What is zero-based budgeting, and is it right for you?

Budgeting can be challenging, no doubt about it. But it can also be self-empowering — after all, the goal is to take more control of your money.

If you’re looking for an alternative to traditional budgeting, zero-based budgeting might be right for you. With zero-based budgeting, you assign every dollar you earn to a specific purpose every month, with the goal of ending up at zero. It’s kind of like playing a game against yourself.

Find out more about the zero-based budgeting method, how to implement it, and its pros and cons, to decide if it’s right for your financial situation.

What is zero-based budgeting?

As the name implies, this budgeting method is based on zero. Each month, your income minus your expenses should equal out to zero.

That doesn’t mean you should spend every dollar you make, of course. Some of your expenses should include savings contributions, building an emergency fund, and paying down debt, if you have it.

But at the end of the month, every penny is accounted for. That way, if you’re not at zero, you can easily see where you may need to adjust for the next month’s budget.

This strategy demands you consider every expenditure — no matter how small — to encourage responsible spending and fiscal restraint.

How zero-based budgeting works

Each month you’ll start with a “clean slate” and create a budget using these four steps:

1. Estimate your income, taking into account your job and any other sources of money.
2. List your financial goals, and determine how much of your income you will allocate to each.
3. Create spending categories for your essential expenses, such as utilities, housing, food, insurance, child care and education, and any loan payments. Estimate your variable costs.
4. Plan non-essential expenses based on the money you have left after savings and expenses.

Whenever you get paid, pay a bill, or move money into a savings account, you update your budget to account for it. You will come in under budget for some expenses and over budget for others.

If you have no significant financial surprises during the month, it is easiest to wait until the end of the month to determine if (and why) your budget is over or under zero. Then you’ll create the next month’s budget based on what you learned from your current budget, adjusting for the current month’s overage or shortage.

For example, suppose you typically budget $500 for food but consistently spend $550 per month on groceries. This means you should create your next month’s budget with $550 allocated to food to lessen the chance of coming in over your budget.

Conversely, if you end the month with an extra $50, you can allocate that money to savings, put it toward debt repayment, or use it for other expenses the next month.

Some months, you may incur a significant expense that you may not want to roll into the next month. In those cases, you can always adjust the current month’s budget as necessary. For instance, suppose you start the month by spending more on your child’s back-to-school supplies than planned. You can reduce your budget’s discretionary spending for the month to cover part or all of the extra school expenses rather than trying to make up for it the following month.

Some people use a slush fund category to simplify accounting for shortages and overages. Here’s how it works: Throughout the month, you’ll add any overages to the slush fund category. When another expense goes over budget, you’ll pull what you can from your slush fund before dipping into other budget categories.

How to track a zero-based budget

A spreadsheet program or a budgeting app can make tracking easy, and some are designed specifically for zero-based budgeting. Good ol’ pen-and-paper can work, too.

Spreadsheets and templates

You can use a spreadsheet such as Microsoft Excel, Google Sheets, or a similar program to track your zero-based budget. Search online for a zero-based budgeting spreadsheet template to make the setup more manageable.

Budgeting apps and software

Numerous budgeting apps and software tools can also simplify budget tracking and management. You can even use a smart speaker or wearable to help.

A few popular choices that are ideal for zero-based budgets include You Need a Budget (YNAB), EveryDollar, and Mint by Intuit. Each of these apps will allow you to quickly categorize every dollar of your earnings and keep tabs on your monthly spending. You can also link your bank accounts and import your transactions into the apps to automate some of the budgeting process.

What are some pros and cons of zero-based budgeting?

Pros

Those who prefer zero-based budgeting over other methods (like envelope budgeting) claim the following benefits:

• Greater spending awareness: This method’s approach may help you become more conscious of spending habits and patterns and more easily spot and stop wasteful spending than you can with more traditional budgeting methods.
• Prioritization of financial goals: Tracking your spending with a basic budget can show you where your money has gone but doesn’t necessarily help you prioritize where it should go. Because zero-based budgeting helps you assign money to goals before expenses, you can prioritize savings goals, debt repayment (including student loans), and other financial goals you are working toward.
• Increased financial control: It enables you to gain and maintain control over your money and live within your means by requiring you to plan and account for every dollar.

Cons

Consider these disadvantages before choosing zero-based budgeting over other budgeting methods:

• Takes time to manage efficiently: Managing a zero-based budget can be more labor-intensive than other methods because you must start with a clean slate each month and create a new budget based on the previous month’s budget.
• Requires self-control: Zero-based budgeting may feel too restrictive for some since you must adhere to budgeted amounts and be willing to cut back on other expenses when unforeseen expenses arise. Other methods may provide more freedom in spending choices without the worry of how it will affect your end-of-month zero balance.
• Focuses on the short-term: Because this budgeting method requires so much focus on your current financial situation, it may be easy to lose sight of your long-term finances, such as retirement planning and investing.

Is zero-based budgeting right for you?

If you have a predictable income and want to gain and maintain better control of your finances to increase savings, reduce debt, or achieve other financial goals, you may be a great candidate for zero-based budgeting. The following questions can help you determine if you should give this budgeting method a try:

• Do you sometimes end the month unable to pinpoint where and how you went over budget?
• Is saving an afterthought some months?
• Do you want to become more intentional with your spending?
• Could a more structured plan make budgeting easier for you?
• Do you have the time to track a zero-based budget, or would you benefit more from a less labor-intensive budgeting method?

The best budgeting method is the one you’ll stick with

Of the many budgeting methods, zero-based budgeting may be one of the most time-consuming, but it can allow you to maintain the greatest control over your money. However, you must be willing to put in the time and effort required for zero-based budgeting. Before selecting any budgeting method, it’s crucial to examine the benefits and drawbacks to determine if it will work with your income, financial goals, and money management style.

A budget is an essential money tool to help you manage your current finances while saving for a secure financial future for yourself and your family. Life insurance is another tool that can help you protect your loved ones financially if something happens to you, and you can apply for an affordable term life insurance policy online.

Get a free online life insurance quote today, and see how easily life insurance can fit into any budget (zero-based or otherwise).