Zero-Based Budgeting Explained: How it Works, Creating a Budget, and App Alternatives

Zero-based budgeting is a customizable and flexible budget that’s incredibly effective for paying down debt and reaching savings goals.

It works so well because zero-based budgeting forces you to pay attention to every dollar that flows in and out of your budget. And when you know exactly where your money is going, you are in control.

What is a zero-based budget?

Zero-based budgeting is taking your income and allocating it to each of your expenses, your savings, and debt payments until you reach zero. You are making use of every single penny you earn. And while it’s strict in the sense that you have to distribute your money all the way down to zero, you get to decide exactly where all of those dollars go.

Besides being very hands-on, the real benefit of zero-based budgeting is that you make things like savings and debt payments a priority by creating a line for them in your budget. You’re not waiting until the end of the month to see if you have enough extra funds for them.

And, zero-based budgeting will show you where you need to make adjustments to your budget so that you have the funds for all of your money goals.

Sometimes you’ll hear zero-based budgeting referred to as zero-sum budgeting or abbreviated to ZBB.

Related: 50/30/20 Budgeting Rule: What It Is and How It Works

How to make a zero-based budget

To build your own zero-based budget, you need to start with a full understanding of your income and expenses. A guess isn’t realistic enough to create an effective budget, so grab your paycheck stubs, bank and credit card statements, receipts, etc.

Here’s your complete guide to making a zero-based budget:

1. Start with your income

This should include your monthly paycheck(s), side hustle income, rental income, benefits, child support, etc. If money is coming in, count it as income.

2. Track and categorize your expenses

If you’re new to budgeting and don’t know what you’re spending money on and how much, start tracking your spending. Write everything down, put it in a spreadsheet, use an app, whatever you need to do.

Your expenses should include:

• Mortgage/rent
• Utilities
• Insurance
• Transportation
• Debt payments
• Savings
• Investments
• Entertainment
• Cell phone
• Extras

For seasonal expenses, like a holiday or back-to-school shopping, add those into your budget and think about when you need to start saving for them. When it comes to writing out your budget, it may help to label these as “funds” so you can save up money for those expenses.

If your income fluctuates from month to month, it would be advantageous to categorize your expenses by importance. I’ll explain more about this a little further down.

3. Subtract your expenses from your income

Take your total income and subtract every expense until you get down to zero.

• If your income doesn’t cover everything, then you may need to find ways to make more money or reduce your current expenses.
• If you have leftover funds, consider putting more towards savings, investments, or retirement.

4. Keep track of your budget and adjust as needed

Having a functional zero-based budget depends on you using it every month and making adjustments as needed. It’s 100% okay to move money from one spending category to another.

As you do things like pay off your debt, you’ll want to adjust your budget and allocate that money to something else.

An example of a zero-based budget

Here’s an example of what a zero-based budget looks like. Remember, we start with income and subtract expenses down to zero.

Monthly income: $9,000 (This is the combined total of everything coming into your household).

Income – Expenses

• Start with $9,000
• – $1,500 for housing expenses (mortgage, insurance, taxes, utilities, phone/internet)
• – $600 healthcare costs
• – $500 transportation
• – $600 food
• – $1,000 childcare
• – $100 entertainment
• – $3,000 debt
• – $1,700 savings/retirement
• = $0

Does zero-based budgeting work with an irregular income?

Yes, zero-based budgeting can work if you have an irregular income! The way you work it is by listing your income as the lowest possible amount you could make in a month. Then, start subtracting your most important expenses (food, shelter, transportation).

When your income starts to go up for the month, subtract the rest of your bills and debt payments. If you still have more coming in, that goes towards everything else.

The goal is to take care of your most important expenses first. If you’re self-employed or a freelancer earning an irregular income, then you’re probably used to spending this way already, even if you aren’t using a zero-based budget.

Zero-based budgeting apps

If using a pen and paper to budget sounds too tedious, there are a couple of great zero-based budgeting apps to make it even easier:

• YNAB (You Need A Budget)- This app works on the premise of giving every dollar a job. It’s an M$M reader favorite, and it comes with a 34-day free trial.
• EveryDollar– Built by Dave Ramsey’s team, EveryDollar has both a free and paid zero-based budgeting app option.
• Spreadsheets- Whether you like Google Sheets or Excel, there are plenty of free templates or you can learn how to make your own zero-based budget template.

M$M tip: We put YNAB and EveryDollar up against one of the most popular budgeting apps today, Mint. Check out these articles to see how they stack up Mint vs. YNAB: Which Budgeting App is Best? and EveryDollar vs. Mint: Which Budgeting App is Best?

Does zero-based budgeting work?

Yes! It’s incredibly effective for people who want to pay off debt or reach savings goals. If you’ve ever heard Dave Ramsey fans go on about how amazing his debt pay off strategy is, it’s because they are using zero-based budgeting.

Zero-based budgeting works so well because it forces you to think about every single dollar you are spending. You end up taking complete control of your money and where it’s going.

You can easily see if you are earning enough to make your financial plans happen, you can move money around from different categories, etc. This flexibility is part of what makes it so effective.

Pros and cons of zero-based budgeting

The pros

Zero-based budgeting forces you to take a hands-on approach to your money so you know exactly what’s coming in and going out. People who use this system are quick to see where they need to adjust their budgets, earn more money, and cut back on spending.

Zero-based budgeting is fully customizable. You end up with a budget that fits your exact financial situation. You factor in your financial goals so you can spend and save in a way that works for you.

The cons

It’s time-consuming because you have to track every single expense. Really, a good budget will take time to build and implement, but the investment is worth it. You’ll find that after a couple of months it gets more efficient and turns into an easy routine.

It’s slightly more difficult if you have an irregular income. Even though it can be done, zero-based budgeting with a fluctuating income takes a little work. One thing that can help is having a healthy emergency fund so that you can make your budget work even during the months when you aren’t earning as much.

Should you start a zero-based budget?

If you are looking for a great way to take complete control of your money, then yes, give zero-based budgeting a try. With any budget you try, be patient and give it a few months before you throw in the towel.

Creating and sticking to a budget isn’t easy work for a lot of people. In fact, the number of people who actually stick to a budget continues to drop.

It’s not going to be perfect at first, but when you give yourself the space to create a zero-based budget and implement it, it might just change your financial life.

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Posted in: Budgeting Tips