What Is Zero-Based Budgeting?

Zero-based budgeting (ZBB) is a strategy that earmarks every dollar you earn for a specific purpose. Since it helps you keep track of your income and spending, it can be a great way to take control of your finances and make the most of your hard-earned money. 

How a zero-based budget works 

Also known as zero-sum budgeting, zero-based budgeting boils down to one rule: your income minus expenses equals zero. In other words, every dollar is accounted for, whether it’s an everyday expense, debt payment, or financial goal. Give every dollar a job and make sure they’re all accounted for. 

How to create a zero-based budget 

If you’re serious about conquering your finances and want to use a zero-based budget, here’s what you need to do: 

1. Determine your monthly income. Your monthly income refers to any money you make from your regular job, plus any tips, bonuses, commissions, or side hustles. Every penny you earn should be listed and accounted for. 
2. Track your expenses. Go through your receipts and bank and credit card statements from the past three months to get a better view of your spending. 
3. Categorize your expenses. Next, put each of your expenses into categories, including groceries, dining out, utilities, giving, rent or mortgage, and so on. Create as many categories as necessary to list each of your expenses. 
4. Create savings categories. You should also take some time to create savings categories, even if you aren’t currently saving any money. This includes an emergency fund, savings account, retirement fund, and investments. 
5. Assign each dollar to a category. Start by setting aside essential expenses that you can’t get rid of, such as rent, groceries, and utilities. Next, determine how much money you want to use for discretionary spending, such as date nights. Lastly, decide how much money to allocate to savings, retirement, and your emergency fund. 

When it’s all said and done, your monthly earnings, spending, and savings should equal out to zero. You may need to rework the budget several times and make adjustments. This is especially true if you decide you want to increase your savings categories and cut back on discretionary spending. 

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Pros and cons of zero-based budgeting 

Just like any financial strategy, ZBB has its benefits and drawbacks. 

Pros of zero-based budgeting 

Zero-based budgeting allows you to: 

• Track your expenses. You have to pay close attention to your bills and identify unnecessary expenses that you can either reduce or eliminate. For example, if you have a gym membership you rarely use, it may make sense to cancel it. 
• Avoid overspending. Since you assign a purpose to every dollar, you’ll be able to see where you overspend. If you tend to spend more than you earn, using the zero-based budget may solve this financial problem. 

Cons of zero-based budgeting 

The downsides of zero-based budgeting are: 

• It’s time consuming. It takes time to calculate your earnings, track your spending, and assign each dollar to a certain category. And, once you have a budget in place, you’ll need to track where your money goes every month in case you need to adjust your budget. 
• It may not work for those with an unpredictable income. If you’re self-employed or otherwise have an unpredictable work schedule, this probably isn’t the budget strategy for you. 

Alternatives to zero-based budgeting 

If you decide that a zero-based budget isn’t right for your situation, there are other options to consider. 

50/30/20 budget 

With this method, 50% of your income goes towards essential spending, 30% goes towards wants, and the final 20% of your spending goes into various savings and retirement accounts. 

Because of its simplicity, the 50/30/20 method is one of the most popular budgeting options around. 

Envelope method 

The envelope budget method involves physically allocating set amounts of cash to spending categories, like groceries and transportation. It’s called envelope budgeting because you keep each category of cash in a different envelope. When the envelope is empty, you can no longer spend on that category for the rest of the month. 

Cash-only budget 

The cash-only budget is similar to the envelope method but without envelopes. Simply put, you do all your spending using cash, rather than checks, credit cards, and debit cards. It’s a great way to cut down on online shopping and frivolous spending and makes you more conscious of where your money is going. 

Why budgeting is important 

Budgeting can feel daunting, but it’s an essential aspect of money management. By setting strict limits for your spending and watching where every dollar goes, you can ensure that you stay within budget and avoid financial trouble. 

Budgeting: 

• Helps you achieve financial stability by helping you understand your income and expenses. This allows you to make smarter money decisions, avoid impulse purchases, and reach long-term financial goals. 
• Keeps you motivated, encouraging you to cut expenses and stay focused on your financial goals with a clear plan. This can help you keep from fizzling if you aren’t seeing huge financial gains in the first several months of your budget. 
• Prevents overspending on unnecessary purchases. Additionally, budgeting can help you track your spending patterns and identify areas where you can cut back. 
• Helps eliminate debt. According to Debt.com, “The percentage of people who say budgeting has ‘helped them get out or stay out of debt’ has increased from 73% in 2018 to 89% in 2024.” As such, if you have student loans, a mortgage, or another form of debt, budgeting can help you eliminate it faster. 
• Prepares you for emergencies. Setting up an emergency fund is a crucial aspect of budgeting that ensures you have something to fall back on in the event of a medical emergency, unexpected repair bill, and other unforeseen expenses. 
• Helps you save for retirement. According to Security Mutual Life, 20% of people over 50 don’t have anything saved for retirement. Another 61% are worried they aren’t saving enough for retirement, and won’t have enough to live on. 

Zero-based budgeting FAQs 

Can I use zero-based budgeting if I have irregular income? 

A zero-based budget can work even with irregular income or biweekly paychecks if you plan carefully. Start by identifying fixed expenses like rent and utilities, then average out your income and expenses based on the last three months. 

Allocate funds to cover fixed costs and essentials and build an emergency fund for low-income periods. With thoughtful planning, a zero-based budget can help you stay on track, regardless of how irregular your income is. 

Is ZBB right for me? 

A zero-based budget ensures every dollar has a purpose, including savings, giving you clear insight into your spending. It’s all about careful planning and ensuring every dollar is spent wisely. While it can help you make informed financial decisions, its detailed nature may feel overwhelming for some. Therefore, you should consider your lifestyle and goals before committing to a zero-based budget. 

You should also compare the zero-based budget to other options and decide which one will help you accomplish your goals and take control of your spending. That way, you can create a budget that works for you.