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Zero-based budgeting: What it is and how it can help you hit your money goals

Couple looking over their financial budget
Your total income, minus your expenses, should equal zero.
Photo illustration by Fortune; Original photo by Getty Images

If you’re guilty of mentally spending your paycheck before it hits your bank account—it may be time to create a budget. 

Having a financial plan for your income can serve as a roadmap for you and your dollars to help you be more intentional about your spending and saving habits. It can also help you cover the cost of living, unexpected emergencies, and set yourself up to reach all of your financial goals. There are a lot of budgeting strategies you can use to do this, one popular method: the zero-based budget.

What is a zero-based budget? 

A zero-based budget, sometimes called a zero-sum budget, is when your total income, minus your expenses, equals zero. 

The goal of this strategy isn’t to spend everything you make—it’s designed to ensure that every single dollar is accounted for, and not just floating around in your checking account waiting to be spent on an impulse purchase. 

Say your monthly income is $3,000 after taxes. Between your living expenses, debts, emergency savings, investments, retirement contributions, et cetera, you should be left with $0 unaccounted for. Your individual categories may vary depending on your personal needs and money goals. (We’ll go over a more thorough example below.)

So what’s the benefit of this budgeting method? There are several:

  • It takes the guesswork out of money management. When you let your paycheck sit in your bank account and spend as you need it, it’s easy to lose track of what you’re spending on. You may also be tempted to overspend or make impulse purchases when it feels like you have extra funds to play with. Allocating the amount you’ll need per category ahead of each month means that when payday arrives, you’ve already set an intention for each dollar. 
  • It provides a safety net for unforeseen expenses. Your emergency fund is automatically baked into the zero-based budgeting strategy. Rather than waiting for a financial curveball to come your way and then scrambling to cover the cost, you’re committing to putting a portion of your income each month into an emergency fund for when the unexpected inevitably happens. 
  • It gives you a detailed snapshot of how much you’re actually spending. When you’re assigning a dollar to every single category you spend money on, you’re better able to point out the areas where you may be overspending or underspending. Perhaps you’re spending a significant amount on dining out each month and half of those funds could be better spent on an extra credit card payment. 

“Research shows that people consistently underestimate how much we spend on unusual or infrequent expenses, as well as the frequency at which these expenses occur,” says Hans Frech La Rosa, senior behavioral researcher at Common Cents Lab, a behavioral research lab at Duke University’s Center for Advanced Hindsight. “Therefore, it is helpful to categorize savings in multiple buckets, such as saving for emergencies or unexpected expenses, and for our different savings goals.”

How to create a zero-based budget 

Start by tracking down a few of your most recent bank statements. This will give you a good starting point for your typical spending categories, how much income you have coming in each month, and which categories you’ll need to set aside extra funds for. 

“It is very important to make sure that you still allocate a portion of your budget to savings and keep an emergency fund,” says Kendall Clayborne, a certified financial planner at SoFi. “One risk with a zero-based budget [is that] every dollar is already allocated. When unexpected expenses arise you may go over budget. Therefore, it is very important to make sure you have an emergency fund to pull from to cover these expenses without disrupting your monthly budget.”

1. Calculate your income

You need to know how much income you’re bringing in each month. This includes your paycheck, income from side hustles, investments, and more. If it’s landing in your bank account and you could be tempted to spend it, write it down. If you’re unsure how much this comes out to, this is when reviewing your bank statements can help you determine how much you’re usually bringing in after taxes. 

2. Create budget categories

Think about where all of your dollars are going. This could be a little different for everyone, but you’ll want to think carefully about the various categories you’ll need to allocate funds for. Examples might include basic needs like your rent, utilities, groceries, emergency savings, and car-related expenses, but you’ll also want to create categories for your “wants.” 

These can be as specific as your monthly grooming costs, your streaming service subscriptions, or your gym membership. The goal is to have every possible expense fit neatly into a spending category. After you’ve settled on your categories, you’ll need to assign a dollar amount to each of them until every single dollar you expect to come in has a purpose. 

3. Arrive at zero

Once you’ve assigned every dollar to a category, you should arrive at $0 and have enough money to cover all of your categories. Fair warning: This may not happen at first. You might find that you don’t have enough to cover all of your categories. In this case, you might be overspending in certain areas and should take a closer look at your spending habits to figure out where you need to cut back. 

If you’re left with extra dollars after all of your categories have been covered, it’s time to get creative and think about the best ways to use those extra funds. Think carefully about your financial goals and where that money could best be put to use. Maybe that’s making an extra student loan payment, making an extra mortgage payment, opening a CD, or putting a little more in your travel fund for an upcoming trip. The point is to avoid spending frivolously and be intentional about how you’re using the “leftover” money. 

Let’s take the previous example where you have $3,000 after taxes. Here’s how you might assign each dollar to a spending category to arrive at $0. 

Pros and cons of a zero-based budget 

A zero-based budgeting strategy is just one of many different budgeting strategies you can use to keep track of your spending and reach your goals. However, it may not be the right fit for you. 

Con: Using a zero-based budget requires you to budget for time to build and maintain it each month. It may involve a lot of trial and error and may not be a great fit if you have a hectic schedule and don’t think you’ll have the time to devote to it. 

Con: If you see massive swings in your income each month, it can be challenging to figure out how much money you have to work with in each of your spending categories. “If this is the case for you, look into other budgeting methods such as a proportional budget like the 50/30/20 or even the pay-yourself-first method,” says Clayborne. 

A few benefits of using a zero-based budget…

Pro: Zero-based budgeting can help you trim unnecessary splurges. “This method works well for those who may have tight budgets or really need to cut down on spending because you must keep a close eye on all of your spending,” says Clayborne. 

Pro: This strategy requires you to be intentional about how you’re using your income. It forces you to think about what your goals are and how your current habits are playing a role in making those a reality. 

Tools to help you succeed 

There are a few ways you can create and regularly update your zero-based budget. Some prefer creating a spreadsheet from scratch that’s tailored to their spending categories and usually free to create. There are also mobile apps like You Need A Budget (YNAB), EveryDollar, and Mint that allow you to create and manage your budget on your phone, which gives you the flexibility to update and make changes to your budget whenever you have free time. 

Ultimately, the right budgeting strategy and tool for you will be what you can be most consistent with. 

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