Zero-based budgeting may be a modification of the old cash and envelope strategy. But its popularity remains high because it works! The following is a complete guide on how to make a zero-based budget and includes a downloadable zero-based budget spreadsheet template.

What is Zero-Based Budgeting?

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.

formula for zero based personal budget

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

How To Make a Zero-Based Budget in Four Steps

The following is a four step process on how to create a zero-based budget for your personal finances.

Step One: Calculate 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.

Step Two: Calculate Your 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: These 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: These 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.

Step Three: Beginning Your Zero-Based 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 savings 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.

Step Four: Be Patient and Persistent

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

At the end of each month, your income minus your expenses should equal zero. 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. Stick with it, you can do it!

Zero-Based Budget Template

zero based budget spreadsheet
Make A Copy Of Our Zero-Based Budget Template

The Pros and Cons of Zero-Based Budgeting

Still unsure if a zero-based budget is right for you? Check out our list of pros and cons for this budget type:

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.

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.

Zero-Based Budget Apps

Zero-based budgets are great because they can be done with a spreadsheet, pen and paper, or an app. Below are some popular zero-based budgeting apps to check out. If you want to recommend any other apps that you have experience with, let us know in the comments below and we’ll check them out.


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 application. But it includes features like educational courses and one-on-one help with financial advisors.

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.


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.

Is Zero-Based Budgeting Right For You?

By now you should have a pretty good understanding of the zero-based budgeting system. When (and if) you’re ready, give it a shot, and remember to be patient and consistent. If it doesn’t work for you, try another budgeting method.

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