Do you feel like your paychecks are gone as soon as they hit your account? Or do you have financial goals, like paying off debt or saving for an emergency fund, but no clear plan of action? If so, zero-based budgeting may help. This method allows you to analyze exactly where your money is going each month, so you can turn your goals into tangible progress.
Zero-based budgeters pre-determine exactly how each dollar of their income will be spent before it is spent. Total income minus expenses, savings, and debt equals zero, so there is no money left unspent.
“This method turns vague money worries into concrete decisions,” says Thomas Doleman, Ph.D., professor of finance at Saint Louis University’s Richard A. Chaifetz School of Business and senior wealth advisor at Elemental Wealth Group. “By clarifying where each dollar goes, it gives people a sense of control that a lump sum paycheck can’t provide.”
But is a zero-based method the best budgeting option? Here’s what you need to know about this popular approach to personal finance.
What is zero-based budgeting?
Zero-based budgeting assigns a purpose to every dollar you earn, including bills, groceries, savings, debt payments, and entertainment spending. In this way, income minus total planned expenditures equals zero.
“It forces people to make intentional choices with each dollar, rather than deciding what to do with the extra money later,” said Beth Stenz, CFP, a financial advisor at Edward Jones.
What is the purpose of zero-based budgeting?
Zero-based budgeting helps you make conscious decisions about where your money goes.
According to Dr. Dolman, zero-based budgeting is more proactive than traditional budgeting because you decide where each dollar will go before you spend it, rather than setting limits on certain spending categories and checking later to see if you’re within that range.
“This is not an accident, but an intentional play on mental accounting, our habit of treating money differently depending on the label we give it,” Dr. Dolman says. “Dollars already allocated to an emergency fund feel represented, making you less likely to spend money impulsively and making any trade-offs clearer.”
How to create a zero-based budget
When creating a zero-based budget, you need to allocate every dollar of your income to different spending or saving categories and track where your money goes throughout the month. Here’s how to get started:
- Calculate your monthly income. Start with your expected total income for the month, including regular paychecks, side jobs, and other sources. If your income fluctuates, use your best estimate.
- Make a list of all your necessary living expenses. These include fixed costs, such as rent and car payments, and variable costs, such as groceries and transportation. Assign each category the amount you want to spend that month.
- Allocate your money to savings and debt. List all your debt repayment obligations and savings goals and how much you want to spend on each. Make sure to cover the minimum monthly repayments and any additional contributions.
- Allocate remaining dollars to other categories. Then allocate the remaining money to any category you like, such as dining out, entertainment, shopping, etc. It can be helpful to create an all-encompassing miscellaneous category to cover unexpected expenses. If you have a variable income, this also gives you more flexibility.
- Track your spending. Track your spending throughout the month. Many budgeting apps automatically sync your bank transactions and can also categorize them. This helps you see when you hit your spending limits within a category and see exactly where your money is going throughout the month.
Zero-based budget example
Imagine your monthly income is $4,500. A zero-based budget would look like this:
Living expenses:
- Housing: $1,400
- Utilities: $250
- Groceries: $500
- Transportation fee: $350
Savings and debt payments:
- Student loan payment: $250
- Credit card payment: $300
- Emergency fund: $500
Discretionary spending:
- Entertainment and dining out: $300
- Streaming service: $50
- Others: $600
Total = $4,500
Be careful how Every dollar of your $4,500 income is assigned a role. The money left over after paying for basic necessities is allocated to discretionary spending, such as entertainment and eating out, or to savings, such as an emergency fund.
Advantages and disadvantages of zero-based budgeting
Strong Points
Zero-based budgeting is suitable for people who need a hands-on approach to managing their money or who need help staying focused on their priorities.
- Make it easy to track your progress toward your financial goals, like paying down debt or building savings.
- Planning your spending in advance can prevent you from overspending
- Gives you a detailed view of where your money goes each month
- Particularly useful for households with fixed or predictable incomes
Disadvantages
However, zero-based budgeting requires more effort than simpler budgeting methods.
- Tracking all your spending can be time consuming
- Requires regular adjustments and ongoing attention
- May feel restrictive to some budgeters who prefer a less structured approach
- Unexpected expenses may require rework in multiple categories
- Most effective when income is relatively predictable
Is zero-based budgeting appropriate?
Zero-based budgeting involves tracking all your spending. This provides valuable insight into your finances, but is not suitable for everyone.
Who is zero-based budgeting most effective for?
This detailed method is typically best suited for people who:
- have regular income
- I want to know exactly where my money is going each month.
- Prioritize debt repayment or savings
For whom zero-based budgeting is not ideal
A simpler or more flexible budgeting method may be suitable for people who:
- People with highly variable incomes, such as freelancers and commission employees
- I don’t want to spend time budgeting on a regular basis.
- You’re already saving money and automating your finances on an ongoing basis
That said, there are ways to tailor zero-based budgeting to your needs. For example, you can use automatic tracking in your budgeting app and include different spending categories to make your method more flexible and efficient.
Conclusion: Zero-based budgeting
Zero-based budgeting is a detailed and proactive approach to spending. It helps you set clear goals and plan how you spend your money each month. This allows some people to increase their savings or pay off debt faster.
“The main benefits of zero-based budgeting are awareness and control. By allocating all of their money to work, savers can better align their spending with their priorities and identify opportunities to direct more funds toward their most important goals,” said Sabino Vargas, CFP, senior financial advisor at Vanguard.
However, it requires careful monitoring and tracking of transactions, so it may not suit everyone’s needs. Budgeting apps can help automate some of the tedious tracking required for zero-based budgeting. Quicken Simplifi is one popular budgeting app that supports this method.
FAQ
What is zero-based budgeting?
Zero-based budgeting allocates all of your monthly income to a specific purpose. “Essentially, your total revenue minus your total expenses equals zero,” Stenz said.
What are the pros and cons of zero-based budgeting?
Zero-based budgeting allows you to create a concrete income plan that will help you reach your financial goals. It’s popular because it encourages you to be more intentional about how you spend your money. However, this method requires ongoing work to update and can be more rigorous than other budgeting methods.
70/20/10 What is the money rule?
The 70/20/10 Money Rule is a simple budget split that allocates 70% of your income to living expenses, 20% to savings, and 10% to debt payments. This is more flexible than the traditional 50/30/20 rule, which allocates 50% of your income to needs, 30% to wants, and 20% to savings, because it doesn’t make a strict distinction between “needs” and “wants.”
Can you create a zero-based budget if you have irregular income?
If your income is irregular, you can try zero-based budgeting, but you may need to be more flexible with your methods. For example, you can update the amount you allocate to savings and discretionary spending each month based on your actual income, or create a larger “Other” category to accommodate fluctuations.
