Zero Base Budgeting | Your Ultimate Guide


Finding the right monthly budget for you can be a time consuming process.

For many people, a zero-based budget is a great first option as it’s simple to get started and follow.

But it’s not for everyone.

In this detailed guide, you’ll learn how to set up and budget using the zero base budgeting method as well as its advantages and drawbacks.

Complete Guide To Understanding Zero Based Budgeting

What Is Zero Base Budgeting?

zero base budgeting process

Aptly named, zero-base budgeting, or a zero sum budget, is a method of budgeting that seeks to help you allocate every dollar of income you make to a specific purpose.

This budgeting process will often make new budgeters nervous, but the name doesn’t imply that you’re going to have zero dollars in your bank account when you get to the end of the month.

Rather, it just means that you know where every dollar is going, whether you’re using it to pay your bills, put it away in savings, or even keep some of it in your checking account.

In fact, many people that use this budget system end up having more money in their checking account after a few months.

If you’re someone who wants to make sure you know where your cash is going, this budgeting method may be the best fit for your needs.

How Do You Create Your Own Zero-Base Budget?

Zero-base budgeting requires you to have extensive knowledge of your income and expenses in order to guarantee that you have complete oversight over the movement of your money.

As such, there are several steps required to get the most out of this budgeting approach.

Don’t be scared off if you have no clue how you are spending your money or what your living expenses are.

By following the steps below, you can figure it out.

Step #1. Track And Record Your Income

For those who rely a full-time job or part-time job for their income, tracking income will be quite easy to do as you know how much your paycheck usually is and the frequency you get paid.

If you work multiple jobs, the same will typically apply.

For those who are self-employed or have irregular income, tracking and recording your income over a period of a few months or so should allow you to come up with a reasonable estimate regarding how much you earn.

You should also record extra income that you may earn from side hustles or micro-earning tasks like taking surveys.

Some people even include interest income and dividends they receive.

However this level of detail is not required as this is usually reserved for those in retirement who are using this supplemental income to live off of and help pay their bills.

At the end of the day, the goal here is to know exactly how much you’re earning so that you can better determine how to budget your money.

Step #2. Track And Record Monthly Expenses

If you don’t already, you should have spending categories for each of the main expenses you anticipate paying each month.

Some of the main expense categories to carve a space out in your budget for include:

  • Groceries
  • Insurance (Car insurance, health insurance, etc.)
  • Utilities
  • Rent/Mortgage
  • Car payment
  • Household items and toiletries
  • Personal care
  • Clothing
  • Miscellaneous

Note that these categories can be as detailed as you like.

For example, some people break each insurance type into a different category.

But most people find this to be too much work, so they stick with just one insurance category.

Likewise, some people include dining out in their grocery category and just name it ‘Food’, while others have a ‘Grocery’ category for food bought at the grocery store and a ‘Dining Out’ category for other food.

At the end of the day, this is your budget so you should set up the categories to make sense for you.

Once you have these categories in place, it’s important to record those that remain the same every month, such as rent, and set an estimate for those that may fluctuate each month, such as utilities.

You should also set a limit for those that you’re looking to only spend a certain amount of money on such as groceries.

These spending categories will determine how you spend the majority of your income and give you an idea of what you will have leftover once you’ve allocated money to these categories.

Step #3. Estimate Your Yearly And Irregular Expenses

Not all expenses are going to fit into a monthly spending category.

When we fail to see these as expenses or goals that we should be working toward, they can surprise us out of nowhere and cause us to dip into our savings as a result.

A few examples of things that may only need to be paid once every year include property taxes, insurance premiums, and HOA fees.

There are also some savings goals that we may overlook, like saving for Christmas presents or future vacations.

Also, there might be a big expense you need to budget for, like a new refrigerator or roof for your house.

Set aside some time to consider expenses that may not be immediately on your radar so that you can place a portion of your income into these categories each month.

As an aside, it helps to create separate savings accounts for these irregular expenses and savings goals.

By transferring money into these accounts each month, you know for certain you have the money to pay the bill when it comes.

Step #4. Remember To Include Debt

Student loans, mortgages, and car payments are all necessary expenses that you should absolutely not miss payments on.

These should be a top priority as you will be expected to pay these off regularly if you wish to avoid penalties or problems with your loan.

If need be, you may even need to place these above certain spending categories that may not be as high on your priority list.

Step #5. Consider Investing And Savings Goals

For the money you have left after accounting for all of the above expenses, you direct this money toward your investing and savings goals when wrapping up your zero-based budgeting strategy.

For example, putting some of your money into an emergency fund until you have at least 3 to 6 month’s worth of expenses stashed away can help you take care of any unforeseen expenses.

After that, you can start putting your money into a high-yield savings account to work towards specific goals like going on vacation.

When it comes to investing, you could start putting your money into an ETF or mutual fund, for which you can create an account with an online broker.

The downside here is many have minimum requirements in order to open an account.

The solution to this is to invest with Acorns.

You can invest as little $5 a month or even just invest your spare change if you don’t want to allocate a monthly amount towards your investment account.

You can open your account with Acorns and get a free $5 in the process.


No matter your savings and investing goals, these are major parts of your budget process and should be included.

As a result, if you find you don’t have extra money for these categories, it is recommended you adjust some of your expenses so you do have something to save every month.

Step #6. What To Do After Recording Your Income And Expenses

When you’ve completed all of the above steps, now is the time to put your budget to the test.

Using the income that you came up with in the first section, begin subtracting your expenses, debts, and other incremental savings goals from your monthly income.

For most, this will result in the majority of your income being used, leaving some money left.

With this final amount, figure out exactly how you want to split it so that you end up with exactly $0 by the time you’ve reached the end of your zero-base budgeting plan.

You could put the leftover money towards extra debt payments, savings goals, or towards your miscellaneous spending category.

The reason to consider putting a little extra towards miscellaneous is because no matter how good you think your budget is, you missed some spending.

It happens to all of us.

As a result, we have to put some expenses into this category until we see if they occur on a regular basis to create a new category for.

Once you’ve finished that, you’ve successfully established your zero-based budget.

If anything should change in terms of your expenses or income, you simply adjust your expenses around until you’ve reached $0 in your budget once again.

Step #7. Review And Adjust

Every month, you should take the time to look back over your budget.

Ask yourself what is working and what isn’t working with it.

Is it too complicated? Not detailed enough? Are you seeing positive changes to your finances?

Maybe you notice your discretionary spending is too high and you need to scale back.

By taking an active role in reviewing your budget, you can adjust it so it best fits your needs.

While this step does take time, it is important if you want to be successful over the long term and reach your financial goals.

And speaking of financial goals, don’t expect to see massive improvements to your personal finances overnight.

It will take some time, so be patient with it.

Advantages Of The Zero-Based Budgeting Method

Given that there are so many different budgeting methods, understanding the benefits and downsides before you get started will help you determine if this is the best fit for your needs.


You know exactly where your money is going. There’s no worry that you may potentially overspend as you already have all of your expenses laid out in front of you.

If you’re someone who may not always see where your money is going and you are surprised by the amount in your bank account, zero-based budgeting can help you get a better grip on your finances.

You’re better suited to save and invest. With other budgets, it can be easy to see that you have money leftover and spend it at the end of the month.

With the zero-based budgeting method, you have a dedicated amount of money you set aside each month to make sure that you’re working towards your savings and investing goals.

Disadvantages Of The Zero-Based Budgeting Method

Is the zero-based budgeting method for everyone? No budget is!

Every budget will offer its own benefits that may make it the right fit for you.

However, considering the downsides is also crucial to finding the right budget.


Time-consuming budget strategy. Not only do you have to follow all of the above steps, but you also have to carefully track your spending to make sure you’re staying within your pre-determined limits.

Even with the use of modern apps that we rely on today, this may still be a time-consuming process.

Hard to implement with variable income. Having an estimate of your income can be great, but not so much when things are constantly shifting well above or below a certain expectation.

For example, making less in a month than you would normally when you’re a freelancer or a business owner can mean not being able to meet the goals of all of your categories as you had planned.

If the majority of your income varies from month to month and you don’t have enough cushion, the zero-based budgeting method may not be the right fit for you.

Alternatives To The Zero-Sum Budgeting Method

There are a lot of budget options out there for you.

As a result, you might find this one isn’t for you.

Here are a couple of alternatives to consider.

50/30/20 Rule

This way of budgeting has you break your spending and savings into 3 buckets.

  • Needs: 50%
  • Wants: 30%
  • Debt and Savings: 20%

The beauty of this budget is that you are free from having to categorize your spending into multiple categories.

You simply put them in the appropriate bucket and go from there.

The downside however is because you don’t have detailed categories, you don’t get a complete picture of how you are spending your money.

For example, dining out expenses and entertainment expenses would go into the wants bucket.

At the end of the month, you might find that you spent more than 30% of your money on wants but you don’t know which specific spending in this bucket is out of control.

Priorities Based Budget

This budget has you list your income, then subtract out your essential items like housing and food expenses.

With the money left over, you budget it based on priority.

Ask yourself, what is most important to me?

List your spending categories in order of importance, top to bottom.

For example, maybe you want to get out of debt.

So your priority budget might have these categories:

  • Debt
  • Household
  • Entertainment
  • Dining Out

Once you have your categories, you take your left over income and assign and amount to each.

The higher on the list, the more money you allocate.

When you get to the end, if you have money leftover, you go back through the list and add more where you see fit.

This is a great way to motivate you to budget for the long term since you will be spending money in ways you want to and limit unnecessary expenses.

And after a few months, if you pay off your debt, you can re-assign the categories and start over again.

Tiller Money

Tiller Money is a hybrid approach to budgeting that I want to mention here.

It’s spreadsheet based, but is created using Google Sheets.

The value here is that it automatically pulls your spending in from your bank accounts, credit cards, and debit cards.

All you have to do is pick the category from the drop down box.

It has a pre-made budget for you, saving you time from setting up a new budget so you don’t have to start from scratch.

And if you want customization, you can change it so it works for you.

Their help and community support areas are top-notch and the budget has all sorts of add-ons to help you improve your finances.

You can learn more about Tiller Money by clicking the link below.

Tiller Button

Final Thoughts

At the end of the day, a zero base budgeting is the most popular budget out there for a reason.

It is simple to use and it works.

It helps you to find a place for every dollar you spend and makes you aware of how you are spending your money.

This allows you to spot over-spending early and make adjustments.

It also helps you to put money aside so you can get ahead and meet your future goals.

I recommend you give this budget a try and see if it meets your needs.

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