Zero-Based Budgeting: What It Is and How to Start

Give Every Dollar a Job With Zero-Based Budgeting

This budgeting method has you plan out your income down to the last cent, so nothing goes untracked. Here's how it works, plus the pros, cons and ways to make it more flexible.

What is zero-based budgeting?

The zero-based budgeting method encourages you to use every penny of your monthly income toward your spending and saving goals. Paying off debt and "fun money" are also part of the plan.

“If you haven’t tracked where your money is going, or if you feel like you don’t have control of your money or spending, then I think that this is a really good method,” says Catherine Hawley, a certified financial planner in Monterey, California.

If you come in under budget in a certain category at the end of the month, add the remaining amount to next month’s budget, or move it to another category, such as your emergency fund.

🎯 The ultimate goal: Give every penny a purpose. Spend and save all your income, so nothing's left at the end of the month.

How to start a zero-based budget

Before implementing this budget, take a few steps to ensure you're realistically planning your spending:

Know your income: Total your paycheck, benefits and other sources of monthly income to find out how much money you have to work with.
Track your expenses for a few months: Knowing what you typically spend — and on what — creates a framework you can use going forward. You’ll spot areas in which you can cut back and in which you want to allocate more.
Categorize your expenses: Identify all of your priorities and expenses, including your needs and wants, emergency fund and other savings goals, plus your debt repayments. Once you've budgeted for the essentials, you can create spending categories for anything else — paying off a credit card, an upcoming vacation, a house fund. The choice is yours.

» MORE: Explore our roundup of best budget apps of the year

Example of a zero-based budget

Let’s say you make $3,000 per month. Your budget might look like this:

Notice the last line: every dollar is spoken for, and the total is exactly $3,000. That's the whole point. If your numbers don't land on zero, you either move money between categories or add a new one — you don't leave a remainder floating in checking.

The pros and cons of zero-based budgeting

Pros

Keeps you aware of how much money flows in and out, which can prevent you from spending what you don't have.

A strong fit if you haven't tracked your spending before or feel like you've lost control of your money.

Fully customizable, which is useful if you're new to managing your money.

Cons

Takes time. Staying accountable means closely and consistently monitoring your spending.

Irregular expenses are a common pitfall. Without planning for them, a zero-based budget can leave you short for the month.

Can also be tricky with irregular income, like freelance or fluctuating hourly work.

This budget might not be for you if...

Your costs shift drastically month-to-month

Birthday parties, holiday gifts, travel and unexpected home repairs are all variable expenses, or expenses that don't come up every month. They can put a wrench in your zero-based budget.

“If you don’t account for your irregular expenses, the zero budget is going to potentially not leave you with enough money on average,” Hawley says.

In other words, one unplanned cost can blow up an otherwise perfect budget.

But there’s a solution: Set aside money specifically for these costs. Create a savings fund, separate from your emergency fund, and set up other sinking funds, and contribute to them each month.

Your income is unpredictable

The zero-based budgeting method might also pose a problem if you have an irregular income. For example, freelancers or hourly workers have fluctuating schedules or seasons where work is busier than others.

If you don't always know how much money you’ll have to allocate, consider using your slowest month's income for the current month’s budget. Anything extra can go into savings.

» Learn: How to budget on a roller-coaster income

See if zero-based budgeting is right for you

Now that you know what the zero-based budgeting system is all about, you’re ready to give it a shot.

If you're looking for an app to help, we've got in-depth reviews on some top contenders, including YNAB, Goodbudget or EveryDollar.

If an app's not your thing, an old-school spreadsheet or pen and paper can also help you account for your hard-earned money.

» MORE: How to choose the right budget system

Frequently Asked Questions

How does zero-based budgeting differ from the envelope method?

The core difference is that zero-based budgeting is about the plan — in other words, it's making sure every dollar is allocated on paper. But it doesn't tell you how to physically manage that money.

The envelope system takes things to the next step by separating money into envelopes — either physical or digital — so you can't overspend on any single category.

In practice, these two systems are easy to combine: use a zero-based budget to build your budget and decide the amounts allocated to your various fixed and variable expenses, and then rely on envelopes to actually control and disburse the spending.

How is a zero-based budget different than living paycheck to paycheck?

The difference between the two is intentionality vs. necessity.

With the zero-based budget, every dollar is assigned a job before you spend it. So, your income minus your expenses equals $0 by design. In other words, you end the month at zero because you told your money where to go, whether that's toward bills, savings, debt payoff or "wants" like dining out, vacations or concert tickets.

Living paycheck to paycheck often means you end the month at zero (or sometimes, less) because of your circumstances. You didn't plan it that way, but there simply wasn't enough income to pay for what you needed that month. In this case, there's little margin and even a small unexpected expense could throw your finances off balance.

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