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.

In this guide, find out why some people have more success with zero-based budgeting and how to do it. Get the steps, pros and cons, and tips below.

What is Zero-based Budgeting?

Zero-based budgeting (or zero-sum budgeting) is a structured budget where every dollar you earn has a specific purpose.

There's no "leftover" money like in a regular budget. You decide exactly how much to put toward your investments, bills, "fun stuff" and everything in between.

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.

When Should Zero Based Budgeting Be Used?

There's no single best budgeting method that works for everyone. For example, 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.

But if you haven't had success with methods like this, 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 offers 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.

How to Calculate Zero Based Budgeting
  1. Calculate and document your monthly income.
  2. Assign spending categories to all your expenses.
  3. Subtract your expenses from your income.
  4. Make sure any leftover dollar has a job.
  5. Update and adjust your budget as needed.

Get a break-down of each step below.

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? Got a quarterly bill? Be sure to create a category for these as long as you'll be spending or saving up for them.

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 the total expenses from your total income.

The goal is to get this number to equal zero, but don't worry if it doesn't at first! Here's how to troubleshoot:

  • 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!

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

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.

Just be sure to 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 track expenses manually.

It's okay to not be perfect. You might overspend the first couple of months. You might forget to account for some expenses. 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.

What is the benefit of zero-based budgeting? Control, flexibility, and an intimate understanding of your finances are the main benefits of zero-based budgeting. Because you're creating a budget from scratch each month, you can adjust as needed to accommodate one-time/seasonal expenses. It also forces you to know your finances on a deeper level - no dollar is unaccounted for.

Zero-Based Budgeting Pros & Cons


  • Lots of control
    Assigning a job to every dollar gives you a 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 aren't making the most of your money, zero-based budgeting can help. It'll help identify any spending pitfalls so you can make effective changes.

  • Flexible
    Each month gets its own budget, which lets you adjust and adapt it to your needs. If you spend too much or too little in any category, you can easily recalibrate.


  • Time-consuming
    You'll have to create a new budget every month. 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. You'll need to keep a close eye on your spending for ZBB to work, which may feel too restrictive and discouraging (especially in the beginning.)

  • Harder with irregular income
    Zero-based budgeting with irregular income is more challenging. Whenever your earnings dip, 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

Zero-based budgeting is one of the best ways to take control of your money and reach your goals quickly.

Whether you need to save up for a holiday gift or pay off credit cards, zero-based budgeting helps you pinpoint extra money to get there faster.

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. Your budget doesn't have to be perfect to make a huge impact on your financial well being

Donna Tang is a content associate 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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