Zero-based budgeting is a strategy that allocates every dollar you make. Your goal is to ensure that income minus all your expenses equals exactly zero at the end of the month.

If you underspend in a category, you reallocate that money somewhere else. If you overspend in a category, you have to find the money in another to make up for it.

The appeal to the zero-based method is that it forces you to think about exactly where your money is going. It makes you plan your savings, discretionary spending, and more.

This means you can’t just guess at how much you can spend on going out to eat or how much you’ll set aside for retirement.

Zero-based budgeting is a modified version of the old-school envelope system. Using cash, you’d move money into envelopes for each spending category you have. If there’s no money left in one envelope, you’ll have to get creative with moving money around.

How to Create a Zero-Based Budget

Calculating Your Income

The first line item in your budget is your total take-home pay. This includes both your day job and any side hustles you have.

The income you include in your budget should be after taxes and retirement contributions get taken out.

The money in your checking account at the end of a pay period is your total take-home pay.

You can use past tax statements or some basic math to figure out your total average monthly income.

Laptop on a wooden desk at night with a desk lamp.

Finding Your Budget Expenses

Figuring out your income is the easy part. Finding all your expenses to include in your budget may take some time.

Start by dividing your expenses into two categories: needs and wants. Needs are things like rent, utilities, health insurance, and other bills you can’t avoid paying. They’re essential to your daily health and wellbeing. Needs are also things like savings or creating an emergency fund.

Wants are a little trickier. Your Internet and cell phone bill may feel like necessities, but your life wouldn’t end without them. These are things that make your life easier.

Then work to find your recurring annual expenses that you probably forget about! Things like your home insurance, car insurance, and property taxes fall into this category.

Finally, do a deep dive into your spending habits. Look at bank and credit card statements or even previous budgets to see what you spend your money on.

Creating Your First Budget

We always recommend saving as the first line item on your budget. It could be saving for an emergency fund or long-term savings goals. But prioritizing your saving is essential.

Use historical spending information to break your budget into categories. Housing costs, utilities, streaming services, and even discretionary spending for date night.

You can use your best guesses on appropriate spending amounts for each spending category in your budget. But remember your budget needs to zero-out when you’re done! Income minus expenses must equal zero so you don’t overspend.

Zero-Based Budget Template Download

We created a free and easy to use zero-based budgeting template spreadsheet. It includes some of the most common spending categories already filled out.

Zero based budget spreadsheet template screenshot.

Download Zero-Based Budget Template

Popular Questions About Zero-Based Budgets

What if My Income is Irregular?

Contractors, seasonal workers, and more all have irregular incomes. It can feel challenging to budget when you don’t know what your next paycheck looks like.

The best way to budget with an irregular monthly income is to use your lowest income estimate. This is instead of taking an average of your yearly income divided over twelve months.

By using your lowest income month, you can ensure you’re prepared for when things get tight. Extra income you make can be an added bonus you use for savings or paying down debt.

Don’t be afraid to change your budget too as you go if your income doesn’t line up with your expenses. A variable income forces you to get creative and think outside the box with where you spend your money.

Budgeting apps like You Need a Budget force you to only account for money you currently have. You don’t consider potential future income. This way, you’re only allocating money you have on hand.

What Happens if I Overspend in One Category?

The beauty of the zero-based budgeting method is that you’re forced to make changes to your budget as you go. Your budget must always zero-out at the end of the month.

This means that if you overspend on groceries, you’ll have to pull money from somewhere else like eating out. You may have to find creative cost reduction solutions like buying generic at the grocery store.

Overspending is not a problem though! With budgeting, overspending is expected! The key is learning how to adapt your budget to meet your real needs.

Two water glasses on a restaurant table with straws and lemons.

Where Can I Find Extra Money in My Budget?

It’s expected that you’ll be wrestling with your budget to keep it in balance. This can mean needing to find money in other parts of your budget. It’s easier to spend less than it is to earn more.

With this budgeting method, you’re hands-on with your money. This means you’re monitoring all your transactions. You’ll be able to see when you’re over or underspending in certain categories.

Cut back in the variable expenses part of your budget.

Who is a Zero-Based Budget Best For?

This budgeting strategy is best for people with consistent incomes. If you work a 9-5 and know what your paycheck is each month, you can easily budget that money.

While you can budget with irregular income, if you’re a seasonal worker it can be a bit harder.

A zero budget is also perfect for those who want to be hands on with their finances. By zeroing out your money, you’re forced to make decisions throughout the month. There’s never extra money sitting around.

Instead, you’ll have to decide as soon as you have income where that money will live. If you overspend or underspend, you’ll need to make changes to your budget.

Is Zero-Based Budgeting Good for Beginners?

Zero-based budgeting is easy in theory but that doesn’t mean it’s best for beginners.

The concept of zero-based budgeting is simple. You subtract your expenses from your total income. Then you’re supposed to zero-out your budget at the end of the month.

The hardest part about this budgeting process is that it can take a few months to get into a rhythm. Your first few months using this method can be time consuming or even stressful.

By tracking every expense and moving money around, you can get burned out. It’s possible to feel overwhelmed with all of the income and expenses messing up your perfect budget every week!

But there’s no doubting the effectiveness of this budgeting style.

If you’re new to budgeting, a good beginner system may be the 50/30/20 budget. It gives rough guidelines for spending and saving money. You can use this philosophy to then transition to a zero-based system later on.

The Pros and Cons of Going to Zero

PROS

CONS

More Awareness of Your Budget

More Awareness of Your Budget

You see every dollar get assigned to a budget category. This means fewer moments like, “Whoa, I didn’t realize I spent $50 on Chipotle this month!”

Time Management

Time Management

It can take a lot of time to manage your budget if you’re new. Tracking every expense and moving money around between categories can be tricky.

No More Extra Money

No More Extra Money

There’s never extra money and that’s a good thing! Because every dollar you earn is allocated, you won’t have money just sitting around. Money in your checking account can burn a hole in your pocket.

Patience Required

Patience Required

The first few months of budgeting with this method are the hardest. It’s common to overspend in certain categories or feel frustrated that your budget doesn’t zero-out perfectly.

Highly Customizable

Highly Customizable

Zero-based budgets are highly customizable. You decide on which categories are important to you and where you want to spend more or less. Saving for a vacation? Put it on there!

No Surprises

No Surprises

The hardest part about spending your money in advance is that surprises can send you overboard. Surprise expenses or emergencies could throw off your perfect budget in no time.

Popular Zero-Based Budgeting Apps

Zero-based budgets are great because they can be done with a spreadsheet, pen and paper, or an app.

Below are the most popular budgeting apps for the zero-based budgeting style.

EveryDollar

EveryDollar is a budgeting app created by Dave Ramsey. It makes you create your budgets from scratch at the start of every month. Sure, some things will be the same. But the app makes you take a look at your expenses and income to see what’s changed.

Many followers of Dave Ramsey use his zero-based budgeting app to become debt free and achieve their financial goals.

Every Dollar available for iOS and Android and is one of the most popular zero-based budgeting apps.

Tiller

If an app isn’t your style, Tiller offers zero-based budgeting spreadsheets. They’re customizable to your needs and financial goals.

Tiller isn’t like a traditional spreadsheet though. They connect to your bank account. It automatically imports transactions and financial data to your spreadsheet.

You Need a Budget (YNAB)

Another behemoth in the budgeting space is You Need a Budget. The biggest difference in their budgeting style is that you can only allocate income you already have.

That means that your next paycheck won’t make it into your budget until it’s in your checking account.

They’ve been around for years and have a wealth of tutorials and classes to help you get started.

You Need a Budget screenshot of homepage signup.

Mvelopes

Finally, Mvelopes is a zero-based budgeting system that gives every dollar a purpose. Focus on paying down debt, saving money, or achieving other financial goals.

Like others, it connects to your bank account and imports transactions automatically.

Mvelopes is a paid appplication. But it includes features like educational courses and one-on-one help with financial advisors.

Diving In to Zero-Based Budgets

Zero-based budgeting may be a modification of a very old cash and envelope strategy. But its popularity remains high because it works!

Your income minus your expenses should equal zero at the end of the month. It’s a simple and robust method of budgeting that can not only pay your bills but help you save for the future.

Moving money around between categories may feel unnatural at first. But after a few months of practice, you too will likely be a budgeting master.