Zero-Based Budgeting: What It Is And How It Works

Zero-based budgeting helps you zero in on your money goals (and zero out excuses!) by putting every single one of your dollars to work. Whether it’s paying your rent, tackling debt, or getting saved for the future, every single dollar has a specific job when you use a zero-based budget. At the end of the month, your income minus expenses should be zero. 

This detailed guide will break down:

1. How a zero-based budget works

2. How to create a zero-based budget

3. The pros and cons of zero-based budgeting

Table of contents

• What is zero-based budgeting? 

• How to create a zero-sum budget: A step-by-step guide

• Zero-based budgeting example

• Tips for successful zero-based budgeting

• Zero-based budgeting advantages and disadvantages

What is zero-based budgeting? 

A zero-based budget, also known as a zero-sum budget, is when you assign every single dollar of income to a specific expense, so that your income minus your expenses always equals zero

Income – Essential Expenses – Flexible Expenses = $0

The main goal of zero-based budgeting is to eliminate wiggle room in your budget by giving every dollar a specific job. With less wiggle room, you’re less likely to overspend. 

Also, don’t let the name fool you…zero-based budgeting doesn’t mean that you’ll have zero dollars in your bank account (that’d be stressful). You’ll still have money in your account. It just means that your monthly expenses will exactly match your income and essentially “zero” it out.

How to create a zero-sum budget: A step-by-step guide

Step 1: Calculate your true monthly income

The first step is to determine your monthly income so that you know exactly how much money you can spend each month. Be sure to record all types of income, including:

1. Salary or consistent paycheck

2. Hourly gigs

3. Side hustles

4. Irregular income

Your income might fluctuate month-to-month, so be sure to look at the past few months to get an average estimate. 

Step 2: List your essential monthly expenses

Now go through your expenses and tally up every essential expense that you have to spend money on each month. For now, we’re only interested in expenses that you can’t avoid, like paying your rent, buying groceries, making certain loan payments, or filling up your car if you commute to work. 

It’s important to be honest during this step and only include expenses that are really essential.

It might feel like you can’t live without your monthly gym membership or Netflix subscription, but those expenses are likely voluntary and shouldn’t be included just yet. 

Step 3: Subtract your essential monthly expenses from your income

Now take those essential expenses and subtract them from your monthly income. Whatever is left over is your flexible spending money each month. This is your budget for things like eating out, personal care, saving, and investing.

During this step, it’s a good idea to think about your financial goals and consider how much you want to allocate to saving or investing each month.

Step 4: Subtract your financial goals and wants

Finally, we’re going to take the remainder of your budget and subtract money for your financial goals and wants.

This is where you can include money that you’re putting towards saving or investing, as well as expenses for areas that are important to you, like personal care, entertainment, or travel. 

Keep subtracting expenses until you have $0 left in your monthly budget. After you hit $0, you should consider cutting out any other expenses.

Then, give yourself a high five and a pat on the back because you’ve officially created your own zero-based budget!

💡 MoneyLion Tip: Try using the 50/30/20 allocation as a rule of thumb

The 50/30/20 rule states that 50% of your budget should go towards necessities, 30% should go towards wants, and 20% towards savings/investments.

If your zero-based budget is fairly close to this allocation, then you’re likely on the right track. If not, then you might need to make some adjustments. The 50/30/20 rule isn’t a law that can’t be broken, but it’s a good guideline to make sure you’re on the right track.

👉 The 50/30/20 Budgeting Rule

Zero-based budgeting example

Okay, it’s always easier to learn with a real-world example, right? Let’s explore a sample zero-based budget template that uses a monthly income of $4,000.

You can see we start with a monthly income of $4,000 (in the top right) and slowly subtract essential expenses, then flexible expenses until we hit $0.

Tips for successful zero-based budgeting

1. Prioritize your most important expenses: Be sure to include expenses that are most important to you first, before adding smaller ones. 

2. Have money left over? Put it toward your goals: If you get to the end of your budget and still have some cash left, just add it to your savings account, investments, or other goals. Remember, your budget should always end at $0.

3. Stay organized: With a zero-based budget, it’s a good idea to track your expenses either daily or weekly so you don’t fall behind. Be sure to stay organized and track all your expenses in one place.

4. Stay committed: Consider convincing a friend to take on zero-based budgeting with you, so you have an accountability partner. If you’re a MoneyLion customer, you can also post your progress in the community section.

5. Leverage the cash stuffing strategy: Zero-based budgeting mixes well with cash stuffing, a budgeting tactic where you divide your money into different categories, stick cash in labeled envelopes for those categories, and only spend what’s in each envelope.

👉 Cash Stuffing: How the Latest Budgeting Craze Works

Zero-based budgeting advantages and disadvantages

There are plenty of reasons why people love zero-based budgeting.

✅ Increased accountability: The zero-based budget is one of the best methods of budgeting because it forces you to be accountable for each dollar of your income. No more letting expenses slip through the cracks.

✅ Greater control over finances: More accountability means more control over your income. You’re in the driver’s seat and control exactly where each dollar goes.

✅ Improved savings and debt reduction: Zero-based budgeting treats savings and debt payments as regular expenses, making it easy to prioritize them.  

✅ Less overspending: Writing and following a zero-based budget can help you avoid overspending and impulse purchases because it clearly labels where each dollar is supposed to go.

✅ Encourages discipline: Following a zero-based budget isn’t easy, but the results will be worth it!

Of course, no budgeting style is without its downsides. Here are a few of the major disadvantages of zero-based budgeting:

❎ Time-consuming: This budgeting style requires constant effort to track your expenses. While this forces you to be accountable…let’s face it…it’s a bit of a hassle (unless you use Moneylion, of course).

❎ Potential for rigidness: Zero-based budgeting isn’t the best option if you tend to have unexpected expenses each month. It’s a bit more inflexible than other budgeting methods.

❎ Not ideal for irregular earners: The same logic applies to irregular earners: It’s a fairly rigid budgeting style that’s not designed for people with fluctuating incomes.

Zero Out the Excuses, and Zero In on Your Money

Zero-based budgeting helps you literally zero in on where your money goes each month by forcing you to track every single dollar. This helps solve that constant mystery of “where did my money go?” each month.  

Sure, it takes a little extra effort, but the payoff is big: fewer impulse splurges, faster debt payoff, and making sure your money flows toward the things that actually matter to you.

💡Want a more basic approach to budgeting? 6 Steps to Make a Budget

FAQs

How does zero-based budgeting work?

Zero-based budgeting works by assigning every dollar of your income to a specific expense, savings, or debt payment until nothing is left unallocated. In other words, you “zero out” your income each month.

Does using a zero-based budget mean that your bank account will hit $0 at the end of every month?

No, it just means your budget balances out to zero on paper. You still keep money in your account, but every dollar has a planned purpose.

How is zero-based budgeting beneficial?

It helps you track every dollar of income so you can avoid overspending and stay focused on your savings or debt goals.

What is a drawback of zero-based budgeting?

It can be time-consuming since it requires monitoring your expenses regularly.

Why might some budgeters consider zero-based budgeting to be simply too much work?

Because it demands detailed tracking and constant adjustments, which can feel overwhelming compared to looser budgeting methods.