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What Is Zero-Based Budgeting?

Ever found yourself in this spot: You think you’re keeping up with your money, but some of it seems to grow wings and flutter out the window at night. We’ve all been there.

The zero-based budgeting method is just what you need. It gives all your dollars (all. of. them.) a job. Because guess what—your money isn’t magically escaping. It’s just needs something to do.

Here’s everything you need to know to make this zero-based budget life happen.

What Is Zero-Based Budgeting?

Simply put, zero-based budgeting is when all your income minus all your expenses equals zero.

This means that all the money going out should be the same amount as the money coming in. So if you make $4,000 a month, you’re giving all $4,000 a job: paying bills, saving money, paying off debt, and living life! When you add in every source of income and then subtract every single expense, your budget should end up at zero.

Here’s an important callout: We aren’t saying your bank account should ever hit zero. That’s playing with fire. And you know what they say about playing with fire. Ouch. Keep a little buffer in your checking account of about $50–$200, depending on what works for you.

But your budget should hit zero every month. Because you’re budgeting all those dollar bills. Every. Single. One. Your money won’t disappear when you’re watching and assigning every dollar to a specific budget line. This is why you need a zero-based budget.

Zero-Based Budgeting vs. Other Budgeting Methods

Before we explain how to make a zero-based budget, let’s look at a couple other budgeting methods.

50/30/20 Rule

A newly popular budget plan is called the 50/30/20 Rule. This sets all monthly spending and saving into three categories: needs (50%), wants (30%), and savings (20%).

At first, this method seems great—because it gives budgeting direction by using percentages, which seems very official and financial. But the biggest problem with the 50/30/20 Rule is that it leaves only 20% for savings, retirement and extra debt payments. Minimum payments on debt are considered a need, but if you want to pay anything above that, it’ll have to come out of the last “savings” 20%.

That kind of thinking makes for very slow progress toward your money goals. Because if you’re in debt, you’ll want to throw more than 20% of your income at those payments to crush debt for good. After that, you can move on to saving and investing.

When you use the zero-based method, any money left over after you budget for all your expenses goes toward your current Baby Step. (The Baby Steps are money expert Dave Ramsey’s proven plan for winning with money—we’ll talk more about those later.) You aren’t stuck at only 20%. And you aren’t throwing money at three goals at once. You’re tackling your money goals one at a time and focusing all your intensity on getting them done.

60% Solution

This method says to put 60% of your income toward committed expenses—aka, the things you need and any nonessentials you’ve “committed” to. The rest of your income is divided up into four categories: 10% to retirement, 10% to short-term savings for irregular expenses, 10% to long-term savings for emergencies or large upcoming needs like a new car, and 10% for fun.

While we applaud the emphasis here on savings, we’re not into lumping needs in with the things you’ve “committed” to. You can commit to a lot of expenses that you really shouldn’t be paying for, like an expensive phone plan or too many TV streaming services.

Also, we’ve found people are far more motivated to follow a path where goals get knocked down one by one. It provides intense motivation when you can say, “I did the thing! Now on to the next thing!” Zero-based budgeting means breaking up your long financial journey one focused (baby) step at a time.

The 60% Solution tries to make budgeting simple. That’s great! But it clumps too many categories together, making this method too complex in the end.

Reverse Budgeting Method

Well named, this method starts with savings and then tackles spending. It suggests beginning your budget by setting aside money to save and invest. After that, you budget for essential expenses like housing, utilities, transportation, food, insurance and debt. Finally, you cover nonessentials and fun.

This method is anti-debt, which we’re all about. But we’re also about taking down the debt before you load up your savings and start investing for retirement. Your income is your largest wealth-building tool. And being debt-free means using that tool to its fullest potential, rather than losing it to interest payments.

“Set It and Forget It” Budgeting Method

This is a common method for new budgeters. They set up a budget, assign their money to each budget line, and then place everything left over into a “miscellaneous” line. Throughout the month, they never check in to see if their planned totals are the same as what they’ve actually spent. They never check in on that miscellaneous money to see what it’s doing, either. The next month, they figure everything will be the same and use the previous budget in a copy-and-paste fashion.

There are two main flaws to this method. First, without tracking their spending, these “budgeters” don’t know if their plan matches their actual lifestyle. Second, putting all that extra money into a catchall category is dangerous. Just like your house keys when you’re running late for an important event, that money’s bound to get lost.

A zero-based budget can have a miscellaneous budget line of around $50. But it’s just for expenses you may have forgotten about when you set up that month’s budget.

Zero-based budgets don’t leave money lying around not doing a job or getting lost in the shuffle. And when you use a zero-based budget, you look that extra money in the eye and say, “Come work as hard as I do. I’m putting you toward paying off debt or saving up for an emergency or good stuff like that.”

How to Create a Zero-Based Budget

Making a zero-based budget may sound complicated, but it’s not hard. It just takes some practice. And with EveryDollar, it’s simple:

  1. Add all your sources of income.
  2. Type in your fixed expenses like your mortgage or rent, utilities, food and transportation.
  3. Then, type in common monthly expenses, like restaurants, entertainment and clothing. Check your past budgets or bank statements to get an idea of what you typically spend each month.
  4. Give every dollar a name—meaning all your income has a place in your budget. Remember: This is the key to zero-based budgeting. If there’s still money left after you list all your expenses, put it toward your current Baby Step. (Keep reading for a breakdown of this!).

You’ll know you’ve reached zero when you see a green check mark and the words, “It’s an EveryDollar Budget!”

With an EveryDollar zero-based budget, it’s simple to make your money (every last dollar of it) work for you.

The Purpose of Zero-Based Budgets

Yes, Chris. That’s the intent behind zero-based budgeting! Anything that’s “extra” doesn’t stay extra. It’s given a purpose and a job. It doesn’t get spent accidently on coffee runs or convenience-store candy. It doesn’t disappear. It works for you—every last dollar of it.  

Also, a zero-based budget gives you permission to spend. Yes, you read that right. People think a budget is limiting, but it’s actually empowering.

Remember, when you’re setting up your zero-based budget, you list all your income first and put in your essential expenses next. Then you’ve got space to enter everything else you spend money on.

See, a zero-based budget isn’t telling you not to spend. It’s giving you the power to spend the right way—to show your money who’s boss. When you know where your money’s going, you can make it go where you want—and kick down money goals like Chuck Norris roundhouses bad guys.

What To Do With the Extra Money

So, where should you put the money you have left over after you list all your income and expenses? Toward whatever Baby Step you’re currently on. What’s a Baby Step? It’s time to share them all. Here’s a quick breakdown:

This list is doable. Just follow the proven order and take on each Baby Step one by one.

Taking control of your money starts with an EveryDollar zero-based budget. That’s how you attack those Baby Steps and make your money work as hard as you do. Soon, you’ll get so far ahead, you won’t be able to look back without high-powered binoculars.