Zero-based budgeting is one method that can help you account for every dollar so you better understand your cash flow situation. This in turn can help you better manage your money and hit your financial goals.
You may be among those people who feel as if your money disappears as you pay for groceries, gas, utility bills, dining out, student loans, and everything else on your plate, without really knowing how much you earned or how much you are spending. That’s where a budget like the zero-based budgeting method can help.
A budget provides a framework to see how much is coming in and what it’s being spent on. It gives you the chance to recalibrate so you can, say, put more into savings. Here, learn more about zero-based budgeting and whether it would be a good fit for you.
Key Points
• Zero-based budgeting allocates every dollar of income to specific expenses, savings, or debt payments.
• Steps in zero-based budgeting include listing income, identifying fixed expenses, and allocating remaining funds.
• When using zero-based budgeting with an irregular income, maintain a buffer and adjust budgets based on monthly earnings.
• Compared to the 50-30-20 budget method, zero-based budgeting is more detailed but can be time-consuming.
• Zero-based budgeting may be made faster and easier with tech tools and apps.
How Zero-Based Budgeting Works
When building a zero-based budget (sometimes referred to as 0-based budget), your income minus your expenses should equal zero. In other words, with zero-based budgeting, every dollar of your income has purpose.
This doesn’t mean you won’t have any money in your bank account, since you might want to allocate some of your budget to savings. Rather, using this method could help you know exactly how much you will spend, save, and invest in any given month. And depending on your monthly needs, these figures may change or stay the same.
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How to Build a Zero-Based Budget
As with most budgeting techniques, you might want to start the zero-based budgeting process by making a list of your expenses.
• Start with your fixed and necessary expenses first, such rent, utilities, groceries, transportation, insurance payments, and debt payments. You know that these payments have to be covered each month, so you could allocate income to each necessary expense.
Tally these expenses and subtract them from your total income. The resulting figure could be the amount available for discretionary expenses.
• Next, you could allocate those remaining discretionary funds. You might consider such spending as dining out, gym memberships, travel, and entertainment.
• Also consider savings. That could include money that you pay to yourself to save for short-term goals such as an emergency fund. Or you might target longer-term goals such as stocking an online retirement account or saving for the down payment on a house.
• Keep in mind that some expenses might be seasonal, such as vacations or holiday gifts. You might want to determine how you’d like to save for these expenses. You may choose to allocate funds in a single month, or it may make sense to set aside a small amount over each monthly period.
It might take a little bit of extra planning to figure out how much you’ll need and how to divide up the cost. When doing so, don’t forget about one-off expenses, such as paying for an annual homeowners insurance premium.
• Some expenses may also be variable — for example, say you’re hit with an unexpected bill when your car needs a new transmission — and these can be tricky to deal with. One way you could build them into the budget is to have a line item such as “savings for variable expenses” to help you cover them. This line item would be different from your other savings. You could keep the funds in a high-yield savings account so it earns some interest.
A simple example of a zero-based budget for someone who makes $6,000 a month might look like this:
| Rent/Housing | $3,500 |
| Utilities | $200 |
| Car payment | $300 |
| Gas | $200 |
| Groceries | $400 |
| Savings | $750 |
| Eating out | $200 |
| Entertainment | $150 |
| Student loan payments | $200 |
| Credit card payments | $100 |
| Total | $6,000 |
In this example, the person’s income less their total expenses — $6,000 minus $6,000 — equals $0. As mentioned above, every dollar has a job to do.
Finally, remember that with a zero-based budget every dollar should have a purpose. So if at the end of figuring out your expenses, you find yourself with some extra cash, it needs to go somewhere. You might want to put a little extra toward savings or pay off some debt quicker.
But if you don’t allocate the funds, they might get spent. The problem is you may not know where you spent that money, and keeping track of it is the whole point of this exercise.
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Tracking Your Budget
You might want to keep an eye on your spending throughout the month to make sure you’re sticking to your budget. This process could be dynamic, meaning it shifts in real time. If you find that you don’t need to spend as much on one budget item one month, you could shift that extra cash into another category the next month.
• If you find yourself needing extra money in your checking account to cover an expense, you could look for places to save.
• If you find yourself with little wiggle room in your budget and need to add to or boost your existing expenses, you might want to increase your budget with extra sources of income, like a side hustle.
Tools and Tips for Tracking a Zero-Based Budget
There are several tools that can make it easier to manage a zero-based budget. A few ideas to consider.
• There are various online calculators for different budgeting tasks, such as emergency fund calculators. Search and find one that could help you with the math for your zero-based budget.
• To better track your spending, see what tools your bank offers. Many have budgeting apps and/or trackers that can help you understand where your money is going.
• You might also investigate third-party budgeting apps. Some are available for free; others require payment.
• Tech tools can also help with managing your money when budgeting, from direct deposit to facilitate receipt of your paycheck to online bill pay to cover expenses seamlessly.
• Some people will like to manage their budget with pencil and paper (a ledger-style pad can be helpful) or an online file, such as Excel or Google Sheets. It’s your choice.
A Zero-Based Budget on an Irregular Income
Many people earn a variable income, whether that means being a seasonal worker or a freelancer whose earnings ebb and flow. A variable income can pose some challenges to building a zero-based budget, but they’re not insurmountable.
Adapting Zero-Based Budgeting for Inconsistent Income
First, you could consider maintaining a buffer of cash, or a cash cushion, to help cover your expenses as your income varies.
You could then use your previous month’s budget as a base for the current month, using the buffer to cover any shortfalls. You might want to replenish this buffer when you have extra money in a month. You may also try building your budget based on a low estimate of your monthly income to increase the odds that you’ll be able to stay within your budget.
An irregular income means that you might spend more time adjusting your budget as your income fluctuates. You might need, say, multiple budgets. A seasonal worker could have, say, a high season and a low season budget that they use at various points during a typical year.
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Other Budgeting Strategies to Consider
There are other budgeting methods that may be worth a try. One rule of thumb, called the 50-30-20 rule, allocates percentages of your income to different categories. When using this rule, 50% of income goes to necessities, like housing, utilities, and food. The next 30% of income goes to discretionary spending, and the final 20% is allocated to savings or additional debt payments.
You may also consider a budgeting system known as reverse budgeting, in which you focus on savings goals rather than expenses. To use this method, you might want to determine your short- and long-term savings goals, such as a down payment on a house, paying down student loan debt, and retirement.
You could figure out how much you need to save for those goals and then automate the savings. The money could be taken from your checking account and put into a savings account each month. You might use the money left in your checking account to pay for necessary expenses first, and the rest you could use however you’d like.
Comparing Zero-Based Budgeting to Other Methods
Finding the right budget to fit your needs is an important process, and it may take some trial and error. It can be wise to experiment with a couple of techniques to find one that feels like a good fit.
For example, some people may find the granular “every dollar has a job to do” approach of zero-based budgeting suits them. They may find it very helpful to know every single expense that occurs during a week or a month. Other people may prefer, say, the 50/30/20 budget rule, since they only need to stay focused on three key buckets of spending their money.
Pros and Cons of Different Budgeting Styles
Here are some points to consider as you decide whether zero-based budgeting is right for you.
• Pros: For a personal budget, a zero-based budget can provide insight on expenses and spending habits which can help a person manage their money better. In a business context, this budget can also be used, allowing managers to delve into their operations and cost savings and maximize their resources.
• Cons: No doubt about it, zero-based budgeting can require considerable time and effort. It may be too detailed for some people’s tastes. They might prefer a simpler approach or to use tech tools to manage their finances.
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The Takeaway
Zero-based budgeting is a technique in which every dollar you earn has a job to do. By managing your money this way, you can have a very in-depth understanding of your finances and your spending and saving habits. However, this technique can be time-consuming and may not suit an individual’s needs. Budgeting in general, though, is an important way to see where money is going and to fund the things you care about most. Your bank may offer valuable tools that can assist with this process.
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FAQ
How much time does zero-based budgeting take each month?
The amount of time it takes to manage zero-based budgeting each month will vary depending on each person’s situation, needs, and speed with organizing their financial details. That said, it may initially take several hours per month to establish this kind of budget, and then a few hours per month to keep it running.
What tools can simplify zero-based budgeting?
There are a variety of tools that can simplify zero-based budgeting. For some people, using a ledger pad or an online file (such as Excel or Google sheets) can be helpful. Others may want to use an online budget calculator, tools provided by their bank, or third-party apps to track and optimize their spending and saving.
Are there challenges to maintaining a zero-based budget?
There are challenges for most budgets, and the zero-based system is no exception. Some people may find tracking their expenses and accounting for every single dollar earned to be a very involved process that takes too much time and effort. In addition, those with a fluctuating income (such as seasonal workers) may find zero-based budgeting to be a challenging technique.
How can I stay consistent with a zero-based budget?
Staying consistent with zero-based budgeting requires diligent tracking of your income, spending, and savings. It can be a detailed process, and it can involve re-evaluating the figures on a regular basis, especially if you earn a fluctuating income. While this sounds as if it must be a time-consuming pursuit, there are tech tools that can help automate this process somewhat.
What should I do if I exceed my budget in a category?
If you exceed your budget in a category, there are a couple of options. You could cut your spending in that category, or you could borrow funds from another category and economize there. For instance, if your spending on dining out is running high, you can either rein it in or borrow funds from, say, your entertainment or travel spending to cover it.
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