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What is Zero-Based Budgeting?

In this article

  1. Zero-based budgeting definition
  2. Pros and cons of zero-based budgeting
  3. Zero-based budgeting example
  4. Tips to get started with zero-based budgeting
  5. Conclusion

Making a budget can help you take control of your money. Find out what zero-based budgeting is and if it is the right budgeting method for you.

Rebecca Lake • August 11, 2021

Making a budget can help you take control of your money. And regular budgeting can make it easier to pay down debt, save or reach other money goals. 

The biggest challenge? Finding the right budgeting method for you. 

If you want to account for every dollar you earn, then zero-based budgeting can be an option. This method can also help you avoid wasting money each month. 

Understanding zero-based budgeting can help you decide if it’s a good fit for managing your money.

Zero-based budgeting definition

If you’ve never heard of this method before you might be asking yourself, what is zero-based budgeting? And you’re in the right place.

Here’s a simple way to define zero-based budgeting:

Zero-based budgeting means assigning every dollar of income to a specific purpose so there’s zero money left over. 

Typically, zero-based budgeting means allocating money using budget categories, such as:

  • Expenses
  • Savings
  • Debt repayment

Your expense category can then be broken down into fixed versus variable expenses or needs versus wants. And if you’re working toward different savings goals, you can further divvy up the savings category.

Zero-based budgeting isn’t a new idea. It’s actually been around since the 1970s, when it was introduced as a budgeting solution for corporate and government entities. 

That’s where the original zero-based budget definition comes from but – since then – it’s been adapted for everyday budgeting. 

How does a zero-based budget work? 

Making a zero-based budget starts with adding up all of your income for the month. This can include income from:

  • 9 to 5 jobs
  • Part-time jobs
  • Side hustles
  • Refunds or rebates
  • Government benefits
  • Child support or alimony payments, if applicable

Once you have your total income number, you’d assign each dollar a specific job. 

So again, you could allocate part of your budget to spending, part of it to saving and part of it to paying off debt. The goal is to have your expenses, savings, and debt repayment equal your income. 

That’s where the zero in zero-based budgeting comes from… The end goal should be having zero money leftover or wasted! 

Zero-based budgeting vs. traditional budgeting

Traditional budgeting methods follow some of the same steps as zero-based budgeting. 

It works like this:

  • Add up your income
  • Add up everything you plan to spend
  • Subtract your spending from your income

The difference is that with traditional budgeting methods, it’s possible to have money left over. 

You’re not trying to make your expenses directly equal your income. And it’s even possible that your expenses could be more than your income, resulting in a negative budget number. 

In that case, you’d need to go back and review what you’re spending to see what you can cut out. Whereas zero-based budgeting assumes that you’re only spending or saving exactly what you make. 

Pros and cons of zero-based budgeting

Like any other budgeting method, zero-based budgeting has both advantages and disadvantages. So it’s important to look at both sides if you’re thinking about giving it a try. 


  • Doesn’t leave room for wasted money or unnecessary spending
  • Makes it easier to see where your money goes each month if you’re not used to tracking expenses
  • Easy to customize, based on how you typically spend money each month


  • Can be more time-consuming than other budgeting methods
  • May be difficult to budget if month-to-month income is not consistent
  • Requires you to be more hands-on since there’s no room for impulse spending

The key characteristics of zero-based budgeting are: detailed accounting of expenses, and having no money left over. 

If you’re already in the habit of keeping track of every dollar and cent, shifting to a zero-based budgeting model may not be that challenging. On the other hand, if you’re less diligent about tracking expenses or your income is never the same two months in a row because you freelance or do gig work, it could be harder to adapt to this budgeting style.

Zero-based budgeting example

Creating a zero-based budget isn’t that difficult if you have an example to follow. Here’s what a zero-based budget might look like, assuming you take home $4,000 a month. 

Transportation (gas, insurance, etc.)$250
Student loans$400
Car payment$100
Credit card payment$200
Emergency fund$300
Retirement $200
Total spending$4000

This is a very simple zero-based budgeting example, but it illustrates how you can divide up income to end up with a net-zero result. 

Tips to get started with zero-based budgeting

If you want to try zero-based budgeting, there are some things you can do to improve your odds of being successful and sticking with it. 

Here are some helpful tips for making a zero-based budget system work:

  • Calculate your average income. If your paychecks are consistent month-to-month, this part of the zero-based budgeting process shouldn’t be that difficult. But if your income fluctuates, you may need to track your earnings for a few months. This can help you understand what your average income adds up to.
  • Track your spending. Tracking expenses is one of the key characteristics of zero-based budgeting. So if you’re not doing this yet, it’s helpful to start a running tally of what you spend in a month. You can do this with a notebook, spreadsheet, or budgeting app.
  • Categorize expenses. Once you’re tracking expenses regularly, look at where you’re spending your money. Breaking expenses up into categories can help with deciding how to divide your income each month. 
  • Review your savings goals. Saving can be easier when you treat it as a line item in your budget. So look at how much you’re currently saving and consider whether you want to keep that same number in a zero-based budget or allocate more to savings each month. 
  • Review your debts. If you have student loans, credit card payments, or other debts, consider how much you’re paying to them each month. Then look at what you have leftover in your current budget to decide if you want to put more of your income to debt repayment in a zero-based budget. 


Zero-based budgeting can help you figure out where the money leaks in your budget are coming from. Once you’re in tune with your spending, you can take a closer look to figure out what to keep and what you might be able to cut back on. The more you can cut, the more money you may be able to free up for debt repayment or to grow your savings account balance. 

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