Personal Finance 

How to Build a Zero-based Budget

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Zero based budgetsA zero based budget is a budget where every dollar you earn is assigned to a category in your budget. Your income minus your expenses equals zero – zero based budget. The idea sounds very simple, and it is, but the real value in creating and following a zero-based budget is that it requires you to plan very deliberately ahead of time and track it very closely as you go through your month.

Benefits of Zero Based Budgets

The main benefit of creating a zero based budget is in the creation process. By forcing you to assign a dollar of income to each expense, you are taking a look at the entirety of your finances. You are forced to remember and allocate dollars to otherwise automatic expenses – such as rent, car insurance, and cable television. As you go through the budgeting process, you might consider shopping those services around to see if you can get them for less so you can spend that money on another expense.

Another big benefit is that by assigning each dollar of income to a category in your budget, you move away from a mindset of casual spending to one of deliberate spending. Unlike envelope budgeting, where you have some wiggle room, you take that wiggle room away when you zero base your budget because there’s no miscellaneous envelope.

Creating a Zero Based Budget

  1. List your sources of income. Your budget starts with a list of your household income – paychecks, bank interest, investment dividends, etc.
  2. List your expenses. This step is probably going to be your hardest because you have to remember all the expenses you pay for each month. Remember expenses that might be paid on a quarterly, semi-annual or annual basis like insurance. Break out aggregate payments like your mortgage – principal, interest, taxes, insurance. Then add a savings expense (or one savings expense for each savings goal you have) and a discretionary category (separate this from an entertainment). As you use the budget, add to this list so that it captures each expense you have.
  3. Allocate income to fixed expenses. Fixed expenses are those that you can’t change easily – like your mortgage payment or cable bill. You can change them if you wanted to (refinance or sell your house, change cable plans) but they’re not like a “restaurant” category that you can chance very easily.
  4. Try to make adjustments to fixed expenses. If you wanted to shop around for cable television or your insurance policy, I recommend doing that so you can distribute more of your income to more fluid categories. You may even decide to cut some of these fixed expenses, like a magazine subscription or Netflix.
  5. Start allocating to fluid expenses based on history. If you’ve never kept a budget, make an educated guess. If you have, use what you think is a reasonable amount.
  6. Zero your budget. At this point, if your income doesn’t equal your expenses, start playing around with it until it does. Add more to savings or discretionary balances (it never hurts to be ahead of schedule on savings!) or some other fluid category.
  7. Stick to your budget. Now, as you go about your month, track your spending an stick to your budget. It’s difficult to go from no budget to zero based budgeting but if you can stick with it, it will pay dividends down the road.
  8. Adjusting your budget. Each month, as you have your spending data, adjust your categories to fit your actual use and adjust your actual use to fit your budget. 🙂 Somewhere in the middle is where you will need to be, so constant adjustment is important. Also, if you have extra slack in your budget (ie. you have $1000 in income and despite having it all budgeted out, you spent $990), take the slack and add it to your discretionary or savings category. If you’re under (spent more than your budget), you have to take a look at your categories, which you’ve now neatly laid out, and find areas to make some cuts.

As you can see, zero based budgeting is very deliberate but not unlike many other budgeting methods. It’s also a budgeting methodology that requires very little in the way of tools. While you could turn to a budgeting tool to help you out, the hard work is in the planning and adjustment of your zero based budget. All that can be done, fairly easily, using Microsoft Excel or some other spreadsheet application.

(Photo: thetruthabout)

{ 20 comments, please add your thoughts now! }

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20 Responses to “How to Build a Zero-based Budget”

  1. I agree with this, but if saving is one of your categories, you should net to zero because you want to make sure you put money in savings.

    However, I do agree about the planning aspect and also being disciplined about sticking to a budget.

    Before you start it can be useful to track your expenses for a few months. You might be surprised where your money is going.

    • Jim says:

      There’s a difference with savings being a category that you set ahead of time and savings being the catchall at the end.

  2. cubiclegeoff says:

    I basically do this but also use a Misc category for things that vary somewhat and I either am too lazy to figure out how to break it up, or know that some things are just surprises. I put my car expenses in there, such as oil changes and care inspections, but I also use it for the occasions I need to buy stamps, or pick up some random item. It’s not a huge part of my budget, but I prefer to have it there.

    • jsbrendog says:

      this. i have a built in buffer for the things that might come up from little things to big things. whatever isnt spent out of it goes itno savings and it ends up working out niceely, knowing i have it if needed and still seeing the majority of it go to savings (most of the time)

    • Lulu says:

      I set my miscellaneous in the zero based budget to take care those infrequent bills like car registration as well. I put in a set amount every month and by the time the expense rolls around I have enough to pay for it.

  3. I have the mother of all spreadsheets to track my budget and then income, cash flow, assets & liabilities. In spite of my best attempts to manage for “zero”, I end up under- or overshooting every month. This is caused by income fluctuations paired with weird tax deduction black magic compounded by job expenses that are reimbursed irregularly. I have given up trying to reconcile this and just created a “plug” category where I adjust the total to balance it back to zero.

    Zero budgeting is a good in theory, but very difficult to pull of in practice.

  4. zapeta says:

    I use YNAB which is a zero-based budget plan and I like it. Previously I used Excel but I find that with the YNAB software I do a much better job of sticking to the budget and it keeps track of any overage and carries what I don’t spend over automatically and makes it easier on me.

  5. David says:

    Hey Jim,

    I’ve been using a zero based budget for about 8 years now. It is great. My wife and I sit down at the beginning of the year and budget every paycheck for the year. I get paid every 2 weeks and she get’s paid once a month. I do it on an excel spreadsheet. It really does help us to see where every dollar is going. It keeps us from blowing money.

  6. Hannah says:

    I would find this extremely challenging without having a “miscellaneous” category. Even then, there is so much variation from month to month. How can you possibly budget in advance for needing to replace your umbrella when it breaks- never mind a huge unexpected expense like car or home repairs?

  7. Maddhatter says:

    Like many have said before, we use a miscellaneous (we call it flex) category; however we allocate the flex part the beginning of the month if possible and readjust in case something comes up during the month (i.e. this month I am getting a tire repaired, so we used up most of the flex incase I have to replace the tires and will readjust the budget once I know whether it is a cheap repair or a replace cost). Our savings stays fix at the beginning and any leftover goes to that.

  8. NateUVM says:

    This is what my wife and I do for our family. We find it works really well, and, as we already track all our expenses (even minute discretionary ones), it’s pretty easy to keep it up to date.

  9. eric says:

    I’m not motivated enough for this haha.

  10. Ken says:

    I like the zero based budget because it makes your money behave. If you don’t tell it where to go, it tends to run away from you.

  11. Glenn Lasher says:

    Novice to mid-level spreadsheet-fu helps a lot here. I have been doing this for two or three years now, using a spreadsheet that enables me to predict the next month’s expenses.

    I get paid on a semi-monthly basis (not bi-weekly, but actually semi-monthly, i.e. on the 15th and last of the month), which makes the pay cycle fall in neatly with the billing cycles. The spreadsheet is divided into two sections, the top half being the first half of the month, and the bottom half being the last half of the month.

    In each of these two sections are listed each of our expenses. Not all of them are listed in the half of the month when they come due; some have been moved either because the top and bottom were out of balance or because the payee was playing games (hello, credit cards — I mean you!)

    The columns, then, each represent one month.

    A formula is in place initially, which formula computes an estimate for each bill for each month. The exact formula varies; some simply copy the number from the previous month; others (e.g. satellite TV) take a 12-month average; others (e.g. credit cards) take a 12-month maximum; some (newspaper) follow some sort of rhythm (paid quarterly or annually); and in one special case (gas/electric), the formula is a maximum of the three months from 13 to 11 months ago (e.g. February ’01 = max of Jan ’09 through Mar ’09).

    As the actual bills come in, I plug their numbers in in place of the estimate.

    At the bottom of the section, the numbers are summed. An additional line, for my household allowance (which buys groceries and gasoline) is then evaluated to see if there is enough for it. It caps at some number (currently $400) and anything available beyond that gets put on another line labelled “debt destruction”. That last one is then used for my Dave Ramsey style debt snowball.

    In the end, as Dave Ramsey says, “Every dollar has a name”.

  12. I have to really have a budget on paper, but I need to start using a plan like this one. I keep track of where all my money goes, but it would make it so much easier if I could see it was on paper.

  13. Mr K says:

    I use a variation on this using 2 checking accounts.

    A “main” account that my direct deposit comes into and all bills, mortgage, etc are paid out of. And a second “living” account that is used for day-to-day expenses including groceries. The debit card in my pocket is attached to the “living” account.

    After figuring out how much is needed for bills, savings etc the remaining total is transferred to the living account weekly. I use the same amount week-to-week and only adjust as recurring income/bills demand.

    I found this technique on some website somewhere but don’t have the reference handy. I’ve been doing it for about a year now and it has definitely helped.

    As for bank choice, I’m a proud USAA member. No cost for the additional checking account and a very capable online bill pay. Plus I can deposit paper checks using my iPhone.

  14. Chris says:

    How do you budget for eating out if you don’t eat at the same restaraunt, purchase the same meal, and leave the same tip each time?

  15. Mr K says:


    I think the usual idea is to set a target for how much you want to spend per week on any given category. Account for your must haves (rent, utilities, etc) and long term goals (emergency fund, retirement, etc) first. What’s left over is “having fun money”. Your eating out $ would come out of there.

  16. Adam says:

    I thought I was doing well with my pennies until I put it all down on paper (or rather in Excel) and found I was doing fine on some months, but would move ‘out of budget’ on other months when I needed to make larger purchases or go on holiday.

    The key is to build in non-regular spending (tempory saving pockets) into the budget -you can’t always catch them all though -that’s why its great to trim your lifestyle a little bit to ensure there’s added flexibility in your budget.

    Also, a budget is never set in stone -your life changes every month!

  17. Paige says:

    I started budgeting like this 3 years ago when I stopped working to stay at home with my daughter. My old boss gave me a book that explained how to do it. I think some people over think it. Like the guy with the restaurant question, it isn’t how much the bill is going to be, it is how much you set aside for eating out. Once you determine the amount of money you are willing to spend on eating out each month, it should be easy to pick which restaurant you want to eat at, and to stay within budget when you are there. This kind of budget has saved us! We never used a budget before, and we did not have any trouble adjusting.

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