Zero Based Budgeting

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Even a broken clock is right twice a day.

If you look for financial advice on TikTok, there’s a good chance you’ll come across misinformation. But every once in a while, FinTok gets it right. In particular, there’s been some useful information circulating on the platform in the past year or so about a budgeting method called “zero-based budgeting.”

Zero-based budgeting is a very hands-on approach to creating and following a budget, which means it’s definitely not for everyone. But for people who need to get their spending under control or save more money, this method can be a game-changer.

What is Zero-Based Budgeting?

Zero-based budgeting (ZBB) is a budgeting method that assigns a role to every single dollar you earn. Where the “zero” comes in is that after you decide which expense category each dollar goes into — whether its bills, transportation, savings or otherwise — there will be $0 left over.

Does that mean that you don’t get to spend any money on fun stuff like dining out or travel? Definitely not. It just means you choose a specific dollar amount to spend on each category, with a priority on spending categories that match up with your goals.

“You really keep track of and plan out every dollar with this method,” says Kendall Meade, Certified Financial Planner at SoFi. “For those who are trying to overcome overspending or pay down debt, it can be very powerful.”

Getting Started With Zero-Based Budgeting

Setting yourself up on a zero-based budget (and sticking to it) takes some trial-and-error. To get started, you’ll want to set aside time for an in-depth look at your finances and think through how you want to spend money. Here are the steps that will get you going:

1. Identify Financial Goals

This whole process might seem like a form of punishment if you’re not working toward something that excites you. So before you start assigning a job to your dollars, think through what goals you really want to accomplish.

Maybe you want to pay off credit card debt or buy a car or save up a down payment for a house. Perhaps you want to retire by 40 years old. Whatever your goal is, you can build it into your zero-based budget and use it to inform how you spend money. In fact, if you have extra cash, the best place to put it is toward your main goal.

Want even better results from your zero-based budget? Get as specific as possible about your financial goals, so you can break down how much you need to set aside each paycheck and track your progress. According to a handful of studies, setting and tracking your goals helps keep you motivated and makes you more likely to follow-through.

2. Document Income and Expenses

The next step is to gather your numbers. During this step, you’ll make a list of your income and all of your expenses, so you can plug the figures into your ZBB.

You can start with a budgeting template to help you catch all of your spending categories, but here are a few extra ways to make sure you don’t miss anything:

  • Paystubs: Review your pay stubs to find your net income (that’s income after taxes and withholdings), since that’s the income figure you’ll use for your budget. You can also look to see if (and how much) you’re contributing to retirement or other employer-sponsored accounts. Just make sure you don’t add them to your budget as separate expenses, since they’re already coming out of your paycheck.
  • Spending statements: Pull up your most recent statements for your bank accounts, credit cards and digital wallets. When you review them, you’ll find expenses you’d otherwise forget about.
  • One-offs: Think about seasonal expenses and one-offs that might not show up in a recent account statement. This might include holiday and birthday gifts, vehicle registration or trips to the salon. These items don’t necessarily belong in your monthly budget, but you can save some money each month to cover them when they do come up.

3. Assign Every Dollar a Role

Now that you’ve taken inventory of your income and expenses, you’ll need to decide where you want to create your budget. Every dollar you bring home should fit in an expenses category on your budget. If, for some reason, there is money left over after you covered each category, then assign that stack of cash to your ultimate goal.

Writing out this type of budget with paper and pen is perfectly fine, but you might find it easier to adjust the numbers if you use a simple digital tool like Google Docs or even a zero-based budgeting app like YNAB.

“I recommend using a digital tool to help track your spending, so you don’t have to dig through your bank and/or credit card statements or write down your spending every time you have a transaction,” Meade said.

4. Balance Spending with Income

As you enter your numbers, remember the goal is to give every single dollar a job. You might have to make some tough choices if there’s not enough cash to cover every want or need. If you find it hard to make cuts, look for items you’re not using or expenses you can reduce or eliminate temporarily, such as:

  • Streaming services
  • Recurring subscriptions and memberships you don’t use
  • GAP insurance on a car that has equity
  • Utility and cell phone bills that can be reduced by switching providers

If you’re not earning much money and you’re coming up short of cash for necessities — expenses like food, shelter, utilities, transportation to work and medical care — you might need to brainstorm ways to earn more income ASAP. Talking to a certified credit counselor about eliminating debt can help, too.

5. Regularly Review and Adjust Budget

Once you start applying your ZBB in real life, you might find that some details need adjusting. But don’t give up! Every budget requires occasional tweaks. In fact, you’re more likely to create a ZBB that works for you if you regularly review and update the numbers. For example, you might review it on the first Monday of the month.

Your zero-based budget will also need updates when your income or expenses change. If your income increases, consider putting all of the extra money toward the category that represents your main financial goal.

Example of a Zero-Based Budget

Every single person’s budget will look different. But people who use a ZBB will all have at least one thing in common: there’s $0 left over after all of your spending is assigned.

Your budget will likely have dozens of spending categories, but here’s a simplified example of what two different zero-based budgets can look like with the same income:

Budget example 1Budget example 2
GoalPay off $30,000 in student loan debt within 3 yearsPay off $4,000 in credit card debt within 1 year
Monthly net income$4,000$4,000
Car payment$400
Car insurance$80
Credit card payments$295
Student loan payment$1,200$200
Dining out$300$50
Cash not allocated$0$0

Advantages of Zero-Based Budgeting

Zero-based budgeting is a proactive approach to spending money. Instead of letting your impulses do the picking, you decide what you want to spend money on, far in advance of decision time. Here are a few of the main benefits:

  • Assign a purposeful role to every dollar you earn
  • Make financial goals a priority
  • Deter impulse buys and overspending
  • It can be done using free tools

Disadvantages of Zero-Based Budgeting

Zero-based budgeting is recommended by many personal finance experts, but it’s definitely not for everyone. “It is very time consuming and can be overwhelming, especially when you’ve never budgeted before,” says Meade. Here are some of the main drawbacks:

  • Time-intensive
  • Requires strong discipline
  • Needs to be updated regularly
  • Difficult to account for irregular expenses

Zero-Based Budgeting vs. Alternatives

Of course, zero-based budgeting isn’t the only way to get your spending on track. “There are many different budgeting methods and what we find is that different types of budgets work best for different personality types,” says Meade.

If you’re looking for another way to budget, here are some methods to try on their own, and some can even be combined with your ZBB:

  • The 50/30/20 rule: With the 50/30/20 rule, you allocate 50% of your take-home pay to needs, 30% to wants and 20% to savings or debt payments. This method works best for people who want a more set-it-and-forget-it approach to budgeting, but doesn’t fit every situation. For example, someone with a lot of credit card debt might need to spend less on non-necessities to pay off debt faster.
  • The envelope system: Also known as cash stuffing, the envelope method involves allocating a set amount of money to each spending category and then putting that cash into physical or digital envelopes. Like a ZBB, this method lets you set intentional boundaries around your spending, but operating on a cash basis is even more likely to deter you from spending. On the other hand, this method can be inconvenient and time-consuming to follow.
  • Pay yourself first method: With this simple method, allocating money towards savings goals is the first priority. To use the Pay Yourself First (PYF) method, set up a recurring deposit to your emergency savings, retirement fund, home down payment savings fund or another savings goal. As long as you have enough income to cover your expenses, you don’t need to fuss over the other details. While the PYF method is a great option for people with surplus income, especially those who don’t like using detailed budgets, it can also foster wasteful spending.

Transform Your Finances

Not sure if zero-based budgeting is right for you? It doesn’t hurt to give it a try. Even just the simple exercise of writing out your expenses and considering where you want your money to go can be enlightening. Plus, you don’t have to do it alone. If you want help from a professional, you can set up a budgeting appointment with a certified credit counselor from a nonprofit credit counseling agency.

If you do just-so-happen to build a ZBB and stick to it, great! As a reward for your hard work, you could end up cutting back on expenses, avoiding new debt and reaching a financial goal sooner than expected.

About The Author

Sarah Brady

Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC).


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