What is A Zero-Based Budget? 5 Important Things You Need To Know

What is a Zero-Based Budget_ 5 Important Things You Need To Know

Last Updated on April 13, 2021 by Serish | I Hated My Boss

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Creating a budget that’ll work for you isn’t as hard as you think. I used to hate the word ‘budget’ and tried several different methods before getting frustrated and giving up.

But all that changed once I learned about zero-based budgeting.

This is the very budgeting style that allowed me to pay off $15k in debt in less than 7 months.

And you may be surprised at how straightforward it actually is.

If you’re eager to get your finances under control, a zero-based budget (ZBB) may be the key to helping you achieve financial freedom.

How To Make A Zero Based Budget for Beginners

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What is a Zero-Based Budget?

Simply put, a zero-based budget is when you account for every single dollar you spend and save. You’re basically assigning each dollar a task.

The formula is pretty simple:

This is your monthly take-home pay minus your monthly expenses, and the total should equal zero.

Zero Based Budget Example - I Hated My Boss

Now, this doesn’t mean you have no money left over. You’re just giving every dollar you earn, a job to do.

For example, if you have $50 left over, you must give it a job to do. Got credit card debt? Pay it down with that $50.

If you don’t assign that left over money a task, you’ll likely spend on something unneccessary and wonder later where it went.

Basically, it’s like having a clear and specific plan for your money.

This way, every part of your income is justified and well-accounted for.

With zero-based budgeting, you end up being more mindful of every expense that makes your list.

To make this even easier for you, I’ve created a Free Monthly Spending Tracker so you can get started today:


How Does A Zero-Based Budget Work?

To get a clear picture of how a zero-based budget works, let’s take a look at this example:

What is a Zero Based Budget? Example Dave Ramsey Money Saving Tips

As you can see from the image above, you’ve allocated every single dollar to a specific category.

These categories are your monthly expenses, as well as any savings.

For example, if you have money left over after subtracting your monthly expenses from your monthly pay, those extra funds can be added to a savings category (such as retirement, emergency, or travel fund).

I broke it down for you here:

Zero-Based Budget Example - I Hated My Boss

See how we had $386 left over after subtracting our monthly expenses from our monthly pay?

Instead of just letting it sit freely in our checking account, we assigned it to 3 categories:

  • Emergency Fund
  • Retirement
  • Travel

Now, of course it’s up to you which category you want to assign left over funds to. If you have debt, you’ll want to apply it to that.

On the flip side, if you don’t have any money left over and are in the negative, this can mean a couple of things:

  • You have an income shortage and will need to increase your income
  • Your expenses are high, so you’ll need to cut costs

Income Shortage

If you’re living paycheck to paycheck, or struggling to make ends meet, it may be time to boost your income.

You can do this by increasing your hours at work or working overtime.

However, if this isn’t an option, you may want to consider a side hustle.

There are tons of lucrative and flexible side hustles you can do to earn extra cash every month.

Cut Your Costs

To do this, you’ll want to take a hard look at your monthly expenses and determine if a certain expense is necessary.

Ask yourself the following questions:

  • Do I need this?
  • Can I live without it?
  • What will I gain from this?

You’ll want to take a look at expenses such as a gym membership, streaming services or subscriptions- to name a few.

Furthermore, you can also trim certain expenses by renegotiating a lower rate on certain bills, such as phone, cable and insurance.

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Why is a Zero-Based Budget Important?

One major reason why a zero-based budget is important is because you account for every single dollar you spend. This way you’ll know exactly where every dollar of your hard-earned money is going.

Additionally, it works so well for many because it’s fairly easy to follow.

You don’t have to think about complicated formulas to get this budgeting method right.

All you need to do is to make sure you’ve accounted for every single expense.

If you don’t keep track of where your money goes, your monthly expenses will keep getting bigger.

With a zero-based budget, however, you can monitor your actual expenses, allocate them appropriately, and save for rainy days.

Saving even a little portion of your monthly income now, will keep you from financial woes later on.


Advantages of a Zero-Based Budget

Ever since I started using the zero-based budget method, my financial well-being has significantly improved.

As mentioned above, I’ve paid off $15k in credit card debt in less than 7 months, and I did this while living on a low income.

Almost anyone can write a zero-based budget.

But its major benefit is that it’s quite flexible and also works well for those who have an irregular income (i.e. independent contractors, commissions and bonuses earned).

In this case, you’d want to start off each month with the lowest monthly estimate. Keep in mind that you can always adjust your income over the course of the month if it changes.

Now, when compared to traditional budgeting, we often forecast how much we’re going to spend based on last year’s expenses.

For example, if last year’s electric bill averaged $75 each month, you’d assume the same for the current year.

Nonetheless, this may not always work as there may be increases to your rate or energy consumption.

Zero-Based Budget Advantages I Hated My Boss

However, with the zero-based budget approach, we look at the actual bill and find the ‘why’ in the budgeting process.

If you know why you’re allotting a budget for a particular expense, you can justify your spending.

As long as you can explain how you can benefit from a specific expense, it can stay in your budget.

In a way, it keeps you on your feet. And since you see where your money would go, you can analyze whether such an expense is even necessary.

If you can’t justify its urgency and necessity, then it should go.

Through that, you get to include more urgent and worthwhile budget allocations in your income spreadsheet.

This budgeting style also allows you to see which practices and decisions are not helpful in your financial well-being.

As a result, you get to correct it right away and avoid incurring mistakes later on.

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Is a Zero-Based Budget Right For Me?

This might be the first question that comes to mind when faced with this type of budgeting style.

The answer to this question is subjective because everyone has different income streams, spending habits, and needs.

However, if you’re looking for a straightforward way to pay off debt and save money, I highly suggest giving zero-based budgeting a shot. 

What’s more, this budgeting style works best for those living paycheck to paycheck or beyond their means, like I was.

Granted, it may take some adjusting to get a hang of.

But once you start to see where your money is going, this budgeting style can be life changing.

When I first started with a zero-based budget, it took me about 2 months to get it right. Not because it was hard to do, I just struggled to ditch my twice daily coffee habit (ha!).

It wasn’t until I wrote down every single expense that I realized some serious changes needed to be made.

So, I bought a cheap coffee-maker, became my own barista (I’m damn good, too!) and saved nearly $300/month from making this one simple change.


How to Make a Zero-Based Budget

Before we get started, I highly suggest you do this manually, instead of using online spreadsheets.

If you don’t have a printer available at the moment, you can still download the free worksheet since it’s fillable.



Step #1: List all your sources of income.

Firstly, you’ll write down your monthly income (take-home pay, after taxes).

This includes any money you earn on a monthly basis- such as a second job, side gigs, child support income, etc.

Keep in mind, even if your income isn’t fixed every month, you’ll be living the current month on last month’s income.

In other words, you’d be paying February’s expenses, with January’s paycheck.

Of course, if you’re just starting out, this may seem challenging at first because you might come out short.

But you can always adjust your current month’s expenses to make up for any shortage (trim costs or take up a side hustle).

Step #2: List your monthly expenses.

Before the start of a new month, make a list of all your expenses.

Start your budget by listing the Four Walls first- food, shelter, utilities, and transportation. These are expenses you absolutely cannot live without.

After this, you can include the rest of your monthly expenses.

Most importantly, don’t forget to add a savings category in your monthly budget.

You see, if you don’t make saving a priority at the start of your budgeting phase, there’s a high chance you’ll never make it your priority.

Step #3: Include your seasonal and irregular expenses.

When budgeting for upcoming months, consider what expenses might come up at this time of the year.

If you’re planning for December, think of the expenses you’re most likely to spend on during this season.

So the possible expenses that might go along with these celebrations, don’t end up surprising you.

In addition, plan for your irregular expenses, too.

These include property taxes, car registration fees, or increase in insurance premiums.

You might even want to add a miscellaneous category because unexpected expenses can pop up here and there.

Consider this as your ‘catch-all’ expense category. This may include random things like emergency car repairs, birthday gifts, and other similar items.

If you do this every month, it’ll be easier for you to anticipate your expenses going forward.

Step #4: Subtract your monthly expenses from your monthly income

Once you subtract all of your monthy expenses (including savings) from your monthly income, your total should equal zero.

If your income and expenses aren’t balanced, don’t worry. It may require some practice before you finally get there.

This only means you’ll need to do some tweaking.

In most cases, it takes people 1-3 months before they get the hang of the process.

Keep working, and soon, you’ll get to zero before you know it.

Step #5: Track your monthly spending.

The only thing left to do now is to track your spending for the entire month and to take note of every dollar you spend.

This is the best way to make sure that your spending is going according to your plan.

For example, if you go on date night and spend $100, make sure to deduct the $100 from your dining out category.

As you progress in budgeting, it won’t take long until you start winning with your money.

Soon, you’ll be amazed to know that you’re already reaching your goals.

You’ll also see that saving isn’t that hard after all!


Final Thoughts: What is a Zero-Based Budget

Saving is not the only goal of a zero-based budget approach.

Before you get to save, it helps you understand your spending patterns first.

It makes it easier to pinpoint the reasons as to why you may be going over your monthly budget.

Unjustified expenses usually get erased to pave the way for meaningful, urgent, and necessary ones. As time passes by, you’ll start seeing your savings grow.

Aside from that, you also get to realize your goals and afford things that you used to only dream about.

Have you tried the zero-based budget yet? What budgeting style has worked for you?

How To Make A Zero Based Budget for Beginners


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