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Budgeting

What is Zero-Based Budgeting?

Read this article to learn more about zero-based budgeting and if it can work for you.
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Perhaps you’ve heard of zero-based budgeting before or you’re completely new to the term. Either way, calculating a zero-based budget is relatively simple and can be an effective way for you to keep track of your money.

Let’s dive into zero-based budgeting and explain exactly how it works and why it’s important.

How To Create Your Zero-Based Budget

A zero-based budget essentially means that if you subtract your expenses from your income every month, that difference should be zero. Now to clarify, this does not mean that you frivolously spend every last dime of your paycheck. However, it does mean that you account for every last dime in your paycheck. It’s a way to keep track on the money you spend, save, and invest.

Step 1 – Take Note of Your Monthly Income

You must first write down your total monthly income. Include any side hustles or other odd jobs that also contribute to your monthly source of income.

Step 2 – Track All Your Expenses

Take note of not only how much you typically spend in a given month, but also the places or categories you spend your money. How much do you spend on groceries, rent, utilities, phone bill, children, pets, school, entertainment, and other expenses?

Step 3 – Subtract Your Monthly Expenses From Your Income

Ultimately, you want this equation to equal zero. Your income is typically a fixed amount unless you are actively looking for a better paying job or trying to find passive sources of income or side hustles. Thus, your expenses will be the most important aspect of this equation.

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While zero will most likely not be the first number you are left with, you can try to organize and redistribute your categorized expenses in order to get your equation to equal zero.

If you are spending more than you will make in a month, you’ll obviously want to cut back in different areas to ensure you don’t end up in any sort of debt.

If you are spending less than you make, that’s always a good thing and you may want to allocate those extra funds into your savings account, student loans, emergency fund, or another area.

Keep in mind, mastering the zero-based budget may take a few months to master, but after a few calculations and altering your budget, you’ll be able to efficiently account for every dollar in your income. 

Why Have A Zero-Based Budget?

Now that you understand how to calculate and create a zero-based budget, you may still be wondering why it’s important.

This type of budget may not work for everyone, but it can be a great way to keep track of how all your money is flowing into and out of your bank account.

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A zero-based budget is a personalized way to customize your expenses as you continuously tweak your budget and expenses in order to make everything balanced at zero. Ultimately, this style of budgeting is designed to keep track of each month’s income and recognize how you can use your money to reach your financial goals whether that include getting out of debt, saving money, investing, or paying off a loan.

Written By

Travis Barnett is an expert in finances backed by 10 years of experience as a financial analyst at CNB. He graduated from UCLA's Anderson School of Management in 2010 and has been in the field ever since. Travis now enjoys sharing his business experience with others as a financial writer in San Diego. In his spare time, he enjoys hitting the links and working on his golf swing.

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