What is a Zero-Based Budget and Why Should You Use One?

by | Jan 26, 2021 | Blog

If you want a budget that puts a name and a purpose to every dollar you make, then a zero-based budget might be for you. Yeah, sure, some people dread budgeting, since it forces them to look at their finances and make some difficult decisions. But truthfully if done right, budgeting will empower you to pay off more debt, build more wealth, and bring clarity to your spending power. How can a budget do that? Let’s dig into the zero-based budget and find out.

What is a zero-based budget?

A zero-based budget means what you make matches what you spend and save.  No “leftover” money, no negative numbers. The point is to list every expense—including contributions to your retirement and savings accounts—and give every dollar a job.

For example, if your combined monthly income is $5,200, a zero-based budget might look like:

  • Debt Payments: $600 (5,200 – 600 = 4,600)
  • Food: $820 (4,600 – 820 = 3,780)
  • Utilities: $520 (3,780 – 520 = 3,260)
  • Mortgage: $1,400 (3,260 – 1,400= 1,860)
  • Transportation/Car Maintenance: $500 (1,860 – 500 = 1,360)
  • Insurance: $800 (1,860 – 800 = 560)
  • Shopping: $270 (560 – 270 = 290)
  • Savings: $290 (290 – 290 = zero)

Why use a zero-based budget?

Because of how intentional you become with a zero-based budget, you’ll find a lot of benefit with this method. Here are just three.

1. Hit your goals faster.

Want to get out of debt faster? Writing down all of your expenses helps you identify places where you can cut spending and put more toward your debt payments. The same is true for saving for a down payment or putting away money for retirement. When you make a zero-based budget, you build your goals into the budget, which means you make your budget work for you.

2. No surprises.

Without budgeting—zero-based or not—it’s so easy to reach the end of the month and wonder: where did all my money go?  With a zero-based budget, you know exactly where your money is going, and if done right, you’ve put your money in the right places.

3. Accurate picture of your finances.

A zero-based budget forces you to take a hard look at the reality of your spending power. Sure, you may really want that Halloween costume for your dog, or that new pressure cooker for your kitchen. But if it pushes your budget over zero (in the negative direction), you know it’s not worth it.

How do you make a zero-based budget?

  1. At the beginning of each month, write down your total household income.
  2. Add up all of your monthly expenses (don’t forget to include holiday expenses, too).
  3. Subtract your income from your expenses. If you need to, adjust your expenses until income minus expenses equals zero.
  4. Stick to your monthly expenses! If you go over or under for a certain category, use that knowledge for next month’s budget.

Is Money Stressing You Out?

You’re not alone. My team knows how terrible money stress feels, which is why we’re here to help you conquer your money problem, whether that’s paying off debt or catching up on your retirement savings. Contact us today, and we’ll help you get on the path to financial freedom.