Zero Based Budgeting: Will it Work For You?

There are quite a few different budgeting styles and opportunities for you to choose from. No budget is a one-size-fits-all option because everyone’s finances, family, and living situations vary so greatly.

The zero-based budgeting method is one you may not have heard of before, but it definitely makes sense for some people. In this article, we’ll discuss what zero-based budgeting is and if it might work for you.

Explaining the Zero Based Budget

The purpose of using a zero based budget is to assign a purpose for every nickel and dime of your income, thus leaving our checking account empty at the end of each month/pay period. This is different from living paycheck to paycheck in that portions of your budget will be dedicated to optional spending and saving. Let’s say you bring home $3,500 per month, your zero-based budget could look something like this:

Rent/Mortgage - $1000
Car Payment - $200
Utilities - $300
Groceries - $700
Childcare - $600
Other - $100
Credit Card Repayments - $200
Retirement Savings - $200
Emergency Fund Savings - $200

Notice how every penny is being used for a purpose in this budget, however, you are allocating portions of your budget to paying off debt, saving for emergencies, and saving for retirement. You won’t be left with much in your checking account, but all necessities and some extras have all been taken care of and addressed.

Pros and Cons of a Zero Based Budget

Pros

You will have a better idea of your spending habits and where your money is being used
You can ensure every bit of your money is working for you and towards your financial goals

Con

This type of budget can be time consuming since you need to follow where every dime is being spent.
There is a possibility that you may not have enough money in checking to cover unexpected expenses or bill increases.
If your income is unpredictable or variers, using a zero-based budget can be difficult with the frequency of changes. You can work off an average income expectation, but this can lead to problems if you come up short.

How to Start a Zero-Based Budget

In order to start a zero-based budget, you’ll need to be very familiar with your spending and your income. You shouldn’t jump into this type of budget immediately, but instead, take some time to watch your spending habits and note how you can and would like to allocate your money. Be sure to list out all of your expenses thoroughly. Pay attention to your spending in the following areas:

Rent/Mortgage
Utilities
Cable
Phone
Car Payments
Gas
Dining Out
Debt Payments
Other Regular Expenses

Now, you’ll need to decide how much money you want to dedicate to categories outside of your monthly bills and necessities. To do this, you can incorporate another budgeting tool - the 50/30/30 rule. Essentially, 50% of your income goes towards covering needs, 30% of your income goes towards covering wants, and 20% of your income goes towards your savings goals and debt repayments. You can, of course, modify these percentages depending on what your financial responsibilities and goals are.

At the end of the day, zero-based budgeting has the potential to be a really good starter budget for those who are new to budgeting. However, you do need to be careful with how you allocate your spending because you are not leaving any wiggle room in your checking account to protect against unforeseen spending or bill increases. If you are unsure if this budget will work for your financial situation, consider other budget options such as a cash-only budget or a bare-bones budget.