In a zero-based budget, every dollar is designed to fulfill a specific purpose.
A zero-based budget is helpful when you want to get your finances together. Budgeting is the first step to get more organized with your finances. Start a budget today if you want to take control of your money.
Budgeting can be intimidating and overwhelming at first, but it gets easier as time goes on.
What is a Zero-Based Budget?
Zero-based budgeting is a strategy of allocating every dollar you earn to work for you. At the end of each month, your income minus expenses and allocations should equal zero.
Income – Expenses – Savings = Zero
Zero-based budgeting doesn’t mean you have no money in your account, but instead that your income minus all of your expenses equals zero.
Zero-based budgeting is a powerful technique for creating better financial security. Zero-based budgeting means that you can’t just spend without planning. Otherwise, you wouldn’t just decide to spend money on something that is not included in your budget.
Though it may be harder to make a zero-based budget at first, in the long run, you’ll adjust.
New to budgeting? These two simple budget plans are great starting points. Start with this simple budget plan for beginners or the 50/30/20 budget. Starting with these plans will help you learn the basics of budgeting before transitioning to a zero-based budget.
Review your budget monthly to see if adjustments are needed. If yes, adjust accordingly and then set a time to update the budget for the next month.
I have provided six steps below that can help you start building a zero budget.
How to Make a Zero-Based Budget?
The steps to create a zero-based budget are:
- Calculate your monthly income
- Calculate your expenses
- Include debt repayment
- Include a savings goal
- Subtract your expenses from your income to equal zero
- Track your spending throughout the month
Zero-Based Budget Steps
Step One: Calculate your monthly income.
Before beginning the process, the first step is to calculate your monthly income, including any side hustles.
You can keep track of your income and expenses in an old notebook or Excel spreadsheet. Your income, in this instance, includes regular paycheck or work income, as well as any money you earn from a small-business venture on the side. It could also be child support payments and other sources of earnings outside of your traditional employment. Record and add up all sources of income in your budget.
Step two: Calculate your expenses
Begin by listing the most important monthly expenses such as rent, utilities, groceries, and transportation. Once you’ve identified the core needs, list other expenses, understand that expenses will vary from month to month, so create a new budget each month.
Unexpected expenses will come up occasionally, so creating a “miscellaneous” expense category is essential. Consider it a catch-all for when your tire burst on the highway and you need a replacement tire immediately.
Remember, this is money for emergencies and not for shopping. If you do not spend the miscellaneous cash at the end of the month, save or pay off debt. Don’t spend it.
Incorporate debt repayment
If you have debt, include it as a line item on your budget. Consider paying down debt as a priority by using the debt snowball method. Begin by paying off the smallest debt, and then successively work your way up to the largest one. This way, you will see the benefits of debt reduction early on and enjoy a sense of accomplishment.
Step Four: Incorporate Savings goal.
Savings is a top priority for zero-based budgeting. Save first before considering what is remaining for expenses; It isn’t easy to save when you list your expenses first. There will likely be little to nothing left for savings.
Incorporating saving is a great way to save up for big-ticket items.
Step Five: Subtract your income from expenses
Use the zero-based budget formula once you have recorded your income and expenses, including savings and debt repayment.
Income – savings -expenses – debt = zero
Your ending must be zero.
If you have a negative balance, it means you are spending more than you make. You’ll need to cut expenses or increase income. Zero-based budgeting takes time, but it can be rewarding. Review your expenses and determine if you can cut back on your spending in one or more areas. When there is no more room to cut expenses, consider starting a side hustle or look for things around your house to sell for quick cash.
If you have a positive balance, consider using the money to pay off debt; however, if you’re debt-free and have sufficient savings towards emergencies, save for retirement or a big-ticket item.
If every dollar is not accounted for, you’re likely to spend them on things that don’t matter.
Zero-based budget template
Zero-based budget example
Let’s say you make $3,500 per month. Your budget might look like this:
- Monthly Income: $3,500
- Rent – $1500
- Utilities (Water, Gas, Electricity, Internet, etc.) – $300
- Groceries – $300
- Auto Insurance – $130
- Eating out – $100
- Clothing – $50
- Entertainment – $100
- Savings – $100
- Credit card payments – $200
- Student loan payments – $250
- Cellphone – $50
- Gym membership – $25
- Car – $350
- Miscellaneous $50
Total Expenses: $3,500
Amount left: $0
Some people say there should be no miscellaneous category. However, when your child is invited to a birthday party and the present cost is not included in the monthly budget, what do you do? And that’s why we have the miscellaneous category. If you don’t spend the money, save it.
Track your monthly spending
Now that you have a zero budget, it is necessary to track your spending monthly and review the budget each month. This way, you’ll better understand where your money is going and what adjustments are needed for the next month.
Can you make a zero-based budget with an irregular income?
You may be thinking, “I don’t have a reliable paycheck – how can I budget?” Even contractors or seasonal workers whose income is not the same for each pay period can benefit from a zero-based budget.
When preparing a zero budget, first list your basic needs and then list your other expenses. If your first paycheck isn’t going to be enough, prioritize paying for basic needs. When you get paid again, cover other expenses.
After budgeting for your monthly expenses, put it towards your debt, savings, or retirement if you have money left at the end of the month.
What is zero-based budget advantages?
Here are some of the advantages of zero-based budgeting if you still doubt it’s best for you.
- A zero-based budget makes your money goal a reality.
- With zero-based budgeting, you’ll be able to see how much money is spent and where.
- Zero-based budgeting will help you gain control of your finances.
- Develop a firm understanding of your financial situation.
Zero-based budget apps
Whatever method you decide to use to make and track your budget is up to you. However, apps are available to make the process easier to create and follow. Here are a few zero-based budgeting apps:
You Need a Budget (YNAB) – This is an excellent app to automate your budget. With YNAB, you can automatically track your spending by linking your accounts. If you wish to log your expenses yourself, you do not need to connect your account. Try YNAB for free!
Tiller – Tiller imports your bank account transactions and balances into your spreadsheet, allowing you to track your spending and balance more closely. Tiller helps you know where your money is going, improve cash flow, and reach your financial goals.
EveryDollar – is a basic budgeting tool. If you are currently unable to save and have debt, this is an excellent app for paying down debt and saving money. I included this app because there is a free and a paid version.
Is A Zero-Based Budget Right For You?
With the information provided, you should have a basic understanding of zero-based budgeting and will be able to create a budget. Trying a zero-based budget can be challenging, and it doesn’t always work for everyone. However, if you stick with the process, your budget will become easier with time.
I use a zero-based budgeting system because I want every dollar I earn used for a specific purpose.
Get started today with zero-based budgeting following the steps provided above.