How to Make a Zero-Based Budget

Spending is a major pain point for a lot of people. Consumer expenditures in the US increased to 9.1% from 2020 to 2021. With inflation on the rise, many of us could benefit from taking a more active approach to monthly money management. 

One way to get a handle on your spending—and to avoid common money mistakes—is to use a zero-based budget. Using a budget calculator might help you estimate how much you should be spending, but tools like this don’t take into account your personal values and priorities. That’s where a zero-based budget can help. 

The idea of learning how to budget may not sound exciting. But once you see how a zero-based budget can help you save money, reach your savings goals, and spend intentionally, you may feel different about it. 

What is zero-based budgeting?  

Zero-based budgeting is a strategy for managing your money that involves assigning every dollar you earn to a specific spending or savings goal. This means you know where every single dollar goes—whether it’s paying your rent or buying a nice dinner out. When you delegate each dollar you earn, your income minus expenses equals zero.  

Planning your budget as your money lands in your account is one of the biggest advantages of zero-based budgeting. It keeps you from overspending or creating unrealistic savings targets. 

How to create a zero-based budget  

Creating a zero-based budget might sound intimidating, but after some thoughtful planning, it’s simple to set up and adjust as needed. Follow these steps to get started: 

1. Tally up your income 

Since zero-based budgeting requires planning your spending around the money in your account, it helps to know how much you can expect each month. Add up any income you receive from your job, side hustles and other sources each month.  

If you have an irregular income, add up your total income from the last year. Then divide that total by 12 to figure out your average monthly income.  

2. Review your spending 

Next, review your spending. Pull up your bank and credit card statements from the last several months to see how much you’re spending each month and what you’re spending on.  

Notice how you feel about where your money is going. If your current spending doesn’t align with your intentions, you can create new spending targets when building your budget. 

3. Categorize your spending 

Next, create spending categories that account for any and all ways you spend money.  

Start by thinking in terms of three “buckets” — needs, wants, and debt payments. What spending categories fall under each? The key is to make your categories specific enough to help you spend intentionally, but not so specific as to make budgeting tedious. 

Don’t forget about prioritizing debt. Your minimum payments (and any extra you can afford) should have a category in your budget. This includes credit cards, personal loans, student loans, and any other debt you have.  

Hint: If your debt feels like an insurmountable burden on your budget, you might want to consider a debt consolidation loan. 

4. Add savings and investment goals 

Savings goals—those big purchases that don’t fall into your typical monthly expenses—need a place in your budget, too. For example, you may want to: 

  • Build your emergency fund 
  • Save for a vacation, wedding, or down payment 
  • Contribute to your retirement or other investment accounts 

If you’re not already saving for these goals, decide what you want to save for and how much you can afford to put toward these goals each month. Don’t spend too much time coming up with a perfect number; you can always readjust later.   

5. Set up your budget 

Now, the fun part! Decide how you’ll build and use your budget. While you may have been planning in a spreadsheet up to this point, you can use a budget app or template to build and manage your budget.  

Choose a free template or app, like Goodbudget or EveryDollar. Or sign up for a paid tool, like You Need A Budget or Tiller (both allow a free trial). Add the spending categories you created, your target monthly spending for each and your savings goals to your account. You can make new goals if you’re unhappy with your current spending habits. 

6. Fund your categories  

Next, it’s time to fund your spending categories. Using the money in your account (and the planning you did in earlier steps), assign your money to your various categories.  

If you’re having trouble deciding how much money to put in each category, start by funding any “need” categories, like rent and utilities. Then allocate the rest toward savings goals and “want” categories.  

Need a zero-based budgeting example? Here’s a theoretical budget for someone bringing home $3,500 after taxes monthly. 

Rent $1,100 
Utilities $200 
Phone and internet $150 
Car maintenance, gas, and insurance $300 
Health, vision, and dental insurance $300 
Groceries $400 
Student loan payment $200 
Dining out/takeout $150 
Subscriptions $50 
Fun money $100 
Emergency fund $200 
Roth IRA contribution $200 
Vacation fund $150 
Total expenses $3,500 

 7. Track and adjust as needed  

Using your tool or app of choice, categorize every transaction you make. For example, if you spend $100 at Whole Foods, log that under “Groceries.” Once you’ve spent everything in a particular category for the month, you have two options: Stop spending in that category, or reallocate money from another category. It’s your budget, so spend and readjust your categories as needed.  

The pros and cons of zero-based budgeting  

Zero-based budgeting can be a great tool, but it requires paying close attention to your spending. Here are some pros and cons to consider before setting up a zero-based budget.  

Advantages of zero-based budgeting  

1. It limits your spending to the money in your account.  

It’s tough to overspend when using this method. Because you only budget the amount of money in your account, you limit your spending to the money you have. A zero-based budget is a helpful tool for those prone to overspending. 

2. It helps you spend intentionally.  

Zero-based budgets take the guesswork out of spending. You know exactly how much you can spend and where all your money goes. When you have to assign each dollar to a spending category, you’ll get in the habit of spending on the things that matter most to you. 

Disadvantages of zero-based budgeting  

1. It takes time to implement and maintain.  

Zero-based budgeting requires you to closely monitor your budget to ensure you don’t overspend. (You’ll need to readjust your budget if you do). That means you’ll need to invest a good amount of time into maintaining it month-to-month.  

2. It’s more challenging with a variable income.  

When your income varies month-to-month, you’ll need to put more effort into making your budget work. That means having a cash cushion in place in case your income dips below your minimum monthly expenses. It might take time to save, and you’ll probably spend more time adjusting your monthly budget. 

Create your own zero-based budget 

If you’re not sure where your hard-earned cash goes once it hits your account, a zero-based budget can help. Though it takes time to plan and set up, a budget like this can make all the difference in your monthly money management. 

Written by Cassidy Horton

Cassidy Horton is a finance writer who’s passionate about helping people find financial freedom. With an MBA and a bachelor’s in public relations, her work has been published over a thousand times online by finance brands like Forbes Advisor, The Balance, PayPal, and more. Cassidy is also the founder of Money Hungry Freelancers, a platform that helps freelancers ditch their financial stress.

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