What Is a Zero-Based Budget?

Greg Johnson, author of Zero Down Your Debt, has written an article for Club Thrifty on how to be on a zero-based budget, read the article here.

What Is a Zero-Based Budget?

A zero-based budget is a budgeting system in which the user’s income minus their expenses equals zero. The result is an exact balance between the amount of money that is earned versus the amount that is saved and spent.

Zero-based budgets can be utilized by either individuals or companies, and they are often prepared on a monthly or annual basis. The goal of zero-based budgeting is to provide an accurate plan for all income and expenses during a calendar period, giving the user exceptional control over their money and cash flow.

Want to know more? Learn how to use a zero-based budget and improve your finance below!

Basics of Zero-Based Budgeting

A zero-based budget, sometimes called a zero-sum budget, is designed to give you maximum control over your money. By accounting for every penny you earn and spend, a zero-based budget helps you gain a better understanding of where your money is coming from, the amount of cash you have available, and where you plan to spend money during a predetermined time period.

Although a zero-based budget can be used in a business setting, for our purposes, we will examine this budget from an individual user’s perspective. Frankly, zero-based budgeting is our preferred budgeting method for families, and it is the type of personal budget that we’ve been using for over a decade.

Utilizing a zero-based budget for your personal finances means you’ll be creating a monthly plan for your money. To do this, you’ll identify all sources of your monthly income, create spending categories, and ensure that your combined savings and expenses are equal to your income.

Here is the simple formula that makes it all work: Income-Expenses-Savings = 0.

The Zero-Based Budget Formula

Income – Expenses – Savings = Zero

As the name suggests, everything you earn, spend, and save will “zero out.” You’ll create a purpose for every dollar you make, and everything will balance to the penny. This helps you become more intentional with your spending, which often results in “found money” that you can save or spend on the things you actually love.

How to Use a Zero-Based Budget

With a zero-based budget, your goal is to be as accurate as possible. Therefore, it is super important that your budget is written down. This helps you stay organized, and it also helps you visualize exactly where your money is going. Additionally, when you write it down, you can easily identify any holes in your budget — both during and after you create it.

Some sections of your budget won’t change very much, however, you should still create a new budget every month. This helps ensure accuracy and allows you to make monthly adjustments as needed.

To get the most out of your zero-based budget, you should also track your spending throughout the month. Your budget serves as your monthly plan, but tracking your spending shows how well you executed the plan. At a minimum, compare your budget to your actual spending once a month. For the best results, we recommend doing it once a week. That way, you can make corrections and adjustments to your budget before you experience any issues.

There are several types of zero-based budgets, but they all share the same basic characteristics. Here are a few quick steps to help you get started with any zero-based budgeting method:

  1. Determine your monthly income.
  2. Identify and create your monthly spending categories.
  3. Record a savings goal for the month.
  4. Determine and record your monthly expenses by category.
  5. Balance your budget so your income minus expenses and savings equals zero.

That’s it! For a more detailed walk-through, check out our complete guide on how to start a budget.

Types of Zero-Based Budgets

As we mentioned, there are several types of zero-based budgets you can try. Essentially, all of them work the same way. Try a few of them to find one that fits your personal style.

  • Pen and Paper – This stripped down method is easy to execute and the one we still use to this day. It doesn’t require any extra apps or technology, and it only takes a few minutes to create. Simply grab a pen and paper, draw a few columns, and start writing it all down. It’s super simple, and that is why we love it!
  • Spreadsheet – Using a spreadsheet for your zero-based budget is another option. Set it up the same way you would on a sheet of paper, then create formulas on the spreadsheet to calculate the math for you. Use our guide on how to make a budget in Excel to get started with your own.
  • Envelope Method – The “Envelope Method” is slightly different than the other options because it requires actual cash. To get started, grab a bunch of envelopes and label them with your monthly spending categories. Then, stuff the amount of cash you need for each category into their respective envelopes. If you run out of cash in an envelope, you’ve hit your monthly spending limit for that category. Should you need more, move money from another envelope to cover the expense. This increases your monthly limit in one category while decreasing the amount you can spend in the other.
  • Budgeting Apps – If you enjoy the convenience of technology, you have plenty of options. There are dozens of paid and free budgeting apps available. Not all of them offer zero-sum budgeting, so you may need to look around to find one that fits your needs. Check out our list of the best budgeting apps to get started.

Pros & Cons

Pros of Zero-Based Budgeting

  • Excellent control over your cash flow
  • Accurately depicts what and where you are planning to spend
  • Ensures each dollar has a purpose
  • Provides a visual, concrete map of your monthly plan
  • Focuses your attention on having a monthly money plan and sticking to it
  • Makes it easy to uncover overspending and budget busting expenses

Cons of Zero-Based Budgets

  • May need to estimate some expenses
  • Still need to track your spending for best results

Final Thoughts

Using a zero-based budget is an excellent way to get your finances on track. By planning for every dollar you earn, you’ll become more intentional with your spending and savings — leading to greater control over your finances and better results over both the long and short term.

If you want to make a difference in your financial health, we believe zero-based budgeting is one of the most important items you can add to your financial toolkit. We’ve used it for years, and it has changed our life. We think it can do the same for you.

Thanks for reading and good luck!

Zero down your debt

Reclaim Your Income and Build a Life You’ll Love

Co-author Holly Johnson appears on Fox Business News as a money expert. • Holly Johnson is a staff writer at Get Rich Slowly, The Simple Dollar, Frugal Travel Guy, and U.S. News and World Report Travel. Holly also landed her very own weekly column in the Indianapolis Star! She will cover a range of money and lifestyle topics aimed at helping middle class families stretch their dollars further. She’ll be answering questions and providing commentary every Sunday in the “Lifestyle” section of the paper. • Greg and Holly Johnson’s work has been featured in The Wall Street Journal, Fox News, Forbes, Lifehacker, Yahoo!, and many other online publications. • Club Thrifty is one of the most popular self-help budgeting sites with dozens of classes, tips, seminars, lessons and advice to help readers achieve financial freedom. • With over 20,000 subscribers to their blog, a well-trafficked website, the ClubThrifty brand is accruing thousands of loyal fans and followers in many social media platforms.

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