How to make a zero-based budget

Quick insights

• Zero-based budgeting is a system of financial management that requires careful planning and great attention to detail.
• Compared to traditional budgeting, which uses more general figures, zero-based budgeting asks that you plan for and justify each cost up-front.
• Zero-based budgeting can result in greater efficiency with how your money is spent, with the trade-off being more time and effort spent setting up and monitoring your budget.

If you’re looking to fine-tune your budget so that every dollar is accounted for, zero-based budgeting (also known as “zero balance budgeting” or “ZBB”) may be for you. In a zero-based budget, your income minus your expenses totals to zero, giving every dollar earned a purpose.

This cost-justifying budgeting method involves meticulously planning for every expense in a new period. Though this technique is often used by businesses, many individuals also swear by it to optimize their income.

While traditional budgeting allocates income to categories based on previous spending or an ideal, a zero-based budget requires you to plan for every upcoming expense in more detail. In this article, we’ll dive into the pros and cons, as well as how to create a zero-based budget of your very own.

Zero-based budgeting vs. traditional budgeting

Zero-based budgeting and traditional budgeting are both aimed at helping you use your income more efficiently. However, their methods are slightly different.

• Zero-based budgeting demands up-front justification for every expense at the start of each period, unlike traditional budgeting, which allocates resources more generally based on prior spending or an ideal.
• Zero-based budgeting may lead to more efficiencies in your spending, but it takes more time and effort to set up and maintain. While traditional budgeting is not as sophisticated, the effort and organization required is much lower.

Pros and cons of zero-based budgeting

As with any type of budget, there are advantages and disadvantages to consider before diving in.

Advantages of zero-based budgeting

• Encourages meticulous financial planning. Preparing for every expense in a period can help you avoid surprises in your finances. 
• Helps identify wasteful spending. Considering every expense can aid in recognizing slack in your budget and finding spots where you can cut back on nonessentials and save.
• Aligns spending with financial goals. Bringing purpose to every dollar spent can help you meet the goals you set.

Disadvantages of zero-based budgeting:

• Time-consuming to set up and maintain. Zero-based budgeting is often time intensive, requires meticulous planning and consistent check-ins to accurately track spending.
• Challenging for those with irregular income. Those working on commission, freelancing or employed as part of the gig economy may find it tricky to anticipate their income.
• Could lead to short-term thinking. If you become overly focused on the month-to-month numbers, you run the risk of losing sight of the big picture.

Who is a zero-based budget best for?

Because a zero-based budget requires lots of attention to detail and planning, it may be overly complex for someone with more general financial goals. However, a person looking to achieve a more ambitious goal (such as aggressively paying down debt) could benefit greatly from the hands-on approach. Finally, those who consider themselves natural planners are also more likely to successfully integrate this budgeting style compared to people who value spontaneity.

How to implement zero-based budgeting

For our purposes, we’ll be focusing on monthly planning. You may find that you prefer to look at another period, such as biweekly, quarterly, or annual amounts.

Step 1: Identify your income

This number will define your overall budget. If you’re paid the same amount weekly or biweekly, it will be easy to calculate your monthly total. Those with irregular income should base their calculations off an average of several recent checks.

Step 2: Subtract fixed expenses

Fixed expenses are costs that do not change in size from month to month, such as your rent, car payment and insurance premiums. Subtract these from your income to find your remaining budget for the next step.

Step 3: Plan for variable spending

Now, it’s time to account for variable (or fluctuating) expenses. Reference both your previous spending in your account statements and your calendar for the coming months when setting totals in your budget. Ask yourself questions like:

• How often will I eat at home or dine out? How much will I need for groceries?
• Will I be driving more this month than last? Do I need a bigger budget for gas, or should I plan to lean on public transportation to save?
• Are my utility bills bound to be the same this month? Or will the weather change and affect my heating or cooling needs?

These are examples to help you start thinking about how to better plan for monthly spending. By giving each expense fresh consideration each month, you’re setting yourself up to better react to seasonal and life events.

Step 4: Assess your total and adjust

This budgeting method isn’t done until your total is zero. If you find money left over after all expenses are accounted for, consider putting the surplus toward one of your goals. If your total is negative, you’ll need to reduce spending somewhere in your budget or seek out ways to supplement your income.

Bottom line

Zero-based budgeting can be a powerful tool for those looking to aggressively manage their finances for big goals. It is a technique that requires a dialed-in attention to detail, careful planning and dedication. Depending on your goals and personal preferences, you may benefit just as well from traditional budgeting, or another means of managing your finances. You know your situation, preferences and habits best—if zero-based budgeting seems like a good fit, consider giving it a try!