What Is Zero-Based Budgeting and How Does It Work?

A great budget can put you in control of your finances by telling you when and where you're spending money. One popular option is a zero-based budget—it's what some of the most popular budgeting apps use. Although setting up and managing a zero-based budget can take work, you might find that the insights are well worth the time you invest.

What Is Zero-Based Budgeting?

Zero-based budgeting, sometimes called zero-sum budgeting, is when you assign every cent you earn to a specific task in your budget. These tasks can be goals—like paying down debts or saving money—or your necessary and discretionary (i.e., fun) expenses. Once you've set up your budget, all your income and spending should even out, so you wind up with zero money left at the end of each month.

How Does Zero-Based Budgeting Work?

To create a zero-based budget, figure out how much you earn after taxes and other withholdings. You'll then create different categories for your expenses and financial goals, and then track how you spend your money.

For example, if you'll earn $4,000 each month, you'll have $4,000 to assign. Maybe $1,500 goes to housing-related costs, $1,000 to debt payments, $750 to essential expenses, $500 to discretionary (fun!) spending and $250 toward your savings account. In total, you have $4,000 in income and $4,000 in expenses.

However, zero-based budgets often use more specific categories. For instance, you might split your savings amount into subcategories, such as travel, emergencies, a new car or saving for another big dream. Similarly, you can closely track different types of necessary and discretionary expenses such as groceries, gas, eating out, entertainment and subscriptions.

By creating and tracking particular categories, a zero-based budget can help you understand exactly where your money goes each month. This deep understanding can then help you plan for the future and adjust your habits or spending to better align with your values and financial goals.

Zero-based budgeting example

Everyone's zero-based budget will look different, but here's a (simplified) example of how you might start to build your budget based on a $4,000 income.

Categories	Amount
Income	+ $4,000
Housing
Rent	- $1,400
Utilities	- $100
Debt Payments
Auto Loan	- $600
Personal Loan	- $125
Credit Cards	- $275
Essentials
Insurance	- $200
Transportation	- $150
Food	- $400
Discretionary
Entertainment	- $200
Subscriptions	- $25
Other	- $275
Savings
Emergency Fund	- $150
Travel	- $100
Amount Remaining	$0

 

Your budget can be much more detailed, with more precise amounts and additional categories. Budgeting software or a spreadsheet can make organizing your budget and tracking the amounts much easier.

Other Types of Budgets

You might want to experiment with several types of budgets to see which one you like the most. Examples of other common budgeting approaches include:

• • Savings-first budgets. Some people want to prioritize their savings over everything else, and they use a budget that aligns with this goal. It's sometimes called the reverse budget or pay-yourself-first budget. With this approach, you set aside a certain percentage or amount of money from each paycheck into savings, and then spend the rest however you need and want without tracking specific expenses.
• • The 50/30/20 budget. This is a slightly more specific approach that involves allocating 50 percent of your money to necessities, 30 percent to wants and 20 percent to savings. You could use this as an alternative to zero-based budgeting, or to help guide how much you put into your zero-based budget categories. You can also alter the amounts based on your financial situation and goals.
• • Envelope budgeting. An envelope budget is actually a type of zero-based budget, but you'll put cash into different envelopes labeled with their categories. A digital approach, such as using budgeting software or multiple bank accounts, might be safer than storing and carrying cash. Plus, you can earn money with an interest-bearing bank or money market account.

No matter which budget you choose, it can take a few months to get the hang of the system and narrow in on realistic amounts for your categories. Every type of budget also requires some flexibility to account for variable expenses and income.

Comparing Zero-Based Budgeting vs. Other Budgets

Zero-based budgeting stands apart from other budgets because it includes all your expenses and savings as part of the plan—you don't budget some of your money and put “the rest" into another category.

Zero-based budgets vs. savings-first budgets

With a savings-first budget, you might set aside 15% of your money for your savings goals and put that money into a savings account. The budget can help you build your savings, but you won't know how the rest of your expenses break down.

If you use a zero-based budget, you'll be able to track changes in each of your categories, which can lead to some helpful insights. For example, you might notice the cost of a subscription rises and then reevaluate whether you want to keep it. And you can calculate the exact cost of a changing habit, such as eating out more often.

Zero-based budgets vs. 50/30/20 budgets

A 50/30/20 budget (or whatever breakdown you choose) will give you a little more insight than only tracking how much you put into savings. It won't necessarily help you notice small changes the way a zero-based budget will, but that's a reasonable trade-off if you don't want to spend a lot of time budgeting.

Zero-based budgets are also different than some other budgets because you generally assign money to categories as you earn it, rather than budgeting for the future based on your expected earnings. In other words, the money you earn this month will be for next month's expenses. Building up a month's worth of financial cushion when you first start can also be difficult. But once you do, you can more easily deal with variable income or expenses.

Which Budget Is Best for You?

The best budget is the one that helps you reach your financial goals—but it's also the one that you'll stick with and actually use. Every single dollar has a job and is put to work.

The insight, control and flexibility that a zero-based budget offers can be helpful, but it can also take a lot of time to manage. You'll need to keep track of all your expenses and categorize them as you go, and you may need to adjust your budget several times throughout the month if your plan doesn't match your spending.

Popular budgeting apps like You Need A Budget, Mint and EveryDollar can make this easier, especially if you're comfortable syncing your bank account and credit card transactions. They can even learn to suggest categories for your purchases, and you can manually add cash transactions.

You could alternatively try a less specific budget if hands-on budgeting isn't a good fit. For example, start with a savings-first budget and set your savings aside in a high yield savings account. You could even try bucketing your savings and use different accounts for short-, medium- and long-term goals.

Bottom Line

You can use a zero-based budget to make sure your spending matches your priorities, values and goals. Although you'll have to create specific spending categories, allocate all your income and then track all your expenses, this mindful approach to managing your money can offer valuable insights. And, though it's more involved than other budgeting methods, you can use a budgeting app to help.

Make Your Savings Work for You: If you're budgeting some of your income to savings, make sure your savings are helping you earn money. Synchrony Bank offers several high yield savings, money market and CD accounts that you can open based on your savings goals.

 

Louis DeNicola is a freelance finance writer who loves helping people and small businesses save money. He writes for financial services firms, publishers and tech companies, and lives in Oakland, CA.

 

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