April 1, 2021

Zero Based Budgeting

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Everyone needs a good budget. We all know that by now.

But "good" is subjective. What works for someone else might not work for you.

If traditional methods of budgeting have got you burned out from pinching pennies, it's probably time for a change.

Find out why some people have more success with zero-based budgeting. And learn how to make your own zero-based budget below.

What is Zero-based Budgeting?

A traditional budget involves setting spending limits and trying not to overspend in any category. You figure out how much you need for essentials. Then you use the rest for savings and other expenses. You can use your leftover money however you'd like.

Zero-based budgeting (or zero-sum budgeting) is more structured. Every dollar you earn is designated for a specific purpose. You decide exactly how much to put toward your investments, bills, or other spending categories. There's no "leftover" money like in a regular budget.

The goal is to have a plan for all your income. At the end of the month, you should be left with zero dollars. Or, put into an equation: your income - your expenses = 0.

Having a plan for every dollar means you're less likely to overspend. But is this level of control right for you? Find out if zero-based budgeting is worth it.

Zero-based budgets aren't just for personal finance. They're also a great way to create a budget for your small business.

Is It Better than Traditional Budgeting?

Budgeting is a powerful tool. When you understand where your money goes, you can make changes and work toward your financial goals. How you choose to do that is up to you. There's not just one best budgeting method.

Some people prefer a 50/30/20 budget. 50% of your income goes to needs, 30% to wants, and 20% to savings and debt repayment. If that works fine for you, you don't have to switch to the zero-sum budget.

But if you haven't had success with other methods of budgeting, you might need a different system. Here are some signs you should give zero-based budgeting a shot:

  • You overspend with traditional budgets
  • You want to save more regularly
  • You're willing to devote time to budget each month
  • You like structure

Zero-based budgeting can be a little intimidating at first. It offer less wiggle room than other budgeting methods. But that's what makes it so effective. Here's how you can get started today.

How to Create a Zero-based Budget

Don't leave your financial health up to chance. Take control of your spending with a zero-sum budget in 5 easy steps.

1. Determine Your Monthly Income

Calculate your total monthly income. This includes all paychecks, side hustles, child support—any money that comes your way counts as income.

How you record all of it is up to you. Write it down, try a spreadsheet or word doc, or use an app. Pick a method that feels natural to you. You'll want to revisit your budget regularly.

Can I use a zero-based budget if I have irregular income?
You can still make a successful zero-based budget—even if you're unsure how much you'll make each month. Start with your lowest projected monthly income. If you earn more throughout the month, you can always go back and spread that money out.

2. Assign Spending Categories

Take a look at your bank statements. Record all your expenses and give each of them a spending category. This could include rent, utilities, groceries, car insurance, entertainment, debt payments, savings, and investments.

Your categories might vary each month. That's why it's so important to start fresh every month. Is your birthday around the corner? Add that to your categories if you're planning to celebrate. Got a quarterly bill? Be sure to account for that.

You should have a clear picture of how much you'll spend in the upcoming month.

3. Subtract your expenses from your income

Now that you have a list of monthly expenses, subtract all of them from your total income. The goal is to get this number to equal zero, but don't worry if it doesn't at first!

Use our free budget calculator to visualize where your money is going—no need to do the math yourself.

If you're spending more than you make, try to cut down on non-essentials. This doesn't mean you can't have any fun. But you might need to reprioritize some of that fun money.

If you're spending less than you make, awesome! You can allocate the money toward savings, investments, or extra debt payments. Or, you can even splurge at a restaurant if you'd like.

Budgeting isn't about living as frugally as possible (unless that's your goal). It's about planning for expenses and making deliberate, informed decisions with your money. If that means you want a nice dinner every once in a while, that's in your power!

4. Update your budget

Your budget will probably go through a lot of trial and error. This is totally normal. Feel free to move your money to different categories throughout the month if your initial budget doesn't make sense.

What matters most is that you regularly check your budget to keep yourself on track. If you use an app, it probably does this for you automatically. Otherwise, it's a smart idea to manually track expenses to keep tabs on your money.

It's okay to not be perfect. You might overspend the first couple of months. You might forget to account for some expenses. It's all part of the learning experience. The important part is that you make the effort to understand your money and have a plan for it.

5. Make sure every dollar has a job

If you have any money left over at the end of the month, give those dollars a job. You can use them for fun expenses or add them to your savings. What matters is that you have a plan for all your income.

Don't just leave money unassigned in your checking account—that's an easy way to spend more than you need.

Zero-Based Budgeting: Pros

Lots of control
As you can imagine, assigning a job to every dollar gives you a whole lot of control over your budget. You'll be less likely to spend impulsively or let your money get away from you.

Helps you understand your spending
If you feel you aren't making the most of your money, zero-based budgeting can help. It'll show you all your spending pitfalls so you can start making effective changes.

Flexible
Each month gets its own budget, which gives you plenty of chances to adjust and adapt it to your needs. If you spend too much or too little in any category, you can easily recalibrate until you get it right.

Zero-Based Budgeting: Cons

Time-consuming
You'll have to come back to your budget every month to work out how much you'll spend. Each month could be different, and it takes some time to figure out exactly what you need.

Needs a lot of discipline
This isn't something you can set and forget. For your zero-based budget to work, you'll need to keep a close eye on your spending. It might feel too restrictive and actually discourage you from budgeting, especially in the beginning.

Harder with irregular income
While it's definitely possible to create a successful zero-based budget with irregular income, it is a little more challenging. In months where you don't make as much, you'll probably have to cut out a lot of non-essential spending.

No budget is perfect the first time around. Find out next how to set yourself up for success, even if you're completely new to budgeting.

5 Tips for Zero-Sum Budgeting

It's one thing to start a budget. Actually sticking to it is a whole different challenge. Follow these 5 tips to get your zero-sum budget on the right track:

  1. Overestimate your expenses. For spending that fluctuates, like groceries or utility bills, overestimate how much you'll spend. It'll give you a little wiggle room in case your expenses are unexpectedly high. At the end of the month, you can save any money you have leftover.

  2. Build an emergency fund. If you don't have one already, devote some of your monthly income to an emergency fund. Unexpected expenses happen. A safety net will give you peace of mind and support you through an imperfect budget.

  3. Log your spending every week. If tracking your expenses every day sounds like a chore, make an effort to do it just once a week. Hold onto your receipts throughout the week and record everything on the weekend. It'll take just a few minutes, but it'll help you stay on track as you budget long term.

  4. Don't be afraid to make adjustments. It's okay to edit your budget if it looks like you've allotted too much or too little money to a spending category. In fact, it's a great sign! It means you're paying close attention to your money coming in and going out.

  5. Set financial goals. It's hard to stay motivated if there's no concrete goal to work towards. Figure out what's important to you. Are you saving for a home? Or for your children's education? Finding a reason will help you stay on track even when times are tough.

Bottom Line

Everyone needs a budget. Zero-based budgeting is one of the best ways to take control of your money. If you have a financial goal that you want to reach quickly, this is a great method.

For example, let's say you want to pay off your credit cards. Zero-based budgeting helps you identify money that could be put toward extra payments.

With that said, this budgeting method can feel a little extreme for some people. If you're debt-free and have very stable income and expenses, you might not feel the need to create a brand-new budget every month.

Whichever budgeting method you choose, be sure to cut yourself some slack as you learn the ropes. Sticking to a budget is hard. But just remember that you don't have to be perfect to make a huge impact on your financial well-being.

Donna Tang is the head of purpose and audience at CreditDonkey, a personal finance comparison and reviews website. Write to Donna Tang at donna.tang@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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