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zero-based budget

How to create a zero-based budget

Did you know that in 2020 and 2021, 80% of Americans managed their savings and expenses better thanks to budgeting? If you’re one of those people who reach the end of the month wondering where all your cash went, you definitely need a budgeting plan, and a zero-based budget may help.

There are a lot of budgeting methods out there, and all of them work well, you just have to find the one that fits you well. However, a zero-based budget is a perfect option if you feel like a beginner when it comes to money management. It may be easy to get overwhelmed but don’t worry, it’s simpler than it sounds.

Why budgeting?

We’ll start by getting on the same page about the concept of budgeting in case you’re not familiar with the financial jargon. A budget is simply a plan of how to use your money during a specific time period taking into account the amount that you will earn and the expenses you need to afford.

No matter your current financial situation, a budget will always be necessary. If you are a successful businessperson with a lot of stock investments, budgeting is good for you. If you work eight hours a day in customer service, budgeting is good for you. Even if you are a student with an irregular income working as a freelancer and don’t know how much money you’ll end up earning by the end of the month, budgeting is good for you.

A well-managed budget will help you understand how you are using your money and improve your financial habits by eliminating unnecessary costs.

What is zero-based budgeting?

Now, a zero-based budget is one of the many budgeting strategies and it gets its name when your income minus your expenses equals zero. In other words, the main objective of this method is to put all your money to work and give every cent a specific purpose.

Let’s see an example, assuming that you make $3,000 every month:

Income$3,000
Food$700
Transportation$350
Rent$450
Utilities$350
Savings$350
Debts$225
Entertainment$225
Extras$350

As you can see, your income minus all your expenses equals zero. Whether it is on monthly expenses, savings, or debt payments, every dollar has a clear destiny in a zero-based budget. Of course, this is just an example, so feel free to tweak each amount according to your needs. Here are some tips to get started.

How to start a zero-based budget

If you want to start with a zero-based budget, there are some basic steps you should follow.

1. Know your monthly income

All the money you make in a month, including your regular job and your side hustle, counts for the total sum of your monthly income.

2. List your expenses

Think about everything you spend your money on during a month, and make a list. 

3. Organize your expenses

You must identify your priorities, and organize them from most important to least important. You can start with your food and rent before listing that streaming subscription you hardly ever use. This will also help you to see if you can cut back on some areas.

4. Divide your money

This is where the zero-based budgeting magic happens. Estimate how much money you will need for each category each month and start deducting each one from the income total. Remember that the subtraction of all your expenses MUST be zero when you’re done. 

Reminder: Create an ‘Extra expenses category’ to leave some extra money aside in case something comes up during the month. Maybe a friend unexpectedly invites you to their birthday party or you end up paying a little more for your parking spot. Whatever the case may be, you’ll need a little bit of money you didn’t include in the rest of expenses.

Chances are that when you’re done listing your expenses and assigning them a monetary value, you get a negative result out of your income subtraction. If that’s the case, try to reduce your expenses by eliminating costs you can absolutely live without such as a gym membership or a streaming platform. Make sure to cut home expenses to make this step easier.

On the other hand, when you get a result that’s greater than zero, it means you still have some cash available after paying for all your expenses. It is recommended to direct that money to your saving goals, debt payments, or investments. However, adding a couple more bucks to your ‘Fun Fund’ won’t hurt anybody!

5. Control your expenses

During the whole month, you must be checking your transactions and making sure everything is going as planned. If you started the month using a zero-based budget, any money that comes in or gets out of your budget has to be registered, you can’t leave everything to go with the flow as that would lead you nowhere. This will help you to stick to your budget and avoid overspending.

6. Start over before the new month begins

Chances are your income won’t be very different from month to month, however, your expenses may change in some cases. Follow the same steps all over again by the end of each month so you continue with your zero-based budget for the next one. 

The zero-based budget and the 50-30-20 rule

With all these steps clear for zero-based budgeting, you might be wondering: “How much money should I place on expenses? How much on investments? How much should I save?” Well, there are different methods you can use to determine that; however, we recommend you use the 50-20-30 rule

This rule states that you will divide your income into three different portions: 50% of it will be used for expenses on first-need products, 30% will go to not primordial expenses, such as entertainment or clothing & accessories; while the remaining 20% will be placed towards investments, debt payments, or savings.

Again, those numbers are just a guide so feel free to adjust the percentages according to your financial needs and goals.

A zero-based budget with an irregular income

A zero-based budget is really helpful… but what if your income is not really stable from month to month? How do you do it? 

As we said earlier, zero-based budgeting is good for you whether you earn a steady paycheck, or if you have an irregular income. 

The advantage of this budgeting tool is that it is pretty flexible and you can adjust and customize it according to your current situation. Here are some tips for zero-based budgeting if your monthly income isn’t stable:

  • Analyze your situation: Check your last month’s income and think if you’ll get a similar amount for the upcoming month. Use that number as a reference guide.
  • Use the worst-case scenario: In case you are having serious doubts about how much your income for the next month will be, use the lowest number you registered in the year. This way, you’ll be ready for any scenario.
  • Improve as you go: Keep in mind it is your personal budget. It’s not homework somebody will check and give it a grade. You can make changes to it during the month, in case you have to cut expenses or if you get some extra cash. Just be sure to subtract your expenses from your income and get a total of zero, otherwise, it won’t be zero-based budgeting.

Finally…

As you can see, using a zero-based budget is nothing out of this world. Just make that the sum of all your monthly expenses, debt payments, savings, investments, etc. equals the amount of your monthly income.

Also, keep in mind that the success of any budget depends on how strictly you stick to it. Having the best-designed budget on paper won’t be any useful if you start spilling your money as if there was no tomorrow.

Now that you understand the basics, it is time you give a zero-based budget a shot to see if it is the best budgeting method for you. In case it doesn’t fit you, feel free to consider other options. Make sure to keep exploring our article library to find some more budgeting strategies and more tips and tricks to improve your money management skills.

One Response

  1. Wow! This can be one particular of the most beneficial blogs We’ve ever arrive across on this subject. Actually Fantastic. I’m also a specialist in this topic so I can understand your hard work.

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