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A zero-based budget is a spending plan that works by assigning a role to every dollar in your bank account. In other words, it has you allocate all of your money to different spending, debt payoff and saving categories, leaving none leftover. When you subtract your expenses from your income, you should be left with zero—hence the name.
Here's what you need to know about how zero-based budgeting works and how to decide if this budgeting system is a good fit for you, plus how to create a zero-based budget.
What Is Zero-Based Budgeting?
Zero-based budgeting is a spending plan that has you allocate all your money toward various categories of expenses—leaving no funds unaccounted for. At first blush, that may sound like risky business—if your expenses really were equal to your income, you'd be living close to the edge, one transaction away from an overdraft or from going into debt.
In reality, zero-based budgeting often treats saving as one of your most important expenses. For example, your expense categories could include contributing to an emergency fund, a down payment fund and working on debt repayment. Putting money toward those goals, alongside your essential expenses and discretionary spending, is how you'll allocate all of your funds each month.
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If you overspend in one category, you can keep your budget out of the red by pulling funds from a different category. So, for instance, if your food spending balloons outside the boundaries of your budget, you could shrink your retail spending category proportionately to come up with the extra funds. In a financial emergency, you might even choose to pull back on your contributions to savings or debt repayment as a last resort.
Pros and Cons of Zero-Based Budgeting
Here are the benefits and drawbacks to zero-based budgeting to consider before you decide to use this budget plan.
Pros of Zero-Based Budgeting
- Provides clarity on spending: If you aren't used to tracking your expenses, then you may find yourself wondering where your money is going each pay period. This method can help you get clear on what you're spending on, which can help you make changes if needed.
- Could help control overspending: Giving every dollar a role leaves you no room for impulse spending. That can be a gamechanger if you need a budget with more structure to help you stay accountable and prevent overspending.
- Can help you prioritize saving: Zero-based budgeting has you treat your savings goals as expenses and allocate funds toward them. In effect, that means paying yourself first—a big step toward creating financial stability.
Cons of Zero-Based Budgeting
- Requires lots of upkeep: This precise budgeting method may be an effective way to control your spending, but it can be a lot of work. Zero-based budgets often require more expense categories than other budgets, and you'll need to monitor your spending closely to adhere to your plan.
- Could cause you to cut it close financially: If all your money is already accounted for and then you're hit with an unexpected expense, you could risk overdrawing your account or taking on debt to cover the difference. Keeping a flush emergency fund or creating a designated budget buffer can help you iron out surprise expenses, big and small.
- Not necessarily a beginner-friendly approach to budgeting: If you're new to budgeting, jumping into a highly rigid budget could sour your perspective on budgeting as a whole. If you're just getting started, consider getting your feet wet with a more flexible budget plan first.
How to Create a Zero-Based Budget
Here are steps you can follow to create your own zero-based budget plan:
- Calculate your net income. Taking account of your income is simplest if you have a regular, fixed income. If you have irregular streams of income, such as through side hustles, contracting, tips or another source, find your average monthly income by adding up your income over the past several months and dividing by the number of months. If your cash flow increases or decreases significantly over time, repeat the process.
- Tally up your expenses. Next, you'll allocate your income toward budget categories. It's easiest to start with what doesn't change: your basic housing and bills. Cover these categories first, and then allocate funds to your variable non-negotiables—how much you'll spend on groceries, transportation, debt payments and other basics. Be sure to include saving as an expense category.
- Allocate funds until you're at zero. Once you have your income and your non-negotiables figured out, look at the sum of money you have left to work with. You'll want to allocate those funds toward different spending categories and goals, assigning money from your pool of funds until there's nothing leftover.
- Track and adjust as needed. Sticking to a zero-based budget requires you to be conscientious about your actual spending throughout the month. If you go over in one category, it's crucial to dial back spending elsewhere in order to keep your total spending from going over your available funds.
Alternatives to Zero-Based Budgeting
Zero-based budgeting is loved by some for its efficacy at keeping close tabs on spending. But it's also a labor-intensive way to budget, and it could be even tougher to upkeep if your income varies month-to-month.
Check out these alternative budgeting methods before you settle on one.
- 50/30/20 budgeting: This budget has you divide your income into three broad categories: 50% of your money goes toward basic expenses like housing and bills; 30% toward discretionary spending such as entertainment and shopping; and 20% is allocated toward saving goals, including debt repayment. This is less restrictive than zero-based budgeting and could be an easier place to start.
- Reverse budgeting: Also called a "pay yourself first" budget, this plan has you prioritize meeting your savings and debt payoff goals first. Once you've funded those goals, your remaining pool of funds goes toward meeting all your expenses and spending. Setting up auto transfers into savings and setting up spending alerts can help you put this plan into action.
- Envelope budgeting: Also called cash stuffing, envelope budgeting is a lot like zero-based budgeting. But instead of allocating funds into different categories, you physically withdraw cash and place it into envelopes for each category of spending. This is a rigid system, but some people find physically dividing up their cash an effective way to reel in spending.
It can take some time and experimentation to find a budgeting style that works for you. As you try to determine the best approach to your finances, it's important to remember the value of being able to stick to a budget long-term. A robust or restrictive budgeting style won't be as effective if you find yourself neglecting it or making frequent exceptions.
The Bottom Line
Zero-based budgets are super hands on, and that could make them feel highly effective for some—or way overcomplicated for others. Ultimately, the best budget plan is one that you can stick with. For some, a structured approach like zero-based budgeting feels most manageable. For others, a lower-effort budget could be more sustainable.
If zero-based budgeting sounds appealing, it's a good idea to use it alongside a budgeting app that automatically imports and categorizes your spending for you. That way, you'll be in the driver's seat of your spending, without having to do the math yourself.