A zero-based budget, also called a zero-sum budget, assigns every dollar a job in working toward your financial goals. Originally created by business leaders for commercial budgets, this strategy has also found a place in household budgeting.
What Is Zero-Based Budgeting?
Zero-based budgeting directs every dollar you earn toward one of your expenses or financial goals. It gives every dollar a purpose, and at the end of each month, every dollar will have been spent or put toward goals.
“Zero-based budgeting is where you account for every dollar before you spend it,” says budgeting expert and personal finance author Deacon Hayes. “Instead of being reactive, you’re being proactive.”
This type of budgeting turns your savings goals into part of your budget and puts money toward all of your specific goals, such as entertainment or savings. Unlike a traditional budget, where some of that money would be left over, every dollar in a zero-based budget is put toward a purpose.
“A lot of people, including (my wife and I) when we were in debt, felt like we were living paycheck to paycheck. You would get to the end of the month and say, ‘Where’d all the money go?'” Hayes says. “With a zero-based budget, you say, ‘I want to put $100 into savings. I want to put an extra $200 on my credit cards.’ You have so much more control, and therefore have more likeliness to succeed when it comes to managing your money.”
Zero-based budgeting can be especially useful for those who enjoy planning their spending.
How To Create A Zero-Based Budget
Creating a zero-based budget is similar to creating a standard budget. But, with a zero-based budget, every dollar will be put toward a goal, and there won’t be anything left over. Here are the steps to create a zero-based budget:
— Gather your income information.
— Gather information on expenses.
— Identify your goals.
— Use a spreadsheet or an app.
— Compare income to expenses.
— Automate as much as possible.
— Check in on weekly expenses.
Gather Your Income Information
To budget accurately, you’ll need to compile information about your total household income. “If we have a salary, look at what actually hits our bank account after tax and after any other things go out, like our 401(k),” says Ashley Feinstein Gerstley, author and founder of the personal finance site The Fiscal Femme. “If we have other income, we can include that there.”
Totaling your monthly take-home pay will give you a better idea of the money that’s available to be budgeted.
Gather Information on Expenses
The next step is to think about your monthly household expenses.
“When we’re coming up with those expenses, we want to track some previous bank statements, credit card statements, if you’re up for it, looking through the entire year,” Feinstein Gerstley says. “It can be a quick scan, but sometimes things only happen once or twice a year.” It’s important to create categories that are broad enough to catch all of your spending, but keep in mind that having too many narrow categories can be overwhelming.
Factoring those expenses into your monthly budget can help you afford them when the time comes. Feinstein Gerstley recommends making “sinking funds,” which are savings accounts aimed at funding a short-term goal or expense. These accounts are made to help cover expenses that you know will pop up, like travel costs to a friend’s wedding or semi-annual car insurance payments.
“Because we’re always planning down to zero, if we don’t include those things that don’t happen every single month, like a trip or the holidays or a vet bill, I like to create sinking funds for them,” Feinstein Gerstley says.
Identify Your Goals
Whether it’s a big goal like retirement or saving money for the holidays, Feinstein Gerstley says it’s important to lay out goals for this type of budget. In zero-based budgeting, your goals will dictate where your money goes. “I would think about, OK, well, how much money do I want to be putting towards these goals?” Feinstein Gerstley says.
People who feel overwhelmed by goal-making should start small. “Little steps can make a really big difference,” Feinstein Gerstley says. “And I would say that a lot of the time our goals are not linear. So just because I’m putting $10 a week towards a house fund right now does not mean it’s going to take me 10,000 years to save up for my house.” Goals can be adjusted over time.
Here are a few examples of goals for a zero-based budget:
— Saving for a future home purchase.
— Saving for retirement in an IRA.
— Creating a sinking fund for a vacation.
— Saving for a child’s education expenses.
Use a Spreadsheet or an App
Pick a method that you’re comfortable using and that’s also easy and enjoyable. “You’re going to be tracking everything that you’ve spent money on,” says Taylor Westergard, a financial coach and founder of Evolving Money in Salt Lake City. “You can do this via apps, or you can just monitor this in a spreadsheet or bank balance.”
There are several popular apps available that support zero-based budgeting. Westergard recommends You Need A Budget, an app that costs $99 per year after a free trial, and EveryDollar, an app that costs $79.99 per year.
[Read: Best Budget Apps.]
Compare Income to Your Expenses
At this stage, it’s not uncommon to realize there is a deficit between your income and expenses. While spending more than you’re making can be a long-term problem, you can fix it now to prevent further issues.
“It’s a good realization because now you can actually act upon it and say, ‘I need to reduce my spending in a certain area so that balances out,'” Hayes says.
If that’s the case, here are three ways to revise your budget to equal zero, according to Feinstein Gerstley:
— Rework your expenses.
— Shift your goals.
— Make a plan to earn more.
“Those are the different levers we can shift to make the budget workable,” Feinstein Gerstley says. “Maybe you notice your phone bill is increasing. Is it time to call and negotiate or switch providers?” This might be a chance to re-evaluate your spending.
While you might have extra money left over after creating a traditional budget, that won’t be the case with a zero-based budget. You’ll want to make sure that your income is equal to your expenses and goals.
Automate as Much as Possible
When it comes to your expenses, aim to put things like utility bills, mortgage payments and other fixed expenses on an automatic payment schedule. “I think that we need to automate as much as humanly possible,” says money coach Delyanne Barros.
Automating payments can help you make sure your bills are paid on time, every time. “I would say maybe you use a spreadsheet for like one month or two months just to really see what your numbers are,” Barros says. “And then I would quickly switch to an automated system.”
[Read: How to Calculate Your Net Worth.]
Check In Weekly On Your Expenses
You’ll want to monitor your spending and check in on your budget frequently. Since there won’t be any money left over in your zero-based budget, you’ll want to pay close attention to your spending and make sure it fits the categories and goals you’ve outlined. “It is something that does need your attention regularly, and I would say at least weekly at the minimum,” Westergard says.
Pay attention to the categories where you’re spending, and make sure they make sense for your needs. “Say you’ve assigned $200 to groceries,” Westergard says. “If it was more or less than $200, then that will tell you what you need to adjust, and whether you need to assign more money to the grocery category, assign less, and you can move the money around a little bit.”
Careful credit card spending is especially important with this budget. “The biggest kryptonite of a zero-based budget is the credit card because it might make somebody feel like they have this extra bucket of money available to them,” Barros says. “You need to think about your credit cards like a debit card.”
While it takes effort to maintain this type of budget, goal-oriented people might find zero-based budgeting effective. “It really is an amazing system,” Westergard says. “You have to be so mindful, and I really do think it helps people save so much money.”
More from U.S. News