What Is Zero-Based Budgeting? With Examples

The zero-based budgeting method encourages you to use every dollar and penny of your monthly income, but wait – that doesn't mean you can spend all your money on what you want. So what does it mean then?

My friends often ask me, “what is zero-based budgeting?” They always seem very curious about it. Well, maybe I don't stop talking about it, but I have used the zero-based budget multiple times because I like to give a purpose to every dollar and penny I make.

The zero-based budget is very popular for businesses, but my total focus here is on personal finance and how you can use this budgeting method for your money.

So let's find out what is the zero-based budgeting method and how you can use it.

What Is Zero-Based Budgeting?

The zero-based budgeting is a method where you give a purpose to every dollar and penny you earn and spend.

With zero-based budgeting, you allocate all of your money to expenses, savings, debt payments, investments, or any other category. The goal of this budgeting method is that your income minus your expenses equals zero by the end of each month.

Who Is The Zero-Based Budgeting Ideal For?

This budgeting method is a technique that companies use to ensure they give a purpose to every dollar they make, but single persons and families can also use it.

The zero-based rule budget is excellent if you:

• Have short-term financial goals.
• Have different monetary needs each upcoming period.
• Want to allocate every single dollar and penny.
• Don't like restricted category budgeting.
• Are new to budgeting.

Zero-based budgeting is excellent for anyone with different monetary needs for each upcoming period (monthly, bimonthly, quarterly, or biannual). For example, I used to travel every three months, so I had to plan in advance all the costs of that travel, like flights, accommodation, food, tourist attractions, etc.

I would use the zero-based budgeting method with quarterly goals to ensure I saved enough money for each travel. First, I would split the travel costs for three months and ensure I would hit my savings goal. Then, after paying for all my basic needs, I would put the rest of the money to travel.

If you are new to budgeting, this method is an excellent way to have a first glance at your finances, but it can also be tricky. After all, you don't have categories to follow. You just subtract your expenses from your income. That's it.

This budget is perfect for short-term financial goals that you can achieve in a couple of months or even one month. However, it can be great with long-term financial goals if you align with percentage budgeting methods.

How To Budget Your Money With The Zero-Based Budgeting Method?

Now that you have an idea of what the zero-based budgeting method consists of and if it's ideal for you or not, let me explain it more in-depth.

Income – Expenses = Zero

This budgeting method is pretty straightforward. You check your income-after tax and then minus every expense you have, including any money you spend on groceries, essential bills, mortgage, transportation, paying debt, savings, etc. In the end, the total cash left should be zero.

For example, if your income after tax is $3,000, you need to allocate the $3,000 to something until you have $0 left. (Check the illustrations below to understand it better.)

This doesn't mean you can't design categories the way you want. For example, if your essential bills are always the same amount every month, you can add all of them to one category and subtract them from your income.

Also, just because you are budgeting your money this way doesn't mean you can spend all your cash on things you don't need. You still need to save and invest your money and pay any debt.

Use A Percentage Budgeting Method

I just want to say that when I use percentage budgeting methods, I always have zero-based budgeting in mind because I always allocate every dollar to every category.

You can also use those categories (but be specific, don't say needs, or wants. Be a little more specific than that, like essential bills, rent, groceries, etc.)

A few percentage budgeting methods you can try are:

• 50/30/20 – For those who never budgeted before.
• 60/30/10 – Ideal for those who want to save most of their income.
• 70/20/10 – If you have many expenses and want to save money, but also invest a small part.
• 80/20 – If you have many costs and want to save money.
• 30/30/30/10 – Ideal for those with a good income who wants to save and invest, but 60% of the money is to pay expenses.

How Do You Set Up The Zero-Based Rule Budget?

If you decide you want to move forward with the zero-based budgeting method, here’s how you can set one up.

1 – Calculate Your After-tax Income

So, the first thing you want is to calculate your after-tax income and understand how much money you will receive every month. Some people receive the same payment every month, but for others, it can vary, which makes budgeting a lot more complicated (but not impossible). If you are a freelancer, calculate how much money you expect for the next month. Some people get paid weekly and some biweekly, so you must adjust your budget according to your situation.

You can use the free tool on the IRS website to help you determine how much income you can expect to receive and how much taxes you will pay. However, if you have any questions, it would be better to speak with a tax professional.

2 – Use The Zero-Based Template/Spreadsheet

To keep you organized and have a more reasonable perspective of what you need to do, ensure you use the zero-based template. It can be a spreadsheet that you print and use/fill online or an Excel sheet. Whatever makes your life easier, it’s what you should use. Don't forget your partner's income and expenses, and check the best personal budget categories for you.

I love Excel sheets, but some people prefer to have a printed spreadsheet where you can quickly look at all your expenses and how much money you have allocated to each category. Learn how to make a budget in Excel.

3 – Minus Your Expenses

Check your bank account for the last three months and put all expenses per month, with what it was (or the place where you spent the money) and the value. Then add that amount to categories to make it easier for you, like all the food in the groceries category, all the water and cable bills in the essential bills category, etc.

This is for you to know where you spent your money since you will predict everything for your next month.

If your income after tax is $3,000, you would do something like this:

$3,000 – $750 rent = $2,250
$2,250 – $300 groceries = $1,950
$1,950 – $550 essential bills = $1,400

Keep going till you have all your loans, investments, and savings on your budgeting till you reach the value of $0. Then, if you usually don't save, invest or make debt repayments, don't worry if you have money left and go to the next step.

4 – Set Up Your Financial Goals

Once you determine how much income you will receive, where you will spend your money, and minus all your expenses from your earnings, you need to set financial goals.

In my opinion, no budget is worth doing if you don't have the motivation to keep yourself moving forward. You need to set financial goals every month or even for an entire year or five years. Some examples are buying a house, paying an immense debt, or creating an emergency fund. You also need to know why you want to invest your money.

You didn't set your financial goals at the beginning because you didn't know your income and expenses. Now you can set realistic financial goals because you know your monetary situation.

After minus all your expenses, allocate to financial goals if you still have money left on your budget. For example, if you want to travel, you can put the rest of the money into a trip you want to do, repay some debt, or save for an emergency fund, etc.

5 – Evaluate And Adjust Your Spending

Finally, you will need to evaluate and adjust your budgeting regularly. First, you will check your spreadsheet and see if you need to make any adjustments to ensure you have all your money allocated and you are not overspending. You must also evaluate it at the end of each month and see what went right and wrong and make more adjustments.

Every month you will need to evaluate and adjust your personal budget or family budget. Don't get discouraged if you fail or it doesn't go like you wanted because you will not get everything perfect on the first attempt. Even the more experienced budgeters like me still make mistakes after years of budgeting.

Zero-Based Budgeting Examples

The average American earns approximately $51,480 gross per year in the USA, equivalent to $4,290 gross per month. So that's the value I will use in one of the examples.

Note: For your information, I have researched a lot about how much the average American pays for rent, bills, groceries, etc. However, it would help if you kept in mind that it varies significantly from each state. These examples are only for you to comprehend better how the zero-based budgeting method works.

The first example is the most basic you can go with the zero-based budgeting method. This is for a single person who splits a house with someone that is not their partner and has no kids.

As you can see in the example above, you literally subtract all expenses you will have next month from your income till you allocate all your money. So that's why it's good to check your bank statements for the previous three months to understand your spending habits better.

You will have a total when you subtract all your expenses from your income (like the example shows the multiple times you go to the supermarket). If the total is not $0, you must keep allocating your money. In the example, the money was assigned to a trip to Portugal.

I like the idea of just deducting your expenses from your income, but it's difficult to find which areas you are spending the most money on, and it's also challenging to cut costs since they are all over the place. That's why I appreciate the following example more.

In the second example, I decided to build a few categories based on the percentage budgeting subcategories to ensure the budget looks cleaner and not so messy. You can choose which one you prefer, but this second one takes extra work.

As you can see, this zero-based budgeting example looks a lot cleaner, and it's easier for you to identify which areas you are spending the most money on, where you can cut expenses, etc. because you have categorized your expenses by groups.

So you can categorize your water, electricity, internet, and gas as essential bills or having transportation instead of repeating fuel twenty times. You can decide how to label your expenses. Remember that your budget is for you and not anyone else.

After you deduct all your expenses from your income, you can allocate the rest of the money to current categories as I did with making a repayment on your debt number one and more to buy clothes. You can also make a new category (I have put investments) to any money you have left since the total needs to be zero, and you need to give a purpose to every dollar.

Is The Zero-Based Budget Good For You?

If you want a simple budget where you just minus your expenses from your income, zero-based budgeting is the one you should pick. It's an excellent way for budgeting newbies to first look at their finances before going to a more complex budgeting method.

Of course, the zero-based budgeting method can become a little more complex when you categorize your expenses, savings, and investments, to make it easier to identify what costs you need to cut.

Whatever you decide, remember that this is the first step to controlling your finances and controlling your life.