A Guide To Zero-Based Budgeting (2024)

With zero-based budgeting, every penny from your paycheck is put to use.

However, that doesn’t mean spending it all on designer clothes and fancy meals. Instead, zero-based budgeting encourages you to intentionally assign every dollar a clear purpose—from meeting basic needs to saving for the future. When done correctly, this can allow you to pay off debt and save while also being able to make more fun purchases without stress.

We at the MarketWatch Guides team analyzed data and interviewed experts to determine how the average American can adequately formulate a financial plan. A zero-based budget was commonly cited as one of the best formulas to use.

What Is a Zero-Based Budget?

Zero-based budgeting is more commonly used in a business or government context, but the concept is also valuable for personal spending. With a zero-based personal budget, you assign every dollar you make to a category so that expenses including savings exactly match your income, according to investment management company Fidelity.

The spending plan assigns every dollar coming into your bank account a specific job. Some are clearly directed toward tasks such as paying off debt, building savings or paying your mortgage. Others go toward more exciting activities such as holiday gifts or charity. After subtracting all of these expenses from your income, you should have zero dollars left at the end of each month.

Example of a Zero-Based Budget

The infographic below details how a zero-based budget might look for someone with a monthly income of $4,000.

Once you get an idea about how your zero-based budget should look, we suggest you start setting money aside in a high-yield savings account. The best accounts can earn you an interest rate significantly higher than traditional savings accounts.

How To Make a Zero-Based Budget

Now that you understand the concept of a zero-based budget, you might be wondering how to formulate one of your own. Here are some tips to develop a zero-based budget around your individual income, based on recommendations from financial experts we interviewed.

List Your Monthly Income

The first step to preparing a zero-based budget is to list your monthly income.

Your income is often centered on regular paychecks from your day job. But it can also include money you earn from side hustles, like driving for Uber or renting out a spare bedroom on Airbnb. It’s also important to note income from sources like child support and pensions.

While you can write them all down by hand, digital tools including Rocket Money and Credit Karma can provide 21st-century solutions for tracking monthly income efficiently. You can also set up spreadsheets using Google Sheets or Microsoft Excel to organize and track your plan.

Categorize Your Expenses

Once you have an overview of your monthly income, it’s time to categorize your expenses. To do this, write down how much money you’ve put towards things such as bills, credit card payments and housing over the last month. It’s good practice to do this exercise for at least a few months to see how your expenses change over time. Again, spreadsheets or digital tools can come in handy.

“Using budgeting tools, such as spreadsheets, can help sort expenses into categories. This will provide a clear picture of spending patterns and help address potential issues,” said He Li, a finance professor at the University of Wisconsin-Whitewater. She said this can help you get insights into your own spending and can even be fun and rewarding, motivating you to stick with a zero-based budget in the long run.

The four essential categories of expenses are food, housing, transportation and utilities. Then there are case-by-case essentials that not everyone will have, such as debt payments and childcare. Savings should have its own slot in the budget, and it’s also important to consider time-specific expenses, like holiday gift-giving.

Make sure to leave a bit of leeway for miscellaneous expenses. You don’t want to be set back by spending a few hundred dollars on something unexpected, like a flat tire or a last-minute trip to the convenience store.

Mark Evers

Financial Planning Program Director, University of North Texas

“Ask for a receipt and write down your purchases in a journal every day. Make this a habit, like brushing your teeth. Each pay period, review your expenses and categorize them. See where you are spending money, so you know where it is all going.”

After you’ve estimated your monthly spending, we suggest researching the best free checking account options. With your income and expenses in hand, you can find an option that best meets your requirements.

Subtract All Expenses From Income to Equal Zero

Now comes the exciting part: Doing the math.

Subtract all of your expenses from your income. If it comes out to zero, congratulations: You are in the minority of people who do this correctly the first time. If it doesn’t work, it’s time to do some redistribution.

If you find yourself with money left over, you can put it toward essentials such as savings and debt repayment. And if you end up with a negative number, brainstorm ways to cut back on costs from unnecessary expenses, such as restaurants or alcohol.

Make a New Budget Before the Next Month

For zero-based budgeting to work in the long run, you have to stay on top of things. As soon as you’ve made it through one month using the method, repeat the process for the following.

“Keeping on track in zero-based budgeting requires regular monitoring and adjustments. At the conclusion of each month, reflecting on your spending patterns can give you important information for the next budgeting cycle,” said Martin Mulyadi, an accounting professor at Shenandoah University.

Evers echoed Mulyadi’s sentiment, reinforcing the importance of getting into the habit of repeated planning. “A budget is a living document. Life changes, so your budget will too. Make sure you think about what is ahead and make updates,” he advised.

Advantages of Zero-Based Budgeting Over Other Methods

With so many budgeting options to choose from, you might find yourself wondering why to choose a zero-based budget. “Budgeting should be a continual process of trading away things that don’t matter for things that do. A zero-based budget makes future expenses current by bringing them into the budget as savings goals,” said Blake T. Gray, a financial professor at Kansas State University.

According to Fidelity, some of the big perks of a zero-based budget are the ability to learn the ins and outs of your financial means and save more. Zero-based budgeting can also work as an extension of other budgeting rules, like the 50/30/20 model.

Below, we compare zero-based budgeting to its alternatives to showcase its strengths.

50/30/20 Budgeting vs. Zero-Based Budgeting

The 50/30/20 rule encourages you to put 50% of your income towards your needs, 30% towards your wants, and 20% towards savings and debt repayment. While zero-based budgeting requires more effort to coordinate, it also allows room for more specificity. It also gives you the potential to save more than 20% of your income.

60% Solution Budgeting vs. Zero-Based Budgeting

In the 60% solution method, your wants and needs make up 60% of your budget. The remaining 40% gets distributed evenly between three categories: Retirement, long-term savings, and short-term savings. The last 10% is left over for pleasure. While this model is certainly great for saving money, it also overlooks the fact that many Americans have to factor in debt repayment — a priority over saving. If you’re living with debt, a zero-based budget allows you to personally calculate how much you can afford to save without falling behind on repaying money you owe.

Reverse Budgeting vs. Zero-Based Budgeting

While a lot of budgeting methods prioritize spending over saving, reverse budgeting has you put saving and investing first. After establishing how much money you plan to set towards wealth accumulation, you’re free to figure out how much you want to set towards essential costs. In theory, a savings-first mentality is commendable. However, due to the financial realities of most Americans, the reverse budgeting model might not be a possibility thanks to debt or a high cost of living.

Envelope Budgeting vs. Zero-Based Budgeting

Sometimes referred to as cash stuffing, envelope budgeting refers to a method of budgeting in which you put physical bills into different folders.

Like zero-budgeting, the process starts by determining your monthly expenses. After establishing how much to put into each category, label an envelope and put in the correct amount of money. After you’ve used all of the cash in an envelope, you’ll have to pull it from elsewhere in your budget to shuffle things accordingly.

Envelope budgeting is a good choice for people who prefer to pay in cash. However, in a world that is heavily reliant on cards and tap-to-pay systems, it just might not be a realistic or convenient method. Apps such as Goodbudget offer digital systems that can mimic the experience of envelope budgeting for people who prefer to manage money electronically.

Drawbacks to Zero-Based Budgeting

While it can be a helpful method for getting your finances in order, there are some drawbacks to zero-based budgeting. For one, it will eat up a lot of your time. In order to make a zero-based budget work, you’ll need to meticulously track all of your spending. The method works best if you’re making a budget well before the new month starts, so you’ll likely spend a lot of your free time thinking about your money.

There’s less flexibility in a zero-based budget, which means sudden or unexpected costs may throw your entire system into disarray. Furthermore, if you have an irregular or unpredictable income, it may be harder to follow your previous month’s budget as a template.

The Bottom Line

Zero-based budgeting describes a budgeting method in which every dollar earned is funneled to a specific purpose. The goal is to be able to subtract monthly expenses from your income and up with the number zero.

When starting a zero-based budget, begin by thoughtfully listing your monthly income. Then, categorize your expenses. If you do the math and end up with zero, you budgeted correctly. If not, move money around from other places in your budget until you break even. Make sure to stay on top of things by coming up with a new budget each month.

Our experts included:

Mark Evers, clinical assistant professor and financial planning program director at the University of North Texas

Blake T. Gray, assistant professor at Kansas State University

He Li, associate professor at the University of Wisconsin-Whitewater

Martin Mulyadi, professor of accounting at Shenandoah University