Trying to get your finances in order? Congratulations on taking the initiative! Like any goal in life, it’s best to start with a plan — in this case, you’ll need a plan for your finances.

If your money is flying in and out of your bank account like Boeing 747s at LAX, consider budgeting to be something like an air traffic controller. Seat yourself in the control tower and try the zero-based budgeting method — sticking to it will help direct your finances, help you see where your money is going, and safeguard against fiscal disaster.

Never made a budget before? We’re glad you’re here. There are actually tons of different ways you can create one, but a simple “how-to” Google search can definitely feel overwhelming! The zero-based budget (ZBB) is a popular choice for both beginners and budgeting pros who want to get a solid handle on their spending.

Ready? Let’s dive into it!

What is zero-based budgeting? 

When it comes to zero-based budgeting (sometimes called zero-sum budgeting), the ultimate goal is assigning a job for every cent you earn. With all your money earmarked and accounted for, the idea is to cover each category of expenses, investments, and savings, giving you total control over your finances. 

When the end of the month rolls around, success looks like no dollar going unused.

So what exactly does this budgeting process look like? Consider your own monthly expenses — you’ll have:

  • Static expenses, like housing costs (rent/mortgage payments)
  • Dynamic costs that can vary, like groceries and entertainment
  • Savings or investment goals

By directing your money into designated categories, you can form a plan for every dollar you earn to cover your bills and pad your savings, and this allocation of funds should leave nothing unaccounted for.

Of course, the zero-based budgeting approach does not encourage you to haphazardly blow any money that’s left after paying the bills. Okay, yes, we’re always into a good treat-yourself purchase when you can do it (by all means, buy that Dolce & Gabbana moka pot you’ve had your eye on — if you can afford it.) But money that’s unaccounted for goes against the rules of the budget. 

So if you want to splurge, add a “splurge” category to your budget. Just be sure to think about your emergency fund and your retirement savings too — the goal is to find a home for all your money and make sure all the important things are covered.

Here’s an example of zero-based budgeting 

Let’s visually take a look at how you might put together a zero-based budget. Remember, personal finances are just that — personal. There’s no such thing as a one-size-fits-all budget, but the technique and the strategy of the ZBB can easily be integrated into nearly any lifestyle. 

Here’s how it might break down for an individual earning $5,500 after taxes:

  • Rent: $2,000
  • Savings and Investments: $1,500
  • Food and groceries: $500
  • Credit card payments: $500
  • Child-care/Education Costs: $500
  • Car-related expenses: $300
  • Miscellaneous: $200

Okay — it may not be as nice and tidy as this in real life, but this is the general idea of how to create a zero-based budget. When you add it up, the full $5,500 is accounted for; every cent has a job to do.

The goal is to cover your obligations and put extra money into savings, investments, vacations, the occasional splurge — just make sure you assign all your earnings to a category. 

Advantages of zero-based budgeting

Like we stated above, no budget is universally perfect for everyone — you need to consider your lifestyle, your spending habits, your debts and liabilities, and your disposable income when putting together a type of budget that will work for you. 

The zero-based budgeting process can be extremely effective if you want to:

  • Catch areas where you’re overspending. A few too many nights out, unused subscriptions, impulse buys at Urban Outfitters — zero-based budgeting can identify how much money you’re spending and help you cut back wherever you feel like you should.
  • Be specific about where your money is going. The zero-based budget doesn’t work well unless you’re crystal clear on where your money should go. Like an air traffic controller, you have to account for and direct all of your income, not just most of it. 
  • Customize your budget to suit you. Artisanal olive oil? Street tacos? No matter what you’re into, you can create a category for it, and you can be as general or specific as you like. Zero-based budgeting gives you full control over your budget. 
  • Form a routine with your reliable income. If you have a regular paycheck, this method can help tidy up your spending and plan out your financial future. 
  • Monitor your progress. It’s hard to tell if something is working if you can’t track your progress, right? With this budget system, you can always tell if it’s working or not — and if it’s not successful, it’s easy to go back to the drawing board. 

Disadvantages of zero-based budgeting

We’ve discussed the merits of zero-based budgeting, but what might work for some people might not work for you. 

Consider a different, more traditional budgeting method if you:

  • Don’t want to monitor and write out every expenditure. ZBB is a process that’s pretty in-depth and time-consuming. Every Starbucks order, a pack of gum from the gas station, last minute Uber rides — they all have to fall in a bucket and be accounted for. 
  • Have lots of changing expenses. If your expenses aren’t the same month to month, zero-based budgeting is tougher. It’s not good at accommodating unpredictable expenses and bills. 
  • Have income that fluctuates month-to-month. If your tax season involves you gathering eight different 1099-NECs, zero-based budgeting might not work for you. The method doesn’t love variables — you won’t be able to plan your categories when you aren’t sure how much money you’ll have to spend!

How to start a zero-based budget

By now you’re familiar with the broad strokes of the zero-based budget. Want to give it a whirl yourself? Here’s how to get started on your new budget: 

1. Determine your monthly income after taxes

Start by determining your net pay every month — for example, if you’re paid twice a month, take a look at the deposits in Simplifi or your banking app and multiply the number by two. This is the total cash coming into your bank account every month, which is essentially what you have to spend. If you have any side gigs, be sure to include that estimated income, as well. 

2. Identify your expenses 

This part is where you’ll consider everything you’re spending money on each month. Take a look at your spending habits and see where your money is going. You’ll want to list all your major expenses out as line items, and also consider what else you’re spending on.

Don’t forget to include any regular, automated savings, like an emergency fund or vacation money, and investments, as well!

A good budgeting app like Simplifi will already have your categories filled in based on your expenses in your bank account, making it a lot less time-consuming on your end. If you have to identify your expenses by hand, use your bank statements to find recurring bills and view budget cycles. Just remember to go back a full year so you don’t miss any payments that happen quarterly or annually.

3. Fill in what you know

Chances are that your rent or mortgage payment, auto loan, and car insurance are all the same amount every month. Identify each of these static expenses that you can anticipate to owe every month, and include any subscriptions, credit card minimum payments, and any other recurring charges too. Once you have these fixed amounts identified, you can move forward.

If you’re not using a budgeting app, consider creating a spreadsheet with all the aforementioned info, along with savings goals and other expenses. You can start with a template, but you’ll probably need to customize it heavily before it will fit your unique needs.

4. Estimate the rest

Here’s where science becomes an artform — you’ll need to estimate the rest of your expenses and allocate money accordingly. Think about your grocery budget, your utility bills (which can be hugely affected by seasonality), your entertainment budget, and your outstanding debt. Once you have an idea of what you’re spending, you can start to create a system of cost management and cut out what you don’t use.

Eventually, you want to find a comfortable middle ground that lets you chip away at debt, stay current with your bills, save money, and move with confidence toward your financial goals.