Is Zero-based budgeting right for you?

Have you heard of a budgeting method, called “zero-based budgeting”? It is a popular method to keep your household finances in order and to stay in control of your finances.

In this article, I’ll explain to you what zero-based budgeting is and help you to decide if it is right for you.

Odometer reading zero
Photo by Scott Rodgerson on Unsplash

Any budget lists the planned amount of money that flows in and out of your pocket. These are the plans you have for your money. Furthermore, budgeting requires you to track the actual income you have and the expenses you make. The tracking of expenses is a bit more work, as you want to track it for different categories of expenditures.

What is zero-based budgeting?

Zero-based budgeting is a popular method to make a personal budget. The focus of zero-based budgeting is that you plan the purpose for every single dollar of your income. That means you plan all expenses and savings, as well as debt service for the next month.

If you list your planned income and subtract all planned expenses the difference must be zero. Hence the name of zero-based budgeting. For simplicity, we treat here savings and debt payments as expenses.

How to create a zero-based personal budget?

You can create a typical household budget on a sheet of paper or in a notebook. Here are the steps:

  1. Write down your income, such as salary, wages, tips, pension, social security, etc.
  2. List all your expenditures, such as rent, mortgage, insurance, car payments, gas, utilities, food, clothing, etc.
  3. Add all savings goals and the amount to contribute each month.
  4. Subtract Expenses + Savings from Income. Make sure the result is zero or you need to adjust your plan.
  5. Continually, when you spend money, list it and add it to the actual value in the expense column. Make sure you are aware when a column gets close to the planned spending.

Saving goals can be of short-term nature, such as holiday or vacation budgets. Or they can be for concrete larger purchases, such as replacing the car or a down payment on a home. Some savings goals are not concrete, such as saving up for an emergency fund or saving for supplemental income for retirement.

The key to successful zero-based budgeting is to know your expenses and to plan your money goals. The other essential thing is to track your expenses and put them into the categories that you assigned for them. You also need to be disciplined when you spent the planned amount in a category for the month. When you reach the amount planned, you have to stop spending money in that category until the end of the month.

What is an example for zero based budgeting?

If for example, your take-home pay in a month will be $3,500. You can create the following list

Income$3,500
Housing (Rent, Mortgage, Insurance,…)$1,200
Insurance (Liability, Life, …)$150
Utilities (Power, Water, Phone, …)$125
Gas$275
Subscriptions (Internet, TV, Play Pass, …)$225
Food$300
Dining$150
Clothing$150
Student Laon Payments$250
Retirement (Roth IRA)$500
Emergency Fund$100
Vacation Fund$75
Balance$0
Zero-based Budget Example


If the balance in the last line is greater than zero, you need to think about which expense category you want to increase or add a new category. You can pay down your debt faster or save towards your holiday funds, that is up to you.

If your balance is negative, you plan on spending more money than you’ll take home. You’ll need to reduce expenses or come up with some way to increase your income.

Zero base budget vs zero-based budgeting

Zero-based budgeting is a technique in personal finance to plan for your money and make sure you account for every dollar of expenses. The zero-based comes from the fact that all income – all expenses and savings = zero.

A zero-base budget is a concept for budgeting in business. It describes a method, where expense line items are not derived from the past, but must be justified every single budget period, which may be a month, quarter, or year. The “zero base” stands for resetting all expense categories to zero and justifying what is needed every planning period.

What are the benefits of a zero-based budget?

As with any budget, having a plan for your money is better than being surprised by expenses. It allows you to save up for emergencies, larger purchases and to plan your future according to your goals.

The discipline of the zero-based budget is to account for every dollar you spend or save. This prevents you from overspending and leaves you in control of your financial situation. You can also use this plan to communicate with your spouse or with your children, what you are planning for and what you can afford.

The system is customizable to your needs. There is no fixed list of categories you need to track your spending and saving in. However, you want to list all major categories and group things together that are equally hard to change. It is a smaller change to not dine out next month because you need to replenish the emergency fund. But cutting the food budget might leave you hungry.

When is zero-based budgeting not a good fit?

Zero-based budgeting can become challenging if your income varies a lot. For example, if you are paid by the construction job or you are self-employed. That said, lumpy income that leads to lumpy expenses is a challenge for any family. It is a sign of inadequate money management. You can get around that is by creating a money cushion, just like an emergency fund. Such a money cushion allows planning in equal amounts of income every month. Expenses can then be better planned, as well as long-term savings goals.

Lots of variable expenses can also make it difficult to keep a zero-based budget. However, if your expenses can be planned, then creating and maintaining a zero-based budget will put you in control of your money. For example, you will be able to decide if you can afford to travel to that wedding, that you just received an invitation for. Because with a budget you know if you can save up enough money for such a goal or not.

Which should I choose, zero-based budgeting or envelope budgeting?

Cash Envelope budgeting is a method of budgeting, that encourages you to make as many payments in cash as possible. Because if your spend cash you have physical control over your spending.

In Cash envelope budgeting, you first take your income in cash and stash it into envelopes, that are the very same categories you’d use in a zero-based budget. Next, when you’ll purchase something, you take the appropriate envelope to the place of purchase and pay with the money in the envelope. For example, if you are going grocery shopping, you take the food envelope with you and pay with cash at the cash register.

As you are dividing all your income into planned expense envelopes, you can see it is essentially the same budgeting method as zero-based personal budgeting. In the US paying with cash becomes increasingly uncommon if not impossible. Therefore managing a zero-based budget with a spreadsheet or an app will be much easier to implement. It will also save you time and energy, so you stick with it.

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