Zero-Based Monthly Budgeting for Beginners

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 come in handy. This method of budgeting allows you to track your expenditures to ensure you’re using your income effectively and saving money each month.

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 equal zero at the end of the month.

Your monthly expenses include:

  • Household expenses
  • Transportation costs
  • Debt payments
  • Savings
  • Other monthly expenses

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. Check out this 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 free budgeting worksheet, 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 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 during the month, 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, and that you know exactly where your money is going and why. The more disciplined you are about making sure that your household budget zeroes out at the end of the month, the less likely you are to use your money on needless expenses.

4. Track your expenses every month

Consistency is key when you are 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 it can be challenging to keep track of where your money is going. It’s 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 off of.

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

Learn everything you need to know about the 50/30/20 rule.

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%

Here’s a breakdown of what each of the items in these categories include:

  • Home: Household expenses like your rent or mortgage, home insurance, utilities, phone bills, and groceries
  • Transportation: Car payments, car insurance, license and registration expenses, fuel, car maintenance costs, or public transportation costs
  • Debt: Payments you are required to make on credit cards, student loans, personal loan debt, medical debt, and other forms of unsecured debt
  • Savings: Money you save for retirement, investments, emergency funds, and more
  • Other: Luxury expenses on things that are not financial necessities, such as entertainment costs, gym memberships, restaurant bills, clothing, and more

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.

On the other hand, if you are going into the negative month after month, it may be time to re-evaluate your budget. Take a hard look at how much you’re spending and where, and try to find creative ways to save money.

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’s an easy way to stay on top of your finances and save money each month. Having an understanding of your cash flow makes 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 aside

Best of all, at the core of zero-based budgeting is a very important principle: don’t spend what you don’t have.

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. Not to mention that tracking all of your expenses could be a big adjustment if you aren’t used to doing it regularly. 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. But if you’re will to put in the work and make changes to your budget when needed, zero-balance budgeting could really pay off.  

One pitfall 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.

It’s critical that you put some of your monthly income aside for unexpected expenses so that you can cover them as they come up

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 Right for You?

If you want to take control of your finances, any type of budgeting could benefit you. And zero-based budgeting may be particularly useful because it requires you to keep a close eye on your budget. The only way to know whether this method of budgeting works for you is to try it—and now you know how to!

Creating a budget is always a good plan, but if you’re dealing with serious expenses like heavy credit card or medical debt, you may want to consider getting professional debt help. After all, having a budget won’t work if a majority of your income is going towards debt. The good news is that there are solutions out there that could actually get you out of your financial bind and cost you less money each month.

To find out more about debt solutions that could help you get your finances and your budget on track, download our guide for how to manage debt now.