What Is a Zero-Based Budget?

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Stacks of coins with items on top represent spending categories in a zero-based budget.
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Do you struggle with budgeting?

Don’t feel bad. There’s no such thing as a perfect budget. And it can be tough to wade through all the options to find the money management method that works for you.

Most of us weren’t taught how to manage our money so is it any wonder only 32% of people bother to budget at all?

If you’re looking for a method that will help you take control of your finances, a zero-based budget may be the answer.

What Is a Zero-Based Budget?

In its simplest terms, zero-based budgeting means you give every dollar a job.

Every. Last. Cent.

At its core, it’s simply subtracting your expenses from your income until you reach zero.

But if that’s as far as you dig you might wind up making the mistake of thinking you need to spend all of your money.

Quite the opposite.

You don’t actually spend your money, you assign it to your goals until you have zero dollars left to budget.

In other words, with a zero-based budget, you don’t spend every penny, you just give them a purpose.

How Is Zero-Based Budgeting Different Than Traditional Budgeting?

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Zero-based budgeting requires a slight shift in thinking compared to traditional budgeting.

Most of us are used to forecasting out our income to include all the money we expect to earn in the month to come.

We factor that number into our total monthly income with which we budget.

But this can give us a false sense of security.

Knowing you will eventually have the money to pay the bill doesn’t mean you can pay the bill when it comes due.

Zero-based budgeting requires that you only budget the dollars you have available right now.

Forecasting your income and spending as though you’ve already got that money is almost guaranteed to keep you living paycheck-to-paycheck.

What Are the Differences Between Zero-Based Budgeting and Other Budget Methods?

There are several other popular budgeting methods but how do they compare to zero-based budgeting?

50/30/20 Budget Method

The 50/30/20 budget is a popular framework that has you allocate your income in percentages:

  • 50% goes toward your needs
  • 30% goes towards wants
  • 20% gets set aside for savings

Percentage-based budgeting is a popular solution for people who want an easy budget fix. And while it may be better than nothing for those who feel overwhelmed by tracking their spending in detail, it’s simplicity is also its weakness.

Without tracking your spending you lack awareness and intentionality. It’s easy to start overspending or making excuses and mix up your needs vs wants.

Another downside to this method is that you’re actually limited by the percentages. Your savings percentage includes debt repayment (only the minimum payments are considered “needs”).

If you’re working to pay off debt, allocating only 20% toward debt repayment will make it a much longer process. Especially if you’re trying to save for other goals and/or retirement.

Reverse Budgeting

Reverse budgeting is the approach of setting aside your savings first and spending the rest without worry.

While I endorse paying yourself first, trying to gain control over your finances without planning for future spending may end in disaster.

Unless you’re saving enough of your money every month to cover unexpected and emergency spending, you’ll likely wind up short when something pops up.

That’s usually how debt starts to accumulate.

If your income far exceeds your expenses, this type of budget may be great for you. But for most of us, it’s much too open.

Set It and Forget It

Similar to reverse budgeting, the set it and forget it method ignores unexpected expenses. It also assumes you’ll live within constraints you made when your priorities may have been different.

Again, this method assumes you’re spending so far below your means that any unexpected expenses won’t affect you.

In my experience that’s unlikely for most of us.

If you struggle with overspending or are stressed or worried about money at all, this method probably won’t help.

Managing your finances without awareness into your spending and your priorities is likely to keep you in a constant state of frustration and worry.

Zero-Based Budgeting

So how does Zero-based budgeting compare?

With zero-based budgeting, you’re forced to plan ahead by assigning a task to all of your dollars.

All your bills, your shopping, and your savings goals need to be funded.

This type of budget makes you pay attention and start prioritizing.

But it’s also flexible because it’s so complete.

A zero-based budget will let you know exactly where every dollar is going. And if you change your priorities it’s easy to simply rearrange those dollars to fund your new ones.

Why You Should Try Zero-Based Budgeting

The best reason to give zero-based budgeting a try is that it’s the best way you can finally gain control over your finances.

A zero-based budget is the best way to:

  • Break the paycheck to paycheck cycle
  • Know where your money goes
  • Reduce mindless spending
  • Hit your goals

With this budget method, you decide where every dollar gets spent.

How To Make a Zero-Based Budget

To start your own zero-based budget you’ll need to do a few things.

1. Determine How Much Money You Have

First, you need to know how much money you have.

Remember we’re not talking about the income you expect to get, we’re only talking about the dollars you have available.

Take a look through your accounts and see how much money you have across your checking and savings.

2. Figure Out How Much You Spend

Next, you need to figure out your expenses.

If you haven’t been tracking your spending, pull out last month’s statements to get an idea of what you’ve been spending on.

Make a list of all your recent expenses. You may be surprised to see what you’re actually spending your money on.

3. Calculate How Much You Owe

Once you have your recent expenses, look back over the past 12 months and make a list of the less frequent ones.

Look for expenses that come up:

  • monthly – like recurring bills and subscription costs
  • quarterly – things like trash and pest control services
  • seasonally – think about holiday and gift spending
  • annually – insurance and group organization renewal fees (like AAA and other professional organizations you may belong to)

These are the expenses that often sneak up on you and cause you all sorts of stress when they do.

4. Set Some Goals

After you’ve got all your expenses noted, take a few minutes to set some goals.

Do you want to pay off debt? Save for a house? Build a vacation fund?

Knowing what your financial goals are will keep you focused when you’re tempted to abandon the budget.

It will also help you with the next step.

5. Prioritize Your Expenses

Look through the expenses you gathered in steps 2 and 3.

How do they align with the goals you set?

If they’re still valid, start prioritizing them. List them out in the order that they’ll help you achieve your goals.

If they won’t help you, be ruthless about cutting them or eliminating them entirely.

6. Subtract Your Expenses From Your Cash Available Until You Hit Zero

Depending on the amount of cash you’re starting with, this may be a long and thoughtful process or a quick and painful shock.

If the latter is the case, consider looking at only the expenses that are due before you’re paid again.

Paycheck budgeting will help you fine-tune your priorities and break the paycheck-to-paycheck cycle.

If you’ve got enough cash to cover your immediate expenses and some, now is where the fun begins.

Start dreaming about your future and assigning dollars to the jobs that will get you there.

Keep budgeting and assigning dollars to categories until you have no more dollars left to budget.

Some Tips to Help You With Zero-Based Budgeting

Tip #1 – Budget for everything.

Don’t just think about expenses and obligations. Start assigning dollars to your savings goals too.

Tip #2 – Over-estimate any variable expenses.

It’s always better to over-budget than over-spend.

Tip #3 – Track your spending.

Awareness of your spending is the only way to know where your money is going and whether it’s being spent according to your priorities.

Tip #4 – Roll with the punches.

It’s almost a guarantee that things will pop up that throw you off. But with a zero-based budget, you’re more equipped to deal with them.


Can You Make a Zero-Based Budget With a Variable Income?


Zero-based budgeting works great when you have a variable income because you’re ensuring you only budget money you have.

When you avoid forecasting you avoid having to worry about your next paycheck not being enough to cover the bills.

With zero-based budgeting you’ll be living off your last paycheck, not pre-spending from the next.

Will a Zero-Based Budget Take Forever to Set-up and Maintain?

Not at all.

A zero-based budget does take a bit of time to set up since you’ll need to gather your numbers and set some goals. But once you’ve gone through the process of setting your goals and prioritizing your spending the bulk of the effort is done.

Tracking your spending may make this more time-intensive than not budgeting at all, but even that can be largely automated with apps.

Will a Zero-Based Budget Be Too Rigid to Keep?

Any budget is only as good as your purpose for keeping it.

If your priorities change, simply change your budget to match. If it feels too rigid, reevaluate your goals and priorities.

Can I Really Not Forecast My Income to Budget Ahead?

You can do whatever you want, but the best way to ensure you break the paycheck-to-paycheck cycle is to make sure you’re living on last month’s income.

Forecasting turns your budget into a fantasy.

The cash it says you have available becomes a lie. It makes you think you have money you don’t actually have.

That’s a dangerous habit to keep.

Final Thoughts

If you’ve been struggling to manage your finances, give zero-based budgeting a try.

A zero-based budget will help you gain more awareness into your goals and be more intentional with your spending. And that’s the best way to take control of your money once and for all.

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