What Is Zero-Based Budgeting & How To Make One

Zero-based budgeting changed my life! It has helped us save more money and spend guilt-free. I firmly believe everyone should have a budget, whether you have $100 or $100k coming in each month. Here are some of my tips on budgeting and why a zero-based budget is the best way to tell every dollar what to do.

Clipboard with zero based budgeting todo list

Personal finance is one of my favorite topics! I’ve always loved number crunching, and budgeting combines number crunching with practical, real-life decision making. Most people think budgeting means you can’t spend your money. It’s actually the opposite! A budget is simply a spending plan, and a budget gives you the freedom to spend without feeling guilty. I truly believe that just like staying mindful of fitness and nutrition is important for living your healthiest life, keeping a close eye on your spending is imperative to healthy finances.

How I got started budgeting

When I first graduated from college, moved into my own apartment, and got my first job, I followed the “just make sure the bank account isn’t near zero” method of money tracking. It worked for a while because both my income and my expenses were small and easy to keep an eye on. Once I bought my first house, I started to have some unpredictable expenses and created my first budget spreadsheet. My first budget was a zero-based spreadsheet. I had rows on the top for income, rows in the middle for expenses, a row for savings, and the bottom goal was to get to zero. For years I used this spreadsheet, which you can see in this NERD KERF series. I actually still use a version of it to plan for the future. But for everyday budgeting, I use the YNAB app.

The budgeting app I use: YNAB

As you guys know, I’ve used YNAB for budgeting since 2016 and love it. In fact, I’m obsessed with it. I literally could not live without it, and I use the app on my computer and phone every single day. YNAB is specifically designed to help with zero-based budgeting. I’ve used some of the other budgeting apps (I tried Every Dollar for a month a long time ago, and I use Mint as a reference tool) but YNAB is the cleanest and most user friendly, in my opinion. Read my posts about it here and here.

Kath at a computer

What is Zero-Based Budgeting?

Zero-based budgeting is a budgeting method that forces you to give every dollar a job. When you practice ZBB, you assign every dollar of your money to particular categories (not all of them are spending – some are savings): monthly expenses, retirement, payment of debts, annual expenses, tax savings, travel, food, etc. The main goal of this budgeting system is that your income minus expenses and savings should be equal to zero by the end of the month.

Simply put: money in – money out = 0

The benefit get from a zero-based budget is it prevents you from spending money that you don’t have, discourages overspending, and creates more accountability in your budget. You’re more mindful of where your money goes day by day but also month by month. It encourages saving because you are forced to put your money somewhere. A very simple ZBB might have one “savings” line item that all goes into one bucket, and someone with a more detail budget might have a savings category with sub categories of travel savings, new car savings, buy-a-house savings, retirement savings, etc.

Zero-Based Budgeting vs. Traditional Budgeting

If zero-based budgeting requires you to give every dollar a job, how is it different from a “normal” budget? Understanding how they are different can help you wrap your mind around the concept of ZBB. Here are key differences of zero-based budgeting and traditional budgeting.

Zero-based budgeting prepares a new budget each month.

Traditional budgeting uses last year’s (or last month’s) budget as the template for the current one. So you look back to the past to create a plan for the future. You have to guess and predict what income will be. On the other hand, ZBB starts with the cash in your account RIGHT NOW and tells you to assign it to categories for the days and weeks ahead. While a traditional budget works fine if you have a very predictable salary and life, ZBB is ideal for those with variable incomes (like the self employed!)

Zero-based budgeting is income focused.

As they say in YNAB, your goal is to live on last month’s income. If you have a baller month, you have more dollars to spend in the month following (even if most of those go to savings). If you had a lean month, the month following will have a leaner budget. When you live on last month’s income you’re less likely to overspend and you don’t need to worry about the timing of paychecks throughout the month. It you’re just getting started and used to living paycheck to paycheck, it does take some time to build up enough buffer to live on last month’s income. You have to make some deep sacrifices in the beginning to build the buffer, but once you do you can go back to “normal” spending.

Zero-based budgeting promotes saving.

ZBB promotes saving because you must use every dollar. It changes your mindset around “extra money” in your budget. Instead of just having a pile of money at the bottom of your account, it forces you to think about and plan what you might use that money for in the future. It also forces you to plan for one-a-year expenses (like memberships, car insurance or life insurance – all the insurances!).

Here’s an example: Instead of getting annoyed that $800 car insurance is due every August, you create a line item in your budget for it and put away $66 a month. When August rolls around, you magically have $800 saved. You can also have line items for things like your health insurance deductible or home repairs. You’ll probably tap into both throughout the year, and if you have funds ear marked for those you won’t have to use your vacation savings to pay them (unless you didn’t save enough, of course.)

How to Make a Zero-Based Budget

You can use a piece of paper, a spreadsheet, a notebook, or find a budgeting app that promotes zero-based budgeting, like YNAB or Every Dollar

Determine your pot of money on the first of the month.

Whatever your bank account(s) balance is on the first of the month is your pot of money to divvy up. This should include all of last month’s income: paychecks, small business income, refunds, returns, side hustles, venmos, literally anywhere you have money coming in. Once you have the total of that pile of money, you’re ready to divvy it up into categories.

List your monthly expenses.

First on the list should be those items that you cannot live without. So food, shelter, utilities, and transportation, which Dave Ramsey calls the Four Walls. Then there are things like insurance, any regular appointments you have, etc. Once you have listed your main fixed expenses, you can write down the rest of your monthly expenses and spending. Saving and giving should also be included in your list. If you have debt, make sure you either include your minimum payments or the amount you plan to put towards debt each month.

Create categories for unexpected expenses.

There will be unexpected expenses such as when you get invited to a wedding, or your child gets invited to a friend’s birthday party. Unforeseen expenses such as these should belong to a separate category and be accounted for. It might be hard to think about all of the unexpected expenses that come up throughout a year at first, but over time you’ll realize what some are. For us, an example is that every June we have to pay $100 for our Cville city trash removal. The time this came around I was annoyed, but I created a line item in my budget for it and so now it’s just a regular expense I plan for each month to be paid once a year.

Include seasonal expenses and savings.

Seasonal expenditures are the ones which you know that come up every year like birthdays, anniversary, Christmas, etc. You know the exact dates so you will be able to project how much you want to set aside for this specific occasion per month before it arrives. This can also be things like your car tag renewal fees, property taxes, summer camps, spring break travel, etc. So when the time comes for you to pay, it will not be such a big chip on your savings or emergency fund because they have already been set aside.

Subtract your expenses from your income & get ZERO.

Keep putting your money into categories until you get zero. Your goal in a zero-based budget is zero, as the name suggests. It does not mean an actual zero in your bank account but a ZERO when you subtract all your planning expenses and savings from your income. The main focus of the zero-based budget is for every dollar of your income to have a name, a place, an intention.

Keep track and edit.

No budget is going to go 100% as planned in reality. Even if you have everything listed to the tiniest of details, you’re going to have to make changes. This is THE HARDEST part for me because I want to be a perfectionist but I can’t predict the future! It’s also the number one reason I love budgeting apps as opposed to spreadsheets – the apps are much easier to edit because all the math is done for you within the app and you don’t have to create your own formulas. As YNAB says, roll with the punches of life!

Tips for Zero-Based Budgeting Best Practices

  1. If your income is less than your expenses, you’ll end up with a negative number. That is not a good feeling! But it’s better to see a negative number when you’re on day 1 of planning than if you’re on day 31 looking back. You have to be honest and realistic with yourself if you want to be a good budgeter.
  2. When your income is higher than your expenses, you get to decide where the extra goes. (That’s obviously the fun part ???? ) How you divide it up is up to your personality. I have tried one big pot of savings and I have tried a million small categories, and I’ve found that somewhere in the middle is ideal. I like to have savings budgets for home, travel, retirement, and fun.
  3. If someone asked you: “How much to you bring in each month and how much do you spend?” could you answer that question? Everyone should know the rough answer to that question. Even if your husband does the budget or you make a lot of money. It’s a responsible number to know. The more you know, the more you can be smart with your spending and saving.
  4. If you have an irregular income or are paid on commission, the rule of thumb is to base your budget on a low earning month. You can create a “hill and valley” category in your budget that can help to fill gaps on lean months.
  5. Check in with your budget at least once a week to reconcile the expenses you’ve incurred. The more you do this, the more closely you’ll watch your spending habits. I check in with my budget once a day (every morning) and sometimes more!

Do you budget?

It’s empowering when you have control over your money instead of it controlling you. If I had all the time in the world, I would love to help anyone who doesn’t budget get started. (I’ve helped several of my friends get set up in YNAB.) So I would love to know if you guys use a different budgeting method or tool and also how you budget for your business or family.