The Zero-Based Budget
Updated on March 23, 2019
Zero-based budgeting tells you exactly what to do with each dollar you earn. Also known as the zero-sum budget, the zero-based budget’s main goal is to give every penny of your income a purpose. This means at the end of the month your income minus your expenses will equal zero. Now this doesn’t mean you will have zero dollars in your bank account, it just means you have designated 100% of your income to a specific expense category like savings, money for bills, or investing.
In a nutshell, zero-based budgeting forces you to know exactly where your monthly income is going before the month starts.
How To Start A Zero-Based Budget
In order to get started with your zero-based budget, you’ll need to follow these simple next steps.
1. Figure Out Your Monthly After-Tax Income
The first step is figuring out your monthly income after taxes. If you get paid on a weekly or bi-weekly basis, you’ll have a do a little calculating. If you’re paid weekly, simply take your weekly after-tax income, multiply by 52, then divide by 12. If you’re paid bi-weekly, simply take your bi-weekly after-tax income, multiply by 26, then divide by 12. This is a simple way to get a rough estimate of how much income you take home each month.
If you’re paid on an irregular basis like commission-based incomes, you’ll want to use a number that reflects a low earning month. This will make sure your budget isn’t doomed from the start.
2. List Your Expenses
Next, you’ll need to make a list of your typical monthly expense categories. These will be things like food, transportation, and rent. You’ll also want to add irregular expenses that you know will pop-up throughout the year like holiday gifts, car registration fees, and taxes. Adding an expense category for random emergencies is also a great way to prepare for the unpredictable things life will throw at you.
3. Add Purpose To Your Income
After you have your list of expense categories, you’ll want to distribute your monthly income to each category until zero dollars are left.
As an example, let’s say you make $2,000 a month and your monthly expenses include rent, transportation, food, student loans, and savings. You would need to divide this $2,000 over these categories until nothing is left. If your expenses exceed your monthly income, you’ll want to consider cutting back your expenses or finding new ways to make additional income.
4. Track Your Budget
Once you know your monthly income and expenses, you're ready to put your zero-based budget into action. As you spend money throughout the month, make sure you’re tracking how much money is going towards each expense category. At the end of each month, analyze how well you stuck to your budget and if there are any adjustments necessary.
If you don’t mind the extra effort required to control every dollar of your income, the zero-based budget might be the best option for you.