We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.
With the economy so uncertain, it’s a good idea to focus on something you can control — like your budget.
And if you’ve struggled with traditional money-management strategies before, you might be ready for a method with some more rigor and accountability. That’s why 2020 could be a great time to consider zero-based budgeting.
Lauren Greutman, a professional debt coach, says ZBB, as it’s known, helped her pay off $40,000 in debt and turn around her finances. Erin Lowry, author of “The Broke Millennial” book series, says it’s especially great for people whose income isn’t consistent.
And one of the most popular and well-reviewed financial apps out there, called You Need a Budget, uses ZBB as the foundation of its model.
So what is zero-based budgeting, and is it right for you?
What’s Zero-Based Budgeting?
With zero-based budgeting, your income minus what you spend and save each month equals zero. For that reason, it’s also referred to as zero-sum budgeting.
Greutman explains the system this way: “Zero-based budgeting is when you give every dollar, every cent, a purpose throughout the month.”
With a zero-based budget you won’t have extra money lying around at the end of the month. But that doesn’t mean you’re spending it all — in fact, it should be just the opposite.
Paying off debt, saving, and investing are examples of the priorities you can build into your zero-based budget each month. So if you make $3,000 a month and have $2,000 a month in fixed expenses (rent, insurance premiums, etc.), then you’ll have $1,000 left to divy up among your variable expenses. That extra $1,000 must be designated to account for all of your needs and wants. So each month you’ll be making decisions about where you want to intentionally direct your spending.
Strengths of a Zero-Based Budget
This way of managing finances can fast-track progress toward your goals. “One of the big strengths of zero-based budgeting is that money doesn’t go to waste,” Greutman says. When your dollars don’t have a purpose, she says, you end up spending more on things that don’t matter.
This system isn’t necessarily about cutting your spending; instead, it’s about funneling your spending toward your highest priorities. For some, that shift in mindset makes it a more sustainable model.
And because what you spend is tied to what you make, your monthly budget is set up to be more flexible, which makes it a good option if you have unpredictable income. Lowry believes that zero-based budgeting can help stabilize irregular incomes when you set it up so that you’re spending last month’s income on the current month’s expenses. This is how the zero-based budgeting app You Need a Budget works (more on that later).
Drawbacks of a Zero-Based Budget
It’s a big commitment to maintain an accurate zero-based budget, because you must track and record every expenditure. If that sounds miserable, Greutman encourages you to find another way to corral your spending. She recommends using cash or a separate checking account for variable expense categories that are more tedious to track, like eating out or groceries.
Also, for a zero-based budget to work long-term it needs to be flexible. If you aren’t willing to invest the energy in adjusting your budget each month, that’s a recipe for failure.
“When it comes to budgeting we pretend like we should have this crystal ball and just be perfectly clairvoyant in what we think we’re going to spend, or what is going to happen around us,” says Jesse Mecham, founder and CEO of You Need a Budget. “We just don’t know those things.” His approach is to think of yourself as a coach making a game plan with room for adjustments, rather than as a fortune-teller.
Prioritization is the key to zero-based budgeting. Acknowledge that your resources aren’t infinite, and use your money for the needs and wants that are most important to you.
How to Create a Zero-Based Budget
When you’re setting up your zero-based budget, you can customize the categories you track to be as detailed or as broad as you like. You just want to be sure you’re not missing anything and that you’re preparing for the unexpected.
1. Record your income
Set your budget each month based on what you have coming in. If you’re a salaried employee, that’s your paycheck after deductions like taxes, health insurance, and pre-tax retirement contributions. Don’t forget to include any money you receive from other sources as well, including side hustles, investments, or government assistance. If you’re a freelancer or seasonal worker, set your income based on an average of the past few months.
2. Set your fixed and variable expenses
Right off the top of your income, you’ll assign funds to cover your fixed monthly expenses, things like rent, internet, and your car payment. To ensure you don’t miss any transactions, review credit card or bank account statements from the past few months.
Reviewing your past spending will also help you to estimate how much you spend on the other big category: variable expenses. This includes things like eating out, entertainment, and even essentials like groceries that fluctuate from month to month.
3. Plan for irregular or unexpected expenses
Since every dollar of your income needs to be assigned to something under ZBB rules, you’ve got to plan for irregular and unexpected expenses, too. Irregular expenses, which are fixed but may not hit every month, include real estate taxes, annual subscriptions, and vehicle registration fees.
It’s also important to set aside funds for unexpected expenses like vehicle repairs, home maintenance, medical bills, or other unplanned costs. If you’ve already built up an emergency fund, those surprises can also be accounted for there.
4. Fund your goals
Prioritizing your long-term goals is what really makes zero-based budgeting shine. Rather than waiting until the end of the month and hoping there will be something left over to invest in your future, you plan for these investments from day one.
Under ZBB, funding your retirement, saving for your child’s education, paying off debt, and building an emergency fund can all be added into your budget just like other expenses. You may not be able to prioritize all of those goals at the same time or at the levels you’d like, but you can still get a start on them.
Zero-Based Budgeting Apps and Tools
To simplify your zero-based budgeting process, there are plenty of tools to choose from. You can make your own spreadsheet, or just Google “zero-based budget template” to find free options you can download.
If you’re looking to automate your budget, You Need a Budget (YNAB) is a well-known zero-based budgeting app. With YNAB, you can automatically track your spending by linking your financial accounts. If you don’t feel comfortable handing out your login information, you can manually enter your spending.
Mecham believes the crux of maintaining a successful budget is to only work with money you have already been paid, not what you expect to make, and his team has designed YNAB to do just that. This helps you make better decisions by making you more aware of your financial limitations.
You can try out YNAB for free for 34 days; after the free trial it costs $11.99 a month, or $83.99 a year. If it feels too weird to try to save money by paying for a budgeting app, you could try out Dave Ramsay’s EveryDollar. It uses a zero-based budget model and has free or paid options. The downside is you can only sync your accounts to the app with the paid version, which costs $129.99 a year. Remember you can also develop your own system using Google Sheets, Excel, or whatever system makes most sense to you.