What Is Zero-Based Budgeting?

Last Updated by Neiko Johnson on 
August 15, 2021
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What Is Zero-Based Budgeting

Have you ever been paid and then wondered where all of your money went? Well, you're not the only one. Zero-based budgeting can help you stay on track with your finances and make better financial decisions.

So, I'm sure you're wondering what zero-based budgeting is.

It's simply income-expenses = zero.

Above all, this budgeting method is where every dollar you make is allocated to something. When you finish your monthly budget, there should be zero dollars leftover.

This is why this budgeting method is called zero-based budgeting!

Ultimately, in order to be financially successful, you need to budget your money. Let's explore and talk about zero-based budgeting to see if this is the best budgeting method for you.

What is zero-based budgeting?

Zero-based budgeting is a method where you allocate all of your money to bills, savings, giving, or debt payments. Most importantly, this doesn't mean you have zero dollars in your bank account.

Your goal is to make sure your expenses match your income during the month and they equal zero.

In fact, it's a pretty simple and straightforward budgeting method that helps you have a plan for your money.

For example, if you earn $4,000 a month. Everything you spend, save, give, or invest should all be up to $4,000. This allows you to know exactly where all of your hard-earned money went.

Important to realize, you could be setting yourself up to fail by not knowing where your money is going each month. It's no fun looking up and realizing you have no money left during the month.

How to make a zero-based budget

Write down your monthly income

First off, start by tracking your take-home pay every month. Also, include all income including any side hustles you may have.

It's very common for people in today's society to have multiple streams of income. Even if you receive child support or even a gift card, it's income!

All money that comes into your household's bank account should be included. Be sure to track this money and add it to your budget.

Write down your monthly expenses

Next, before the next month begins, write down all of your expenses. The best way to do this is by having a monthly budget meeting on the last few days of the previous month. Add it to your calendar so you don't forget.

That is to say, things like rent or mortgage, utilities, food, and everything else should be added to your list. In fact, be sure to have priorities when writing down your monthly expenses. You should always cover food, utilities, shelter, and transportation.

Once you have the basic needs in your budget, list the rest of your monthly expenses. Your expenses may change from month to month, which is why it's so important to stick to your budget and create a new one every single month.

Additionally, you should always plan for unexpected expenses. This is why you should budget for miscellaneous items. For example, if your kid gets invited to a birthday party or you forget you need to get your tires rotated and balanced. Budgeting for these items will be a lifesaver.

On the other hand, this category isn't meant to buy new clothes or electronics that you've been looking at. If there's money left over that you didn't spend, reallocate that money to one of your financial goals.

To point out, include savings and giving in your budget. These are priorities and should be considered each month. A great way to get started saving a little bit each month is by using Acorns. You can even use spare change to start to invest consistently.

The first thing to remember, don't get overwhelmed when starting out. Take your time and learn how to improve your budget each month.

Write down your long-term expenses

This step involves looking ahead and thinking about what expenses you may have coming up later in the year. Once you're comfortable with your monthly budget, start evaluating your calendar.

With this in mind, if you can forecast how much you're going to spend on gifts for Christmas, birthdays, or any other special occasion, you can create a plan for these expenses.

Other long-term expenses may include property taxes, tag renewal fees, insurance premiums, anniversaries, or vacations.

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Must be remembered, you have to prepare for long-term expenses in your budget. Try to set aside a little bit of money each month so you can relieve some stress off yourself.

Subtract your income from your expenses to equal zero

To emphasize, we want this number to equal zero, but it may take a few months before you perfect this budget. Don't worry if you're not able to balance your budget at the beginning. It just means you have to do some small adjusting to get the numbers right. Also, if you find yourself spending more than you make, find time to trim your budget. You can also find ways to save money on your bills so your income and expenses can equal zero. Start by automating saving money by using Trim. Trim analyzes your spending patterns to find ways that we can take action and save you money. To decrease expenses even further, start using cashback and coupon apps such as Ibotta, Rakuten, and Swagbucks. These are great ways to save money while making purchases. Sign up today using the links below:

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So, zero-based budgeting means every dollar must be allocated. To clarify, it doesn't mean you will have zero dollars at the end of the month – it just means you have zero dollars left in your budget. However, if you're still in debt, all of your extra money should go towards your debts. If you're saving up for a big expense, put the extra money in savings. At the end of the day, give every dollar an assignment so you have complete control over your money.

What are the pros of using zero-based budgeting?

The primary benefit of using zero-based budgeting is you have the ability to track every dollar you spend. By assigning every dollar to a category, you will have a perfect picture of what's going on and how to make adjustments.

Another key point, you will be able to see where you can save money each month. This will help prevent you from spending money that you don't have.

It's also ok to treat yourself every now and then, but make sure you stay on track with your financial goals.

Get out of debt as fast as possible and set your priorities on the front end.

What are the cons of using zero-based budgeting?

Using zero-based budgeting does take a little more time than other budgeting methods. As always, choose the best budgeting method that works for you.

One thing that can be difficult when dealing with zero-based budgeting is people who have irregular income. It can be challenging to budget if you're paid every few months or seasonal.

For example, some teachers are paid their salary in 10 months instead of 12, due to summer vacation. In these cases, it would be great to use zero-based budgeting and prepare for the months you know your income will be lower than usual.

Also, zero-based budgeting requires that you know exactly how much your expenses are. A zero-based budget forces you to know your finances inside and out.

Final words - zero-based budgeting

Now that you know all about zero-based budgeting, you're prepared to give it a try. In the beginning, you may struggle with being consistent each month, but don't give up. Continue working on your budget and making adjustments as needed.

Remember, you're in control of your money and get to tell your dollars where to go each month.

What is your favorite budgeting method?

Article written by Neiko Johnson
Neiko is a personal finance expert and Co-founder of Secret to Finance. Along with his wife Alexis, they learned how to get out of debt and paid off $400,000 in 4 years.

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