Zero Based Budgeting 101 + The Best Zero Based Budget Templates

Zero-based budgeting example

Budgeting… the dreaded “B” word. If you've tried budgeting before and failed, first of all, welcome to the club. Very few people get it right the first time (including me). However, you most likely failed because you haven't found a method that works for you. That's why today I want to talk about the zero based budgeting method which just happens to be my personal favorite.

Read on to learn what a zero-based budget is and how it works. In addition, you can review our example of a zero-based budget and free templates to help you get started.

What is a zero-based budget?

So, what's a zero-based budget anyway? A zero-based budget is where you assign all of your income to specific budgeting categories until there’s no money left over. For instance, if your paycheck is $3,000 a month, you divvy all $3,000 up among your expenses, debt payments, and savings goals until you're left with $0.

It’s sometimes referred to as the “zero-sum method” because your income minus expenses always equals zero when you’re finished. However, in this case, "expenses" also include the money you pay yourself in savings and extra debt payments.

Zero based budgeting steps: How it works

Here are the five zero-based budgeting steps to take if you want to give this method a try:

1. List out your income

Similar to other budgets, with zero-based budgeting you start by listing out all your monthly income. For example, you'd include any income you receive from your job, side hustles, rental properties, alimony, child support, investment income, you name it!

2. Tally up your expenses

Now it’s time to calculate how much you typically spend each month. The best way to do this is to look at your bank and credit card statements. After that, compile a list of all your expenses in a spreadsheet or on a piece of paper.

Since no two months are ever the same, you may want to compile a list of expenses for the past three months and then average them together to get an accurate picture of how much you typically spend.

And don't worry. It’s totally normal to forget about small or one-off expenses when you do this the first time. However, don’t beat yourself up if you keep adding in forgotten expenses those first few months.

3. Create budgeting categories for absolutely everything

So, this is where it starts to get fun. Not only will you create budgeting categories for all your expenses, but you'll also create them for all your savings and debt payoff goals too.

To help get your brain juices flowing, here are some categories you may want to include in your zero-based budget:

Mandatory expenses

  • Rent/mortgage
  • Utilities
  • Cell phone
  • Groceries
  • Gas
  • Insurance
  • Medical expenses
  • Pet supplies

Optional expenses

  • Dining out
  • Subscriptions
  • Haircuts
  • Fun money

Debt payments

  • Auto loan
  • Credit cards
  • Student loans
  • Personal loans
  • Medical debt
  • Extra debt payments

Savings goals

4. Put those dollars to work

Once you've created all your budgeting categories, it's time to put those dollars to work. Take however much money is in your checking account right now — whether that's $500 or $5,000 — and divvy up every dollar among your budgeting categories until there's no money left over.

When you do this, one of two things will happen:

  1. Your budget will be in the green (AKA you have money leftover)
  2. Your budget will be in the red (AKA you're spending more than you make)

If your budget is in the green, congratulations! Take that extra money and put it toward your savings goals or debt, if you have any.

On the other hand, if you're in the red, see if you can trim the fat from any of your categories until you break even. (Here's a list of 23 ways to cut back on your budget.)

5. Track your expenses & stay flexible

Your life is fluid and constantly changing. Why should your budget be any different? As you move throughout the week, track your expenses and make adjustments if you spend more in one category than anticipated.

Unexpected expenses will pop up — whether it’s a last-minute dinner out with friends or a $25 co-pay to the doctor’s office. You will inevitably have items you forgot to budget for — like a birthday gift, an oil change, or a new filter for your water pitcher.

That’s all okay. The beauty of zero-based budgeting is that it’s flexible. If you go $50 over on groceries this month, move $50 from your “fun money” category to cover the difference. If your electricity bill is higher than usual, skim a few dollars from your grocery, gas, and pet supply categories until you have enough to cover it.

Now that you know the zero-based budgeting steps check out our zero-based budgeting example to make your own.

Example of a zero-based budget

For this zero-based budgeting example, let’s say Christin makes $4,000 a month after taxes. She may set up her zero-based budget like this:

Rent $1,400
Utilities $235
Internet $50
Cell phone $70
Food $375
Gas $100
Subscriptions $75
Fun money $100
Unexpected expenses $100
Car payment $250
Car insurance $70
Credit card payment $200
Student loans $300
Emergency fund $200
Vacation $100
Extra debt payments $375

Total leftover: $0

In this zero-based budgeting example, not only is Christin covering her essential expenses, but she's also made room for fun money (so her budget doesn't feel like a restrictive diet), extra debt payments (so she can pay those off early), and savings goals (so she has a nice cushion between her and the unknown).

You can use this example of a zero-based budget to create your own!

The best zero-based budget templates

Did you know that at Clever Girl Finance we created our own zero-based budget template to help you get started? (You can download it here.) Choose between a PDF version or an Excel version if you're a fellow spreadsheet nerd like me.

Some other popular zero-based budget templates include:

These are the best zero-based budget templates that will get you started budgeting like a pro!

The best zero based budgeting app

I can't talk about zero-based budgeting without also mentioning the highly coveted app, You Need A Budget (YNAB). This is hands down *the* most popular zero-based budgeting app, software, and tool on the market.

Its entire philosophy is built around helping you give every dollar a job, pay off debt, and get to the point where you're spending money today that you earned at least 30 days ago (AKA you're no longer living paycheck to paycheck).

I've personally used YNAB since 2016, and it's allowed me to pay off $18,000 of student loan debt in 10 months and build a six-month emergency fund. In addition, it's helped me increase my net worth from –$25,000 to $250,000 by the ripe young age of 27. It's awesome. And it works.

If you're a fan of Dave Ramsey's 7 Baby Steps, EveryDollar is also a good app.

Pros and cons of zero based budgeting

Now let's talk about why you would (and wouldn't) want to use a zero-based budget.

Pros of the zero based budgeting method

A couple of pros to this method are:

1. It's incredibly insightful for spending habits

Zero-based budgeting shines a light on all of your spending, so you can ruthlessly cut down on expenses that don't align with your values and goals.

2. It's a flexible budgeting method

Unlike traditional budgets, you don't just guesstimate your expenses at the beginning of the month, then hope and pray you don't go over. Instead, you track your spending in real-time and make adjustments as needed.

Cons of the zero-based budget

Of course, there are cons to pretty much anything you try, but the main one is that this method can be tedious. If you do your zero-based budget manually, inputting all those transactions each week can be time-consuming.

But you can cut down on this admin time by using an app that automatically imports transactions for you.

Can you use the zero based budgeting method if you have irregular income?

A lot of people think you can’t use a zero-based budget if you have irregular income, but that’s not true. The key is to only budget using the dollars that are currently in your checking account. If it’s not enough to cover all your expenses at once, rank them in order of importance and put the money toward expenses you need to cover now.

For example, if the electricity bill is due this week and you also need $80 for groceries and $30 to put gas in your car, cover those expenses first. You can wait and fund your internet bill that isn't due for another three weeks when you get paid again.

In conclusion: Is zero based budgeting right for you?

So, is the zero-based budget the right method for you? You never know until you try! I personally love a zero-based budget because it's flexible. It adapts to your life and ensures one unexpected expense doesn't throw off your entire budget.

In addition, it's also incredibly insightful if you're trying to break the paycheck to paycheck cycle, pay off debt, and reach your savings goals.

That said, there are dozens of different budgeting methods out there, but why not follow the zero-based budgeting steps to start and see what happens. It may work for you, or it may not. Sign up for our free budgeting course if you need help getting started.

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