budgeting Approach

The zero-based model isn’t right for everyone. As you can see, it can be time-consuming compared to traditional budgeting. You can always use Excel  and other spreadsheet programs to simplify the process. The ZBB also leaves little to the unexpected. It may start to feel a bit monotonous, but you can always budget more for the unexpected if you like to go with the flow. This model is also designed for those with predictable income models. You may have trouble keeping pace with your budget if you get paid at different times and varying amounts.

You don’t have to be rigid with your ZBB by calculating the exact dollars and cents. Use estimates and rough percentages to save time every month. The budget will start to become routine over time, so it may not require as much work as you think.

Use this approach to stay in control of your finances. The ZBB model can be as flexible or rigid as you want. It’s all about making your money work for you.

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