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Zero-Based Budgeting: Is It Right for You?

Jul 12, 2020 4 min read Susan Johnston Taylor

Key Takeaways

  • Budgeting puts you in control of your money.
  • Zero-based budgets assign a “job” to every penny.
  • Zero-based can be useful but isn’t for everyone.


Whether you're saving for the future or trying to pay off debt, learning how to make a budget can help set you up for financial success.



Why is budgeting important?

Budgeting puts you in control of your money. Without a budget, it's hard to know if you're spending more than you're earning — let alone if you're on track to achieve your financial goals. It's also easy to overspend and, at the end of the month, find yourself wondering where your money went.

Budgeting may seem especially daunting if you're not making a lot of money. But it's especially important to budget on an entry-level salary so you can develop good financial habits and avoid debt.

Some people use a zero-based budget (ZBB, also called a zero-sum or rational budget). But what is zero-based budgeting?

A zero-based budget means every penny you earn is assigned to a job. That job might be paying rent, going into a savings account or buying theater tickets, but the key characteristic is that every dollar (and quarter, dime, nickel and penny) is accounted for.

Think of it this way:

Income – expenses – savings = zero

At the end of the month, your goal is to have spent, saved or invested every penny of your net income (your take-home pay after taxes). If you wind up with a number above zero, you can put the excess money into savings. If your number falls below zero, you've overspent your budget — so next month you’ll need to raise your income and/or lower your expenses to make your budget hit zero.

On the other hand, non-zero-based budgeting is a more relaxed approach, because you're not tracking every penny. You allocate money for expenses, then either transfer whatever's left to savings or reallocate it to next month's budget.

So how exactly do these two methods work?

Applying zero-based budgeting to your life

For a zero-based budget, start by listing your monthly income and current expenses, including necessities such as food and housing and extras like travel and entertainment. (ZBB can be time-consuming because you're tracking every penny. So, consider using a budgeting app or carrying a notepad to record every transaction.)

Let's say your monthly take-home pay is $4,000. You'd assign every dollar of that $4,000 to a category of spending, such as housing, travel or savings. (If you're using cash, try the “envelope system”: Money for each category goes in its own envelope.) Remember to include some semi-regular expenses, such as annual insurance premiums or holiday gifts, in your budget. Consider automating monthly transfers to savings before you have the chance to spend that money. (Paying yourself first is one of the benefits of zero-based budgeting.)

So, you'd divide your $4,000 among food, housing and other categories. Once that total is gone, you must stop spending. You can transfer money from one category to another, but you don't get any extra money. Under zero-based budgeting, you can’t spend more than $4,000, even if you have leftover money from the previous month.

At the end of the month, compare your planned spending to your actual spending to see how you did. The goal is to wind up with zero dollars: If you have money left over, it means you didn't allocate funds correctly. But if you spent more than you’d planned, you also didn't allocate correctly.

As you might have noticed, ZBB is harder to do with inconsistent income. If you freelance or work in the gig economy and your income fluctuates, you'll need to base your ZBB spending on last month's income and adjust accordingly for the next month. That means you're spending last month's income rather than the current month's.

Applying non-ZBB to your life

Non-zero-based budgeting starts out similarly to ZBB: You write down your monthly income and current expenses, including necessities such as food and housing and extras like travel or entertainment.

But instead of tracking and assigning new spending to categories, look backward before you move forward: Based on what you've spent in the past, look for ways to reduce future spending in each category. Can you eat fewer restaurant meals or switch to a cheaper cable TV package? Do you still need that gym membership if you're not using it?

Of that $4,000 monthly income, say you're currently spending around $3,500 and putting another $500 into savings. Challenge yourself to spend a bit less — $3,400 — and put a bit more — $600 — into savings the next month. Then adjust your goal further the following month.

Track your monthly spending by category, and aim to have a surplus at the end of each month. Transfer that surplus to a savings or investment account, or carry it over to the following month. That last part — the ability to carry over extra money from one month to the next — makes non-ZBB more flexible. That can be helpful if you run into unexpected expenses, like a vet bill or car repairs. However, it also means you might come in under budget one month, but overspend the next.


What you can do next

Compare zero-based and non-zero-based budgeting to see which strategy best fits your financial goals. Try ZBB for a couple months and adjust as needed. If it doesn't work for you, start over with a different approach. Just remember: Having some kind of budget in place is almost always better than having no budget.



Susan Johnston Taylor has written about personal finance and business for The Atlantic, The Boston Globe, Fast Company and U.S. News & World Report.


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