While there are many different budgeting softwares and systems out there, most of them are based on a few sound principles. One of these foundational ideas is zero-dollar budgeting. A zero-dollar budget means that you assign a job to every dollar you earn in a given month. In other words, not only do you know exactly how much you earn, but also exactly how much you spend and save.
A good zero-dollar budget eliminates uncertainty and guesswork around your finances. Sure, it’s a bit more work to keep track of your income and expenses, but the end result is truly worth it. Not only do you avoid unnecessary expenses, but you can anticipate exactly what the near future will look like in terms of expenses.
So what exactly is zero-based budgeting?
Here’s an easy calculation to remember: income – expenses = zero.
Let’s look at an example: say your monthly income is $3,000. Every line in your budget should add up to exactly $3,000. The remainder should be zero. Something like this:
Should you have a zero dollar budget?
If you would like to get a better idea of your spending (even if you’re saving the required 20% or so of your earnings) zero-based budgeting can be great for you. Maybe you’re good about curbing those daily lunches or coffees but are always frustrated by a surprise expense or bill at the end of the month. Or maybe it is those lunches and coffees adding up to an astonishing amount by month end. By allocating every single dollar to spend, save, give or invest, you’re less likely to have money sitting in your bank account without a purpose and thus less likely to spend it.
Zero-based budgeting is also easier for people who have regular, predictable income (like a salary or benefits) but it also works for irregular income (like for freelancers and business owners). We’ll go over how to create a zero-based budget with some uncertainty in earnings below.
How to Create a Zero-Based Budget
Remember the equation we looked at earlier? Here’s a refresher:
Income – Expenses = $0
To make your budget hit zero every month, you have to know your numbers. Here are the main things to track:
1. Your monthly income
Begin by reviewing your last few paychecks and tracking the amount of money you take home every month. If you have any side-hustle income or multiple streams of income, be sure to include this in your monthly budget.
With irregular income, you’ll want to adjust your budget on a monthly basis based on how each month looks in terms of income.
When you’re first starting out, it is beneficial to establish a ‘base layer,’ or a one-month buffer in between your income and expenses. This way, if you have a low-income month or an irregular expense, you don’t get charged overdraft fees. Start by saving a little bit each paycheck until you have an average month’s income in your checking account.
2. Your monthly expenses
Even if your income can fluctuate in a given month, chances are you have a few fixed expenses that you have to pay each month. For most people, this is a rent or mortgage payment. Other staples are utilities, food, transportation, and minimum debt payments.
By starting with the basic expenses, you can rest assured that your essentials will be covered. However, to make a true zero-based budget, you cannot simply stop at the essentials. Be honest with yourself. How much money can you allocate to happy hours or takeout? During the planning stage of your budget process, it helps to stay as close to past spending trends as possible.
Part of your monthly ‘spend’ categories should be savings and investments. By paying yourself first and treating savings like a bill that you are 100% responsible for, you can supercharge your savings.
3. Your irregular or long-term expenses
Think critically about your finances and spending. Are there quarterly or annual bills you find yourself scrambling to cover? Are there cash discounts to be availed by paying insurance annually instead of monthly?
Once you have a good idea of your monthly expenses, start writing down categories like holiday gifts, anniversaries, property taxes, HOA dues, vehicle repairs, and vacations. Writing down all of these expenses makes it easier to plan for them. By saving a little bit every month, you will avoid the feelings of frustration and stress that can sometimes accompany big-ticket spending.
Tips to Make a Zero-Based Budget Work for You
If you think that any of the tips above may not work for your life, here’s a quick disclaimer: zero-based budgeting is incredibly easy and adaptable. Here are a few tips to make the zero-based budget work for you:
1. Be flexible. OG zero-based budgeting software YNAB calls this ‘rolling with the punches.’ Here’s an excerpt from their website:
No matter how well you plan. Things happen, circumstances change, priorities shift. You shouldn’t feel bad about it. It isn’t a failure of any kind.
A budget is not some rigid, arbitrary set of numbers that you impose on yourself so that you can feel really guilty and terrible when you realize you didn’t guess correctly.
Here’s an example they give: If the car tire blows out then you’re going to need a new tire more quickly than you might need to do that thing that was a little more fun, a little more entertainment-oriented. You’ll shift things around, you’ll say, well we’ll defer the entertainment for a little bit longer. You’re going to be making these adjustments all the time. This is how you stay on track.
2. Actually track every dollar you spend. Nothing is more real and in-your-face than actually writing down your expenses in a bullet journal, excel spreadsheet, or budgeting software. Track your spending (commit to at least doing this for three months) down to every single dollar. Without doing this work, you will not get a line-of-sight into your true spending.
Budgeting softwares make it easy to connect your banking accounts and import transactions, but don’t fall in the trap of seeing = tracking.
A zero-based budget can be the single-most effective way to understand your income statement (income – expenses) once and for all. No matter what goals you set for yourself – getting out of debt, building an emergency fund, never putting holiday spending on credit cards again – zero-based budgeting can help you achieve them.