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What Is Zero Based Budgeting and How Do You Make One?

Zero Based Budgeting

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Do you always want to save money from your next paycheck only to wonder where it all went a few days or weeks after receiving it?

Or perhaps you constantly spend idle money on unnecessary purchases, leaving you stuck in a vicious paycheck-to-paycheck cycle

This is the reality of over 60% of Americans, and if you can relate, I’m here to propose a solution that worked wonders for me: zero based budgeting. 

I always struggled to set up an emergency fund and save extra cash because of impulse-buying tendencies. 

However, since I started implementing the zero-based budgeting method, I have been able to take more control of my finances. 

If you desire the same, this post is for you. 

So, what is zero-based budgeting, and how does it work? Also, how do you know if it’s the best solution to your financial needs?

Let’s find out!

What Is Zero Based Budgeting and How Does It Work?

As the name suggests, the zero-based budgeting system is where your income minus expenses equals zero. 

I’m sure by now you’re wondering how I’ll encourage a system that ensures you use all your money. Where do savings, emergency funds, and investments come in?

Hear me out. The zero-based budget includes your savings in your expenses so that you account for every dollar you make. 

For me, this has been an effective strategy for implementing the “pay yourself first” principle rather than waiting to save what’s left after my expenses. 

That said, it has been a practical way to grow my savings and take control of my financial life in general. 

So, how does this method work?

Say you earn about $4,000 monthly and want to cover basic expenses and set some money aside to save. 

The zero-based budgeting system requires that you create a plan for your finances before your paycheck arrives. 

You can allocate a percentage of your funds to bills, debts, investments, emergency funds, and savings, leaving you with $0. 

The most significant upside of the zero-based budgeting system is that it ensures every dollar is accounted for, leaving no idle money in your checking account for impulse spending. 

How To Create a Zero-Based Budget

Now that we know how a zero-based budget works let’s dive right into creating one that suits your needs and helps you gain control of your finances. 

Whether you’re looking to cut back on impulse purchases, build an emergency fund, or prepare a safety net for your future, here’s a step-by-step guide on creating a zero-based budget. 

1. Calculate Your Monthly Income 

Calculating your after-tax monthly income is the first step to creating a practical zero-based budget. You must know exactly what you earn to keep yourself accountable for every dollar. 

Remember those bank statements you shoved in a drawer because you thought you’d need them later? Well, later is here. 

This is the time to review your paychecks and bank statements to determine your monthly earnings. 

What if you have an irregular income? Will the zero-based budget still work for you? 

The short answer is yes. The zero-based budget system will work for you regardless of your income streams as long as you want to account for every dollar you make. 

Whether you have a fixed paycheck, multiple income streams, or a job with varying income, you can still implement this method into your finances. 

Remember that this method requires you to include income from all sources including the passive ones. 

Consider using an average amount or the lowest expected income if you have a job with varying income.

2. Estimate Your Expenses 

Now that you’ve organized your income, it’s time to determine where your money goes. You can do this within a short time since it’s an estimation. We’ll do a more detailed tracking in the steps below. 

Here’s an example of a list of expenses:

  • Utility bills like electricity, water, gas, and internet.
  • Rent 
  • Childcare 
  • Transportation 
  • Savings 
  • Charity 
  • Insurance 
  • Retirement 
  • Entertainment 
  • Miscellaneous 

Having a miscellaneous category is helpful because it acts as a cushion in case you under budget or if prices increase due to inflation and the high cost of living. 

Categorizing your expenses into needs and wants also gives you a clear picture of your financial priorities and how to optimize your finances. 

I also recommend categorizing your estimated expenses into fixed and variable amounts so that your budget reflects the exact amount you need for each month. 

3. Subtract Your Expenses from Your Income to Arrive at Zero 

After listing your income and estimating your expenses, the next step is ensuring the amounts add up to zero. 

Suppose you have a few dollars left over after subtracting your expenses from your income. 

In that case, you can re-evaluate your expenses or inject the extra cash into your savings, emergency fund, or investments.

If you have a negative value after the math, you might be living above your means. Consider re-evaluating your expenses so that you’re left with $0. 

4. Track Your Spending 

Your spending estimate may not be accurate, especially because you made it within a short time. Tracking your spending will help determine if you need to adjust your budget.

Don’t rush through it. I recommend taking a month to track your expenditures since your budget will cover the same period. 

Also, don’t leave out the small incomes or expenditures, as these may accumulate and throw off your budget. 

For instance, if you receive $150 from your side gig or spend $7 on coffee, include them in your income and expenses categories. 

Like with estimating your expenses, organizing your expenditures into different categories when tracking your spending is also essential. 

Organize your spending into fixed and variable needs and wants. This way, you can quickly identify unnecessary expenditures and cut back if needed. 

You can track your spending manually using an Excel sheet or a budgeting app like PocketGuard. You should also consider checking if your bank has an expense-tracking feature. 

5. Create a New Budget 

The last step is creating a budget incorporating your income and tracked spending. This is the time to analyze your expenses and evaluate your financial goals. 

Identify areas where you’ve been spending money unnecessarily and cut back. For example, you can cut back on dining out and start making meals at home instead. 

To increase your savings, consider eliminating cable TV, unused subscriptions, and the $3 you spend daily on coffee. 

Including recreational activities in your budget is an excellent way to avoid impulse purchases that may set you back in your financial journey. 

If you like swimming, hiking, or going to the movies occasionally, ensure you include them in your budget.

You must also review and adjust your zero-based budget monthly to cater for variable expenses and incorporate variable income. 

Zero-Based Budget Example 

Here’s a zero-based budget example to guide you as you create your own. It only includes basic categories, so feel free to adjust them as you deem fit. 

Monthly Income:

Paycheck: $3,000

Side Hustle: $1,000

Passive income: $500

Total Income: $4,500


Rent: $1,500 

Food: $600

Utilities: $300

Transportation: $200 

Entertainment: $400

Insurance: $150

Debt: $200

Savings: $1,050

Miscellaneous: $100

Total Expenses: $4,500

Total Income – Total Expenses = $0

When allocating amounts to different categories, consider your income, lifestyle, and the cost of living in your state. 

Remember that your budget should be flexible to accommodate changes in income and expenses. 

Tips for Creating a Zero-Based Budget 

Here are some helpful tips to keep in mind as you create your zero-based budget:

Set Clear Financial Goals  

Why have you decided to budget your income? Are you working towards reducing debt, increasing your savings, or developing a frugal lifestyle?

Knowing the why early on is an excellent way to stay focused on the cause, especially when times get tough. 

You don’t have to set long-term financial goals like building a retirement fund immediately. If it feels overwhelming, consider breaking down large goals into smaller, manageable ones to boost your motivation. 

Once you feel ready or after checking several short-term goals off your list, you can think about setting long-term financial goals.  

Create a Flexible Budget 

A flexible budget is easy to adjust in case of income variability and changes in the costs of items. 

For instance, if you usually spend $500 on food monthly, inflation may increase the price to $550 in the next month. 

You can cater for such changes by including a miscellaneous category in your budget. This leaves a little wiggle room and saves you a lot of trouble if changes occur within the month.

Regular budget adjustments are also beneficial, especially if your job pays variable incomes. In this case, consider basing your budget on the lowest or average expected income.

Extend Yourself Some Grace 

While a zero-based budget is stricter than other budgeting methods because it ensures you have no idle money to spend unnecessarily, it’s still hard to stick to it, especially if it’s your first time budgeting. 

You may find yourself using your miscellaneous amount for an iced coffee and your food money to cover emergencies. Trust me, I’ve been there. 

Beating yourself up will not be helpful in this case. Extend yourself some grace because, at the end of the day, you’re only human. 

However, this doesn’t mean you should let yourself make this mistake. Find ways to cultivate your financial discipline. You can also use an incentive if that works for you!

Build an Emergency Fund 

I didn’t realize the importance of an emergency fund until I developed a health issue last year, which left a huge dent in my savings. 

An emergency fund acts as a cushion and helps you combat uncertain events like job loss, which may otherwise affect your financial standing. 

It’s good practice to have an emergency fund that can cover your expenses for at least six months. 

I recommend building an emergency fund before considering savings and investments. However, you can do both simultaneously if that works for you.  

Always Pay Yourself First 

Paying yourself first generally means prioritizing your savings and financial future. This is the main goal of the zero-based budget system. 

Creating your budget before payday lets you determine beforehand the amount you want to allocate to your savings. 

So, once your paycheck arrives, consider setting the savings amount aside before you cater for expenses.

This is an excellent way to build your savings, especially if you always forget to save or have unexpected expenses during the month. 

I’ve been using Raisin to save my money and I always earn up to 5.30% interest on my idle cash. You can also use it and let your money work for you.

Pros and Cons of Zero-Based Budgeting 

Here are some upsides and downsides of the zero-based budgeting system:


  • It enables you to track every dollar 
  • The budget is flexible 
  • The zero-based budgeting system improves your awareness of your spending 
  • It increases savings 
  • It gives you more control over your finances 


  • It’s time-consuming compared to other budgeting methods 
  • It’s easy to overlook some expenses 
  • It requires a lot of discipline 
  • It can be restrictive, especially with unplanned events 

Frequently Asked Questions 

Why Is It Called a Zero-Based Budget?

It’s called the zero-based budget because this system ensures you balance your income and expenses, leaving you with $0.

It ensures you prioritize savings and prevent unnecessary purchases by leaving no idle money after allocating funds to various categories.   

What Is the Main Difference Between Traditional Budgeting and Zero-Based Budgeting?

The main difference is that the traditional budgeting system is based on the previous period’s budget, while the zero-based budgeting starts from scratch after every payment period.

With traditional budgeting, you’ll pick a previous budget and make minor adjustments, but with the zero-based budgeting system, you must justify every expenditure afresh.  

Also, the zero-based budgeting system requires a cost-benefit analysis, which is not the case in traditional budgeting. 

Why is the Zero-Based Budget the Most Effective Type of Budgeting? 

The zero-based budget is the most effective system because it focuses on critical thinking, cost-benefit analysis, and accountability rather than financial management alone. 

It’s especially effective if you have a problem with impulse buying or building your savings, as it allows you to pay yourself first and leaves no money unaccounted for. 

Final Thoughts 

I always recommend the zero-based budgeting system because it helped me overcome impulse buying and focus on my financial goals. 

If you struggle with tracking your money or often forget to save, this might be the best budgeting system for you. 

Always evaluate your income and financial goals to create the best budget that works for you. 

Also, remember to give yourself some grace. It’s understandable if you need time to adjust to a budget. 

Looking for other ways to budget?

Lydia is a personal finance expert and the founder of Sproutinue, a personal finance site helping you find legit ways to make money, save money, and achieve financial freedom. She has been featured on various major financial publications, including Investopedia, Business Insider, GoBankingRates, and more.

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