What is Zero-Based Budgeting?

Whether you’re looking to take care of debt, save more money, or just keep better track of your spending, budgeting is a helpful tool. 

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 track your expenses to ensure that you’re using your income effectively and saving money each month.

Let’s take a deep dive into zero-based budgeting, including its pros and cons, so you can decide if it'll work for you. 

What Is Zero-Based Budgeting?

Zero-based budgeting is a budgeting strategy that gives every dollar in your paycheck a purpose. Your household income minus your expenses, including savings, should equal zero at the end of each month. Your monthly expenses may include (but aren’t necessarily limited to):

• Household expenses like rent and utilities

• Transportation costs

• Debt payments

• Healthcare expenses

With zero-based budgeting, every dollar of your income is accounted for in your budget. So if your household brings home $5,000 each month, all of the money you use and save that month should equal $5,000. 

Here's an example of a zero-based budget for a $5,000 monthly income: 

It’s easy to understand why zero-based budgeting could help you stay on top of your finances. Accounting for all of your expenses and knowing where your money is going is the best way to make sure you can save and cover your costs without getting into debt (or adding to existing debt). 

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How to Use Zero-Based Budgeting

1. Figure out your monthly income

The paycheck you get from work may not represent your total income. Also account for any side-hustle earnings, income from investments, or any other money you have available during the month.

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. 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. Set a savings goal

Once you’ve added up your expenses, figure out a reasonable amount you can save each month. Make that monthly savings target a line item in your budget.

4. Make sure the numbers work

With zero-based budgeting, your household income minus your household expenses and savings should equal zero. 

If you find that your expenses exceed your income, it could be a sign that you need to cut down your spending or explore debt relief options. On the other hand, if your expenses are less than your income, you could start saving more money, or use the cash to pay down your debt more quickly.

The most important parts of zero-based budgeting are:

• Your income and expenses should zero out when you stick to your budget

• 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 expenses that don’t offer you a lot of value.

5. Track your expenses every month

Consistency is key when you’re doing zero-based budgeting. Try to review your household budget every month, and do your best to avoid 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 to get started. 

Two Household Budgeting Guidelines to Help You Stay on Track

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

To use this method in conjunction with zero-based budgeting, keep track of the exact amount you spend on needs, wants, savings, and debt. Make sure your budget comes out to zero each month.

The household expense chart

If you’re looking for a more in-depth breakdown of how much you should spend on various expenses, you can use this chart as a guideline:

Following this recommendation could help you stay on top of your spending and work toward savings goals. But remember—this is just a guideline. 

Everybody’s budget is unique, so if you find yourself spending more on one category or another, don’t sweat it. As long as you’re breaking even at the end of the month—and not going into the negative—it means zero-based budgeting is working for you.

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

Zero-Based Budgeting Pros

Zero-based budgeting helps you focus on the money coming in and out each month. It can be an easy way to stay on top of your finances and save money. 

Zero-based budgeting could help you pay down debt and save for specific goals.

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

Zero-based budgeting could help you avoid new debt.

By making sure your budget zeroes out at the end of the month and doesn't go into the negative, you can avoid getting into debt (or more debt).

Zero-Based Budgeting Cons

Zero-based budgeting requires you to stick to a plan and put in time and effort. 

Zero-based budgeting could be frustrating in the first few months as you dial in your spending. Many people don’t know exactly where their money goes. It’s okay to take some time to nail it down.

Zero-based budgeting doesn’t account for budget fluctuations.

Zero-based budgeting is that it doesn’t necessarily 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. Similarly, during the holidays, you’re likely to spend extra on gifts, and your budget may not account for that.

Zero-based budgeting doesn’t have a specific line for unexpected expenses.

Unforeseen costs like car repairs and medical expenses are hard to anticipate and could make budgeting tougher. So if you plan to do zero-based budgeting, it’s critical that you put some of your monthly income aside for surprise 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’re struggling with your expenses, zero-based budgeting could help you get a better handle on them. But it may be time to take further action. 

If you have a lot of debt, Freedom Debt Relief is here to help you understand your options for dealing with it, 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.