How to Make a Zero-Sum Budget: Your Tool to Financial Freedom

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With so many different budgeting methods out there, it can be hard to get started.

Do you choose a 50/30/20 method? Should you use cash envelopes? The range of options can make it harder for beginners who don’t know which method will work best for them.

One of the most common types of budgeting is a zero-sum budget or a zero-based budget. It’s also one of the simplest and most straightforward ways to budget your money. This is how I budget my money, and I find it works really well.

If you’re new to budgeting and want something simple and easy to start with, consider using a zero-based budget.

What is a Zero-Based Budget?

A zero-based budget is a budget where you assign every single dollar a job, even if you have “leftover money” after paying bills. This ensures that your monthly expenses equal your monthly income. With this budget, every single dollar you earn goes toward a purpose.

Just because every dollar has a job doesn’t mean you spend every dollar you earn. Rather, some dollars will go toward expenses and others will go toward paying down credit card debt, adding to your emergency savings, or another financial goal.

This type of budget is a more mindful approach because it makes you think about every dollar and forces you to confront your spending habits.

Zero-based budgeting encourages you to create a budget that incorporates spending and saving. You’ll have some expenses that are fixed, like your mortgage or rent or car payment. But when it comes to variable expenses, like your grocery bill or your clothing budget, you’re more likely to think about what you really need and can afford.

To see it in action, check out our zero-based budget calculator below:

Example of a Zero-Based Budget

Here’s an example of how a zero-based budget actually works. You can use this as a guide to create your own spreadsheet, or you can use our zero-based budget calculator to get started. Just modify the categories and amounts to fit your spending and expenses

Monthly Income$3,500Left to Budget
Mortgage-$1,200$2,300
Groceries-$400$1,900
Gas-$250$1,650
Eating Out-$125$1,525
Utilities-$300$1,225
Entertainment-$150$1,075
Clothing-$100$975
Car Loan Payments-$400$575
Student Loan Payments-$150$425
Emergency Fund-$200$225
Travel Fund-$100$125
Miscellaneous-$125$0
Amount left$0$0

Benefits of Budgeting to Zero

There are numerous benefits to zero-based budgeting. Because every dollar is accounted for, you’re less likely to waste money. This can help you reach your financial goals much faster because you know where your money is going.

Every dollar has a purpose

In a zero-based budget, every single dollar has a purpose. If you aren’t sure how much you’re spending each month, this is a great place to start. It’s also helpful if you’re trying to get out of debt and need to allocate extra money toward your debt payments.

When every dollar has a purpose, you have better control over your money. You can effectively spread your money out between monthly necessities and long-term financial goals.

Helps to identify spending patterns

Without a budget, you might not be completely aware of what you’re spending money on. A zero-based budget forces you to face where your money is truly going and evaluate whether that decision aligns with your values and financial goals.

I made the mistake of finding out how much money I spent at Starbucks last year. Let’s just say, I haven’t had any Starbucks since the new year started. We all have our little vices, and when you pay close attention to a zero-based budget, you’re more likely to make better decisions.

You also have the ability to choose what’s more important to you — daily Starbucks drinks or a nice date night, for example. Whatever you decide, this budgeting exercise gives you a reason to evaluate the tradeoffs you make with your money. And this ultimately will lead to better financial decisions overall.

Reach your goals faster

A zero-based budget can be a great tool to help you reach your financial goals faster because it encourages you to be consistent and clear about where your money goes.

For example, if you’ve assigned $300 to the “pay down car loan” category, you’ll be less tempted to use the money for something else. When you can be consistent about payments or savings over time, you’ll reach your goals faster.

Downsides of Zero-Based Budgeting

Zero-based budgeting can be an amazing tool to achieve financial stability, but it also has some downsides. If you’re the type of person who struggles to stick to a budget, consider these challenges before choosing this budgeting system.

It can feel restrictive

Unfortunately, a zero-based budget can feel restrictive at times. You have to decide how all of your money will be used for the whole month before it even begins, so it’s easy to get frustrated when you need to address the unexpected.

Perhaps you only make it halfway through the month before you’ve spent your entertainment budget. Then a friend invites you to a big birthday outing where you have to pay your own way. You can rebalance the budget and borrow from another category, but if this type of restriction will bother you, then the zero-based budget may be a challenge.

Difficult to handle emergencies

When every dollar has a job, unexpected expenses can put a dent in your financial plans.

You can set aside a sum of money each month for unexpected expenses or emergencies, but these can still be hard to predict. Months can go by without any major surprises, and then suddenly your car needs a new transmission.

You can handle this by allocating money to an emergency fund each month and drawing on that fund when large, unexpected expenses occur. Look at your unexpected expenses over the last year or so to calculate how much to put into your emergency fund.

Time consuming at first

When you’re trying to get the hang of zero-based budgeting, it can be extremely time-consuming. You’ll have to monitor your spending throughout the month and record which expenses go into which category. You might even end up tracking your spending every day.

Instead of manually tracking your expenses, you can always use a budgeting app. You Need a Budget is probably the most well-known, and it’s based on zero-based budgeting principles. It also teaches you to live on last month’s income, which is great for people who have a variable income or are self-employed.

Mint and Personal Capital also allow you to set a budget and track your expenses in various categories.

Some people like to track their expenses without an app and prefer to use a spreadsheet or notebook. They claim that it’s easier to truly see how you spend your money.

How to Make a Zero-Based Budget

Making your own zero-based budget may sound time-intensive, but it’s a useful exercise for anyone new to budgeting.

1. Figure out your monthly income

First, you’ll need to add up all of your monthly income. This can come from a variety of sources, including:

  • Wages and tips
  • Freelance payments
  • Stock dividends
  • Sale of investments or property
  • Tax returns
  • Rental income
  • Royalties
  • Child support and/or alimony

If your income varies from month to month, look back at least six months to capture a realistic average monthly income.

2. Start with regular expenses

Next, list your regular expenses. This includes all expenses you’ll incur every month. It should cover things like:

  • Mortgage or rent
  • Utilities
  • Gas, tolls, parking or public transportation pass
  • Groceries
  • Childcare
  • Cell phones
  • Insurance
  • Car payments
  • Memberships and dues
  • Subscriptions

3. Add your sinking funds

After you’ve listed your monthly expenses, add your sinking funds. A sinking fund is savings set aside money toward an expense that doesn’t occur monthly. To prepare for infrequent expenses, you’ll need to create sinking funds for any irregular items such as:

  • Car insurance payments (every 6 or 12 months)
  • Property taxes (yearly)
  • Christmas (yearly)
  • Income taxes (yearly)

A sinking fund ensures that you have the money you need when you need it, which is especially important when it comes to expenses like insurance and taxes.

4. Plan for your goals

Now it’s time to think about your family’s long-term financial goals. Start putting aside money for the things that matter to you. Remember, even if you allocate just $50 to each category every month, the money will add up when you’re consistent.

You can save toward goals like:

  • An emergency fund for surprise expenses
  • Paying off credit card debt, car loans, or student loans
  • Going on a vacation
  • Making a down payment on a house
  • Remodeling your house
  • Sending your children to a private school or college

You can put all of your savings into one account or set up sub-accounts for each goal. The latter might make more sense, particularly if you’re saving for multiple goals at once.

5. Budget to zero

Now that you know your monthly income and have a list of your expense categories, assign every dollar of income to an expense.

Cover your fixed expenses first. There won’t be any wiggle room in your mortgage and car payments, so you know precisely how much to allocate.

For variable costs, you may be able to find creative ways to reduce those expenses. For example, you can save money on groceries by using cash-back apps or call your phone service provider to ask if there are any deals you could be taking advantage of.

Next, consider how much money to put into your sinking funds. For many of these funds, you can’t be short on cash when you need it, so add a buffer.

For example, look at your property taxes over the last few years. Suppose you paid an average of $1,000 per year in property taxes over the last three years. Add a buffer, and plan to have $1,200 in your property tax account at the end of the year just in case. This means you need to plan to add $100 to this sinking fund each month.

For sinking funds related to taxes, you should include a buffer since you don’t want to be short. A sinking fund for something like Christmas has a little more leeway.

Finally, allocate the remaining income to your financial goals. Even if you can only save a little each month, it will feel great to put $25 into the vacation fund or $50 into the kitchen remodel account.

6. Track and adjust

Once you create your budget, start tracking your expenses. If you find that you’re consistently over in one area, think about adjusting your budget. You’ll have to take money from one category to increase the budget for another category, so think carefully about where you can reduce your spending.

As mentioned, You Need a Budget, Mint, and Personal Capital are all great apps for tracking your budget and expenses. If you’d rather go old-school, a simple spreadsheet from Excel or an app like Tiller could also work well.

Related: You Need a Budget Review: What You Need to Know About the App

7. Get a month ahead

Once you get in the routine of using your zero-based budget, try to plan a month ahead and have the entire amount you need for the month in your bank account on the first day of the month.

It might take a little while to get there if you’re living paycheck to paycheck, but you’ll have peace of mind if you can make this happen.

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Zero-Based Budget FAQs

Making a zero-based budget can be confusing if you’re new to budgeting or have more experience using another system, like the 50/30/20 budget.

Can I make a zero-based budget if I have irregular income?

Yes, you can. If anything, it’s a preferred method if you have irregular income.

Try to build your budget around a lower income than you plan on receiving so you always have wiggle room in case a payment is late or you make less than planned in tips.

Do I need to use a spreadsheet for a zero-based budget?

You can use your own spreadsheet or a digital system like Mint or Tiller. That’s the beauty of a zero-based budget. It might take some time to figure out the best system for you, but there are a variety of options to choose from.

Related: Tiller Review: A Perfect Budgeting Tool for Spreadsheet Addicts

What if I have money left over?

If you have money left over, allocate it to your next financial goal. You can decide where this money will be of the most value to you, whether that’s paying off debt, padding your emergency fund, or moving you that much closer to your next vacation.

The Zero-Based Budget Is Worth Your Time

It takes some time, but a zero-based budget is worthwhile if you have big financial goals or if you’re just getting started budgeting. It can help you rein in your spending or pinpoint areas you need to work on.

The zero-based budget is also helpful if you tend to spend any extra money you have left over at the end of the month. This type of budget means every dollar has a specific purpose that you designate.

By helping you planning ahead and aligning your expenses with your income, you’ll be able to make positive steps toward both short- and long-term financial goals.

Author
Cat Alford

Cat is the go-to personal finance expert for educated, aspirational moms who want to recapture their life passions, earn more, reach their goals, and take on a more active financial role in their families.Cat was named the Best Contributor/Freelancer for Personal Finance in 2014, and over the past few years her writing and financial expertise have been featured in dozens of notable publications like The Wall Street Journal, Yahoo! Finance, U.S. News and World Report, and many more.

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