What is Zero-Based Budgeting?

Whether you’re looking to pay off debt, save more money, or just keep better track of your spending, budgeting is crucial. But merely knowing how much money is coming in and going out only takes you so far.

If you want to reach your financial goals faster, you need to think about where your money is going and why. That’s where budgeting strategies like zero-based budgeting can come in handy. This method of budgeting helps you to track your expenditures to ensure you’re using your income effectively and saving money each month.

The following information will get you up to speed on the basics of zero-based budgeting, pros and cons of this method, and help you determine whether it’s right for you.

What is zero-based budgeting?

Zero-based budgeting is a budgeting strategy where all of your household income is allocated to an expense. This means that your household income minus your expenses (including money you set aside) equal zero at the end of the month. Your monthly expenses include (but aren’t necessarily limited to):

  • Household expenses
  • Transportation costs
  • Debt payments
  • Savings
  • Health care expenditures

With zero-based budgeting, every dollar of your income is accounted for in your budget. So if your household earns $5,000 each month, all of the money you use and save that month will also be $5,000. Here is an example of a zero-based budget:

Monthly income: $5,000

Monthly expenses  
Mortgage $2,500
Utilities and other bills $500
Insurance $200
Fuel $225
Entertainment $150
Restaurants $250
Credit Card Payments $300
Student Loan Payments $500
Retirement $150
Savings Fund $150
Other $75
Total Spent $5,000

It’s easy to see why zero-based budgeting could help you stay on top of your finances. After all, accounting for all of your expenses and knowing where your money is going each month is the best way to make sure you are saving money each month and not overspending.

How to create a zero-based monthly budget

1. Figure out your monthly income

At the beginning of the month, use our budgeting worksheett, a budgeting app, or an Excel spreadsheet to track all of your household’s income, including your monthly salary, bonuses, money you collect from investments, and any other revenue streams you may have.

2. Calculate your monthly expenses

Sit down with all of your bills and bank statements and figure out how much money you spend every month to keep your household running. Make sure to add up all of your utility bills, rent or mortgage payments, medical expenses, transportation costs, and other living expenses. If you spend money on it, it needs to be a part of your household budget.

3. Subtract your income from your expenses

Your household income minus your household expenses should equal zero. If you find that your income is less than your expenses, it could be a sign that you need to cut down your spending. On the other hand, if your expenses are less than your income, you could start saving more money or use the extra cash to pay down your debt more aggressively.

The most important part of zero-based budgeting is that your income and expenses zero out when you stick to your budget, and that you know exactly where your money is going and why. The more disciplined you are about balancing your budget each month, the less likely you are to use your money on needless expenses.

4. Track your expenses every month

Consistency is key when you’re doing a zero-based budget. You have to commit to tracking your household budget every month and do your best to make sure you aren’t overspending. Everybody slips up from time to time, but if you’re keeping track of your spending, it’s easier to correct your mistakes and hit your financial goals.

Download our FREE budgeting worksheet here.

On paper, zero-based budgeting seems pretty simple—but you should be aware of zero-based budgeting pros and cons (more on that later). It can be challenging to keep track of where your money is going, and even harder to know how much you should be spending on each item in your budget each month. While there are no hard and fast rules for how you should be allocating your monthly budget, sometimes it helps to have budgeting guidelines to work from.

Two household budgeting guidelines to help you stay on track

Once you create a budget, you’ll know how much money you are paying on your household expenses, but that isn’t necessarily the same thing as knowing how much you should be spending on your household expenses. Here are two guidelines that you can use in addition to zero-based budgeting to keep you on track.

The 50/30/20 rule

One simple way to allocate your household budget when you’re using zero-based budgeting is the 50/30/20 rule. This budgeting guideline states that you should put:

  • 50% of your budget toward needs
  • 30% of your budget toward wants
  • 20% of your budget toward debt payment and savings

The 50/30/20 rule provides a good framework for how much you should be spending and savings. However, if you use this method in conjunction with zero-based budgeting, it’s important to keep track of the exact amount you’re spending on needs, wants, savings, and debt, and make sure your budget comes out to zero each month.

The household expense chart

If you’re looking for a more in-depth breakdown for how much you should spent on rent or mortgage payments, transportation, debt, savings, and more, use this chart as a guideline for your household budget:

Expense Recommended Income Allocation
Home 35%
Transportation 15%
Debt 15%
Savings 10%
Other 25%

Following this recommended allocation of income could help you keep better track of your monthly expenses and make sure that you aren’t overspending in one category or another. But remember, this is just a guideline. Everybody’s budget is unique, so if you find yourself spending more on one category or another, you shouldn’t feel ashamed. As long as you are zeroing out at the end of the month—and not going into the negative—your budget is working.

Before you start your zero-based budget (or any other budget, for that matter), it’s important to understand the pros and cons of using this system

Zero-based budgeting pros

Because zero-based budgeting helps you focus on the money coming in and out of your accounts each month, it can be an easy way to stay on top of your finances and save money. Having an understanding of your cash flow helps make it simpler to adjust your spending so you can reach your financial goals faster.

If you’re dealing with a lot of debt, this method could help you allocate extra funds to pay off that debt. Similarly, if you want to save up for a vacation, a home, or some other major purchase, knowing how much money you have to spend and identifying where you could cut your spending could help you put extra money aside.

By making sure that your budget zeroes out at the end of the month and does not go into the negative, you can avoid getting into more debt.

Zero-based budgeting cons

Like any commitment, zero-based budgeting could be tough to stick to. Between tracking all of your income and expenses, this sort of budgeting requires time and effort. Zero-based budgeting could also be frustrating in the first few months if you find that your budget isn’t exactly where you want it to be.

One con of zero-based budgeting is that it doesn’t always take seasonal expenses into account. For example, during the winter you might spend extra money on your heating bill. That money needs to come from somewhere, and finding the cash to cover the expense could throw your budget off track. Similarly, during the holidays, you’re likely to spend extra on gifts and your budget may not account for that.

Unforeseen costs like car repairs, medical expenses, and other unexpected expenses are also hard to anticipate and could be a budgeting obstacle. So in short, if you’re planning to do a zero-based budget, it’s critical that you put some of your monthly income aside for such expenses so that you can cover them as they come up.

Is zero-based budgeting the solution, or do you need more help?

If you are struggling with your expenditures, making a zero-based budget will help you get a handle on your situation. But it might be time to take further action. If you are struggling with debt, Freedom Debt Relief is here to help you understand your options for dealing with your debt, including our debt settlement program. Our Certified Debt Consultants can help you find a solution that will put you on the path to a better financial future. Find out if you qualify right now.