What Is Zero-Based Budgeting?

What Is a Zero-Based Budget?

Zero-based budgeting is a spending plan that has you allocate all your money toward dedicated categories of expenses. When you subtract your expenses from your income, you should be left with zero—hence the name.

At first blush, that may sound like risky business—if your expenses really were equal to your income, you'd be living close to the edge, one transaction away from an overdraft or from going into debt.

In reality, zero-based budgeting often treats saving as one of your most important expenses. For example, your expense categories could include contributing to an emergency fund, a down payment fund and working on debt repayment. Putting money toward those goals, alongside your essential expenses and discretionary spending, is how you'll allocate all of your funds each month.

How to Create a Zero-Based Budget

Here are the steps you can follow to create your own zero-based budget:

1. Calculate your net income. Taking account of your income is simplest if you have a regular, fixed income. If you have irregular streams of income, such as through side hustles, contracting, tips or another source, find your average monthly income by adding up your income over the past several months and dividing by the number of months. If your cash flow increases or decreases significantly over time, repeat the process.
2. Tally up your expenses. It's easiest to start with what doesn't change: your basic housing and bills. Cover these categories first and then allocate funds to your variable non-negotiables: groceries, transportation, debt payments and other basics. Be sure to include saving as an expense category.
3. Allocate funds until you're at zero. Once you have your income and your non-negotiables figured out, look at the sum of money you have left to work with. You'll want to allocate those funds toward different spending categories and goals, assigning money until there's nothing left over.
4. Track and adjust as needed. Sticking to a zero-based budget requires you to be conscientious about your actual spending throughout the month. If you go over in one category, it's crucial to dial back spending elsewhere to keep your total from exceeding your available funds.

Tip: A budgeting app that automatically imports and categorizes your spending can make zero-based budgeting much more manageable, so you can stay in control without having to do all the math yourself.

Zero-Based Budget Example

Here's what a zero-based budget might look like for someone with a monthly take-home income of $4,000:

• Housing (rent/mortgage): $1,400
• Utilities and phone: $200
• Groceries: $400
• Transportation (car payment, gas, insurance): $500
• Minimum debt payments: $300
• Extra debt payoff amount: $100
• Emergency fund contributions: $200
• Retirement savings: $200
• Entertainment and dining out: $250
• Clothing and personal care: $150
• Subscriptions: $50
• Miscellaneous: $250

As you can see, every dollar has a job, and total monthly expenses match income exactly, bringing the total budget to zero. If you overspend on groceries by $75 one month, you'd pull $75 from another category—like entertainment or miscellaneous—to keep your total at $4,000 rather than blowing your budget.

Pros and Cons of Zero-Based Budgeting

Zero-based budgeting can be effective, but it's not for everyone. Here are the key benefits and drawbacks to consider before you commit.

Is Zero-Based Budgeting Right for You?

Zero-based budgeting tends to work best for people who want a high level of control over their spending and are willing to put in the effort to maintain it. It can be especially helpful if you:

• Are trying to pay off debt aggressively: When every dollar has a job, it's easier to direct extra money toward debt payoff rather than letting it get absorbed into vague "miscellaneous" spending.
• Have recently experienced a major income or expense change: Starting fresh with a zero-based budget can help you realign your spending after a job change, a move or another major life event.
• Earn enough but still feel short at the end of the month: If you can't account for where your money goes, this level of structure can help reveal the culprits.

On the other hand, zero-based budgeting may not be the best fit if you have highly variable income, are brand new to budgeting or simply don't have the bandwidth to track spending in detail each month.

Alternatives to Zero-Based Budgeting

Zero-based budgeting is loved by some for its ability to keep close tabs on spending. But it's also a labor-intensive method, and it can be even tougher to maintain if your income varies month to month. Here are some alternative budgeting methods worth considering:

• 50/30/20 budgeting: The 50/30/20 budget divides your income into three broad categories: 50% toward basic necessary expenses like housing and bills, 30% toward discretionary spending such as entertainment and shopping, and 20% toward saving goals, including debt repayment. It's less restrictive than zero-based budgeting and could be an easier place to start.
• Reverse budgeting: Also called a "pay yourself first" budget, a reverse budget has you prioritize meeting your savings and debt payoff goals first. Once you've funded those goals, your remaining funds go toward all your other expenses.
• Envelope budgeting: Also called cash stuffing, envelope budgeting works a lot like zero-based budgeting. But instead of allocating funds into categories on paper or in an app, you physically withdraw cash and place it into envelopes for each spending category. Some people find that physically dividing up their cash is an effective way to rein in spending.

Tip: It can take time and experimentation to find a budgeting style that works for you. Remember that a budget you can actually stick to long-term will always outperform a technically better one you abandon after a month.

Make Every Dollar Count

Zero-based budgets are hands-on by design, and that can make them feel highly effective for some and way overcomplicated for others. Ultimately, the best budget is one you can stick with. Whether that's zero-based budgeting or a lower-effort approach, what matters most is that you're actively managing your money.

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