In this post, I'm going to answer what the zero balance budget is and how you can use it to create a budget. I use this method right now to remain debt-free and setup long-term savings goals.
If you're struggling to create a budget and you've tried other methods like The Envelope Method, then the Zero Budget Method might work for you.
How The Zero Base Budget Works
The zero base balance budget is set up so that your income and expenses balance out each month. You plan every cent that you earn down to the penny.
Zero dollars will be left unbudgeted – hence, the name – zero-based budget.
That doesn’t mean you “spend” every cent you earn. This system encourages you to save your money more effectively.
People also call this the “traditional” budget system. That’s because it requires you to make spending-based categories and allot funds to each category.
Here's why people love the zero-base method:
- Unused funds are easier to move around.
- Rollover funds month to month.
- Move funds to savings when you need them.
- Increase / decrease to categories.
For me, this is a straight-forward and easy to adopt budgeting method. Let me show you how to get started.
How to Start
Follow these steps to setup your zero-based budget.
Step 1 – Assess your Income and Spending
To begin, you’ll want to grab your bank statements, including any credit cards that you use. If you can, print the last 90 days to get a true reflection of your living situation.
With these records in hand, divide your total income for the past 90 days by 3. This will give you an estimate of your average monthly income.
Be sure to write down this amount.
From there, begin logging everything you have spent money on. Do this for the past 3 months to get a clear look at your spending habits.
The first thing that will jump out at you is what you overspend on. We were spending $300+ at Starbucks and we replaced that habit by keeping the ingredients at home ($30). Total savings: $270 per month!
Step 2 – Categorizes your Expenses
Next, grab your spending logs and begin to categorize each expense.
Here are some of the budget categories that I use:
- Auto Insurance
- Subscriptions (Cable, Hulu, Netflix, Gym)
- Health Insurance
- Self Care
- Petty Cash
- School Supplies
- Tree Trimming
Total up how much you’ve spent within that category over the 3-month period. Then, divide that amount by 3 to find your average monthly spending for that category.
Repeat this process until all of your sub-categories are averaged out. This will now become your “expected” expense. Are you following me?
From here, we can begin to make your monthly budget going forward.
To do this, chart out each of your previous categories and your monthly averages for each. You'll have three columns:
- Column 1 = Category
- Column 2 = Expected Expense
- Column 3 = Actual Expense
Then, as you spend, track how much you’ve spent in each category.
Step 3 – Implement and Adjust
Let's take a look at your chart. It would look something like this:
For your income, you have $3150 income.
For your expenses, you have $2257 expense.
That puts $893 leftover for the month.
You decide what category you want that to go to. Are you going to pay down your car loan or start an emergency savings account?
This is where you adjust according to your lifestyle. Where do you need to increase? What do you need to cut back on?
How to Free Up More Money in Your Zero-Based Budget
There’s a reason why the zero balance budget system has remained my favorite. The system allows for adjustments and makes your results easy to understand.
But where can you free up some cash.
The first and easiest is your monthly subscriptions. We're talking cable and cell phone. I used a company called Bill Shark to negotiate down my bill.
I was skeptical in the beginning, but they have a 90% success rate and a “savings calculator” right on their page here.
In the beginning, we realized we had too many payments going to student loans, car loans and mortgage. We used a Super Loan to combine payments. That freed up over $1440 in extra cash. I was able to use that extra to pay down and pay off the consolidation loan faster.
If you're in the same boat with many payments going out, then try the Super Loan. I was surprised how fast it took. Click here to create your free account.
The Pros of Using Zero Based Budget
In practice, this method makes it easier to know exactly where your money is going. And the categories help you identify your overspending areas.
Also, this system can be flexible.
You can increase or decrease categories based on your lifestyle, while also using the extra money to pay down debt or start an emergency savings account.
Should I Use the Zero-Based Balance Budgeting Method?
This method can eat up a lot of time each month. You’ll have to commit to really looking at your finances each month, too. If you have the extra time, then this will work out. If you don't, this will be a bear.
Also, this budgeting system is not ideal for irregular income streams. Self-employed may find limited success with this kind of budget. The same can be said of those with varying expenses like medications.
If you're a college student with little money, then the envelope system might be a better fit.
Of course, you don’t know if a budgeting system will work for you until you try it out. Take action and put this into play to discover your month-to-month spending habits.
I find this budgeting practice rewarding in the long run.
Frequently Asked Questions About Zero Based Balance Budgeting
Zero based balance budgeting allows you to allocate your income and expenses into categories so you can view exactly what you have left at the end of each month. It allows you to cut expenses and make decisions about what to do with the remaining money.
Step 1: Pull the last 90 days of bank statements and credit card statements to review every income & expense.
Step 2: Start allocating each expense to its category.
Step 3: Create an average of expenses for each category. Create an average of income every month.
Step 4: Keep records in real-time to get an actual income & expense chart for the month. You will be able to compare it to your expected average.
Step 5: Adjust your spending and create new goals.
Yes. Zero based budgeting allows you to view each category of expenses so you can cut-back in areas of waste while adjusting for your lifestyle or goals.
The advantages are flexible budgets, focused operation, easy goal-setting, lower costs, and more disciplined approach.
The disadvantages of a zero-based budget is time-consuming and discipline.
Make sure you bookmark this page, too. I’ll be updating it as often as I can to keep you informed on the zero balance budget method.
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This is my favorite budgeting method – easiest way to see all the numbers.
I really need to get discliniped with my budgeting. Which one do you recommend if I only make $1200 every two weeks?
I’ll need more information about your debts, but let’s combine strategies here:
1. First – you’ll want to pay off debts using a debt payoff strategy. I combined all my payments into one loan like this.
2. Then, I created a few budgets along the way starting with The Envelope Method and moving to the 50/30/20.
This is the budget that my wife and I use and we typically save about $30K per year on a $60K salary.