Zero-based budgeting changed my life! It has helped us save more money and spend guilt-free. I firmly believe everyone should have a budget, whether you have $100 or $100k coming in each month. Here are some of my tips on budgeting and why a zero-based budget is the best way to tell every dollar what to do.
Personal finance is one of my favorite topics! I’ve always loved number crunching, and budgeting combines number crunching with practical, real-life decision making.
Most people think budgeting means you can’t spend your money. It’s actually the opposite!
A budget is simply a spending plan, and a budget gives you the freedom to spend without feeling guilty. I truly believe that just like staying mindful of fitness and nutrition is important for living your healthiest life, keeping a close eye on your spending is imperative to healthy finances.
How I got started budgeting
When I first graduated from college, moved into my own apartment, and got my first job, I followed the “just make sure the bank account isn’t near zero” method of money tracking. It worked for a while because both my income and my expenses were small and easy to keep an eye on.
Once I bought my first house, I started to have some unpredictable expenses and created my first budget spreadsheet.
My first budget was a zero-based spreadsheet. I had rows on the top for income, rows in the middle for expenses, a row for savings, and the bottom goal was to get to zero. For years I used this spreadsheet, which you can see in this NERD KERF series. I actually still use a version of it to plan for the future.
But for everyday budgeting, I use the YNAB app.
The budgeting app I use: YNAB
As you guys know, I’ve used YNAB for budgeting since 2016 and love it. In fact, I’m obsessed with it. I literally could not live without it, and I use the app on my computer and phone every single day. YNAB is specifically designed to help with zero-based budgeting.
I’ve used some of the other budgeting apps (I tried Every Dollar for a month a long time ago, and I use Mint as a reference tool) but YNAB is the cleanest and most user friendly, in my opinion. Read my posts about it here and here. I also use the site Personal Capital to track my overall wealth and net worth. Their retirement calculator is the best I’ve used.
What is Zero-Based Budgeting?
Zero-based budgeting is a budgeting method that forces you to give every dollar a job. When you practice ZBB, you assign every dollar of your money to particular categories (not all of them are spending – some are savings): monthly expenses, retirement, payment of debts, annual expenses, tax savings, travel, food, etc. The main goal of this budgeting system is that your income minus expenses and savings should be equal to zero by the end of the month.
Simply put: money in – money out = 0
The benefit get from a zero-based budget is it prevents you from spending money that you don’t have, discourages overspending, and creates more accountability in your budget. You’re more mindful of where your money goes day by day but also month by month. It encourages saving because you are forced to put your money somewhere. A very simple ZBB might have one “savings” line item that all goes into one bucket, and someone with a more detail budget might have a savings category with sub categories of travel savings, new car savings, buy-a-house savings, retirement savings, etc.
Zero-Based Budgeting vs. Traditional Budgeting
If zero-based budgeting requires you to give every dollar a job, how is it different from a “normal” budget? Understanding how they are different can help you wrap your mind around the concept of ZBB. Here are key differences of zero-based budgeting and traditional budgeting.
Zero-based budgeting prepares a new budget each month.
Traditional budgeting uses last year’s (or last month’s) budget as the template for the current one. So you look back to the past to create a plan for the future. You have to guess and predict what income will be. On the other hand, ZBB starts with the cash in your account RIGHT NOW and tells you to assign it to categories for the days and weeks ahead. While a traditional budget works fine if you have a very predictable salary and life, ZBB is ideal for those with variable incomes (like the self employed!)
Zero-based budgeting is income focused.
As they say in YNAB, your goal is to live on last month’s income. If you have a baller month, you have more dollars to spend in the month following (even if most of those go to savings). If you had a lean month, the month following will have a leaner budget. When you live on last month’s income you’re less likely to overspend and you don’t need to worry about the timing of paychecks throughout the month. It you’re just getting started and used to living paycheck to paycheck, it does take some time to build up enough buffer to live on last month’s income. You have to make some deep sacrifices in the beginning to build the buffer, but once you do you can go back to “normal” spending.
Zero-based budgeting promotes saving.
ZBB promotes saving because you must use every dollar. It changes your mindset around “extra money” in your budget. Instead of just having a pile of money at the bottom of your account, it forces you to think about and plan what you might use that money for in the future. It also forces you to plan for one-a-year expenses (like memberships, car insurance or life insurance – all the insurances!).
Here’s an example: Instead of getting annoyed that $800 car insurance is due every August, you create a line item in your budget for it and put away $66 a month. When August rolls around, you magically have $800 saved. You can also have line items for things like your health insurance deductible or home repairs. You’ll probably tap into both throughout the year, and if you have funds ear marked for those you won’t have to use your vacation savings to pay them (unless you didn’t save enough, of course.)
How to Make a Zero-Based Budget
You can use a piece of paper, a spreadsheet, a notebook, or find a budgeting app that promotes zero-based budgeting, like YNAB or Every Dollar
Determine your pot of money on the first of the month.
Whatever your bank account(s) balance is on the first of the month is your pot of money to divvy up. This should include all of last month’s income: paychecks, small business income, refunds, returns, side hustles, venmos, literally anywhere you have money coming in. Once you have the total of that pile of money, you’re ready to divvy it up into categories.
List your monthly expenses.
First on the list should be those items that you cannot live without. So food, shelter, utilities, and transportation, which Dave Ramsey calls the Four Walls. Then there are things like insurance, any regular appointments you have, etc. Once you have listed your main fixed expenses, you can write down the rest of your monthly expenses and spending. Saving and giving should also be included in your list. If you have debt, make sure you either include your minimum payments or the amount you plan to put towards debt each month.
Create categories for unexpected expenses.
There will be unexpected expenses such as when you get invited to a wedding, or your child gets invited to a friend’s birthday party. Unforeseen expenses such as these should belong to a separate category and be accounted for. It might be hard to think about all of the unexpected expenses that come up throughout a year at first, but over time you’ll realize what some are. For us, an example is that every June we have to pay $100 for our Cville city trash removal. The time this came around I was annoyed, but I created a line item in my budget for it and so now it’s just a regular expense I plan for each month to be paid once a year.
Include seasonal expenses and savings.
Seasonal expenditures are the ones which you know that come up every year like birthdays, anniversary, Christmas, etc. You know the exact dates so you will be able to project how much you want to set aside for this specific occasion per month before it arrives. This can also be things like your car tag renewal fees, property taxes, summer camps, spring break travel, etc. So when the time comes for you to pay, it will not be such a big chip on your savings or emergency fund because they have already been set aside.
Subtract your expenses from your income & get ZERO.
Keep putting your money into categories until you get zero. Your goal in a zero-based budget is zero, as the name suggests. It does not mean an actual zero in your bank account but a ZERO when you subtract all your planning expenses and savings from your income. The main focus of the zero-based budget is for every dollar of your income to have a name, a place, an intention.
Keep track and edit.
No budget is going to go 100% as planned in reality. Even if you have everything listed to the tiniest of details, you’re going to have to make changes. This is THE HARDEST part for me because I want to be a perfectionist but I can’t predict the future! It’s also the number one reason I love budgeting apps as opposed to spreadsheets – the apps are much easier to edit because all the math is done for you within the app and you don’t have to create your own formulas. As YNAB says, roll with the punches of life!
Tips for Zero-Based Budgeting Best Practices
- If your income is less than your expenses, you’ll end up with a negative number. That is not a good feeling! But it’s better to see a negative number when you’re on day 1 of planning than if you’re on day 31 looking back. You have to be honest and realistic with yourself if you want to be a good budgeter.
- When your income is higher than your expenses, you get to decide where the extra goes. (That’s obviously the fun part 😉 ) How you divide it up is up to your personality. I have tried one big pot of savings and I have tried a million small categories, and I’ve found that somewhere in the middle is ideal. I like to have savings budgets for home, travel, retirement, and fun.
- If someone asked you: “How much to you bring in each month and how much do you spend?” could you answer that question? Everyone should know the rough answer to that question. Even if your husband does the budget or you make a lot of money. It’s a responsible number to know. The more you know, the more you can be smart with your spending and saving.
- If you have an irregular income or are paid on commission, the rule of thumb is to base your budget on a low earning month. You can create a “hill and valley” category in your budget that can help to fill gaps on lean months.
- Check in with your budget at least once a week to reconcile the expenses you’ve incurred. The more you do this, the more closely you’ll watch your spending habits. I check in with my budget once a day (every morning) and sometimes more!
Do you budget?
It’s empowering when you have control over your money instead of it controlling you. If I had all the time in the world, I would love to help anyone who doesn’t budget get started. (I’ve helped several of my friends get set up in YNAB.) So I would love to know if you guys use a different budgeting method or tool and also how you budget for your business or family.
More NERD KERF Talk
- We needed a budget
- Financial Independence + The FIRE Movement
- Six months of using YNAB
- How finance is like fitness
- The Numbers (a 2011 post and my first on finances)
Susan says
Fellow budgeting nerd here! I’m an accountant and I love doing our home budget. Years ago I read a book called Debt-Free Living by Mary Hunt. I started using the Freedom Account method. We opened up a second checking account and it’s literally called Freedom Account in our online banking site. At the end of every month I transfer over a lump sum to that account and have a spreadsheet where I keep track of the categories, such as clothing, annual fees, property taxes, lawn care, school, vacation, auto and water utility. My husband and I agreed on the categories and figured out the annual amounts and divided by 12 to get the monthly deposit. Now when those expenses come up it’s NBD and I just account for it in that category. We have been doing this for 6 years and it is a comfort to me to know we have that built up.
Kath Younger says
NICE! That sounds a lot like the “True Expenses” in YNAB. It sure makes you feel better about those annoying yearly things!
Shana says
This is so timely! I LOVE budgeting (and I realize how nerdy that sounds!). Just last night I was wondering if people would pay me to help them do their budget (lol). Budgeting is a solve-able problem which is probably why I enjoy doing it so much. It puts you back in control instead of letting life happen to you. We’ve been doing the Dave Ramsey plan since February of 2019 so I use Everydollar (the free version). Budgets aren’t as scary as they sound!
Kath Younger says
100% agree with you about problem solving!! I also want to be a budget coach : )
Shawnessy says
Um.. yes, I would!!
Andrea says
My husband and I have been together 17 years and we’ve never formally budgeted nor had any issues with being able to save or having debts pile up. Some of that is the luxury of having well paying jobs, but also neither of us are particularly big spenders or shoppers so that’s probably why it works. I typically am a hyper-organized person in every other area of my life, but for some reason I feel like meticulously tracking a budget and where every penny goes would really stress me out!!
Kath Younger says
Haha – if it ain’t broke! I listened to a podcast interviewing Jesse Mecham (YNAB founder) and the host had never had a budget. He had systems though and was never short of cash. Jesse said he probably didn’t need a budget (imagine him saying that sentence!). But if you are hyper organized, I bet you would get joy of out a simple budget – one that doesn’t have too many categories. I don’t have one for “diapers” for example – just all household stuff.
Ali says
One reason budgeting stresses me out is the categorizing piece. For example, if you make one big trip to Target for $200 do you then go through the receipt line by line and separate out each item in each category? Food, clothing, cleaning supplies, household items, personal care etc? (99 cents for this, $2.49 for that!) Just the thought of doing that makes me want to quit!!
Kath Younger says
NO!! Definitely don’t break up receipts – that is way too tedious! (I know some people do it, but I agree with you that just stresses me out.) Think bigger 1) Wants 2) Needs 3) Fixed monthly 4) Spending 5) Annual 6) Savings. You can of course have sub categories in these bigger categories.
For example: I have a line items for Groceries, Dining Out, Spending, and a line item for Household.
Sometimes I go to Target and buy something fun and it goes into Household. And sometimes Dining Out and Groceries get blurred. Sometimes I buy a household item at Whole Foods or food at Amazon. Whole Foods is always Groceries and Amazon is always Household (or sometimes spending!) but you get the picture. BIG categories and you can always move money between them.
Emily says
Great post! I like keeping a spreadsheet of our monthly expenses and sending what’s left at the end of the month to savings. We’re also not extravagant spenders so it works and we can easily see if we’re starting to spend too much in one category. I also love having a line item for insurance and property taxes each month so I know the money will be there when it’s needed. I should start doing this for gifts too. All my nephews were born in the fall and then it’s Christmas right after the birthday train so it can can be a challenging season for gift budgeting!
Charmaine Ng | Architecture & Lifestyle Blog says
Such an interesting budgeting concept! I need to start recording how much I spend… right now I’m all over the place with my finances!
Charmaine Ng | Architecture & Lifestyle Blog
http://charmainenyw.com
Laura says
Getting on a budget (I’m a huge Dave Ramsey follower) changed my life. It started when we had just bought a house, had a toddler and was newly pregnant. And then we discovered a terrible water leak and insurance wouldn’t cover it. I cried when the contractor quoted the fix. And I decided then I had to get in control of my finances. We simply couldn’t live like that. I discovered Dave Ramsey, got on every dollar and the rest is history. I too love planning my month out via our budget. Now that we are debt free aside from our house the budget is more freeing and we can save up for what we need/want. Glad to see another budget nerd like me out there!
Kath Younger says
Thanks for sharing your story! I love Dave’s show – so inspiring!
Jess says
I admit this confused me at first. Zero based budgeting in the business world starts at zero and then you have to justify every dollar as you build the budget. I guess I never spent time reading about personal budgets because I’ve always used methods my mother taught me when I was a kid. I don’t know how people function without a budget!
Katharine says
Agreed, same here! The common business term “zero based budgeting” has a really different meaning than this (lots of investopedia articles about this) .
This is a great idea, but it’s not zero-based budgeting!
Kath Younger says
Well it IS known as so in personal finance too, but I agree it’s confusing and different from the biz version. This really should be called “every dollar budgeting” or something different.
Jillian says
I have seen this called “zero-sum budgeting” before which makes a lot of sense, since the goal is to sum to zero (not base anything off of zero)!
Sarah says
I tried YNAB years ago and it didn’t work well for me because they really pushed hard for you to have a whole extra month’s salary from the start, so I instantly felt like a failure. I just tried it again recently and was so happy that they’d eliminated that part (or it’s not a big focus at least)! It seems to work much better for me so far.
Kath Younger says
That is still one of their four “rules”, but you can work the app however you want! It’s hard to create a buffer but once you have it it’s easier to keep going forward. Glad you found a way to make it work!
Liz says
We budget every dollar, always. My husband keeps a spreadsheet (shared with me, of course) that goes 8 months in the future, so we always have a snapshot of what our finances *should* look like in the future. We have a bi-weekly budget for groceries, gas, and fun that we keep a running tally of on the fridge. Then all other expenses, bills, gift budgets, kids needs, etc all go into the spreadsheet. We aren’t able to always follow it exactly, but it definitely helps keep us in line. I don’t know how people don’t keep a budget, I did that when I was younger and got myself into a lot of irresponsible credit card debt that way. Now we track every dollar that comes in and every dollar that goes out. I never realized that we follow a zero based budget, but that’s exactly what we do. Every dollar has a place.
Kath Younger says
Yeah I feel like zero based is what a lot of people do they just don’t know that’s what it’s called 🙂
Shawnessy says
Thanks for this post. At the end, I thought you were saying you’d love to help anyone set up a budget and I was like, SIGN ME UP!! Seriously, though.. I have tried mint.com and even YNAB a couple of years ago. The huz and I just bought our home and are finally in a place where we are not living paycheck-paycheck. I am dying to get a grip on all this and “live like a responsible grown up” but I struggle. I will give YNAB another shot.
Thanks, Kath!
Elizabeth says
I found Dave Ramsey through you last year and it really gave me a jumpstart on getting control of my finances. I don’t agree with his politics AT ALL but I believe in his ideal of people taking personal responsibility for their finances and cleaning up their financial messes. (His podcast is free and if you listen to a handful of them you will get the gist). Having peace regarding your household finances is such a gift. I have irregular income and utilize a “hill and valley” account to rely on in lean months and add to in flush months. Your budget doesn’t have to be perfect. It’s just a visual accountability partner (however detailed you wish) that helps you stay on track and get to your goals faster. It’s amazing how much money every one of us wastes every day when we aren’t paying attention. One of the great things about a budget is that it gives you permission to spend on items you prioritize. For example, if you put $200 in a “fun” account per month, you can spend that guilt free and enjoy it knowing that it is not impacting your other goals. One of Dave’s sayings that struck a chord with me was “you can wander into debt but you can’t wander out.” So true. Have purpose to your actions and you will achieve your goals.
Also, just a tip to younger readers-start investing in your retirement now (even just $50/month). Your future self will thank you! I wish I had listened when someone told me that 25 years ago! Good luck everyone!
Kath Younger says
Love all of this!!! (And agree with you on DR politics – I like him for $ advice and that’s it 🙂 )
Phoebe says
ha – I am too lazy for this. With each pay cheque I transfer very healthy set amounts to my savings and retirement accounts first, and then I can do what I want with the rest. At the end of the month, what is left over goes into retirement. It helps that I am naturally frugal. I read The Wealthy Barber 30 years ago and the general concepts stayed with me.
Rebekah Gamble says
I think the zero based budget system has its pros and cons but for someone who is interested in really tracking every dollar and trying to stay ahead it could work wonders. I’ve been using the “no budget budget” since I enjoy the flexibility that comes with spending my money as I please with no spend days in between. Usually any money I don’t spend ends up in a savings account throughout the week so I can count it as a money win.
Allen Alfred Francis says
I think zero-based budgeting is advanced budgeting for people who are financially literate and have savings. People who are financially illiterate, don’t save, struggle to budget, and live paycheck to paycheck would probably struggle with zero-based budgeting because they don’t have money. Don’t get me wrong, I think zero-based budgeting is great, but if you’re struggling financially it would be hard to do. I think one has to master the traditional budget and keeping a spending diary before graduating to ZBB.