Zero-Based Budgeting: When Spending Your Whole Paycheck Is a Brilliant Move

Here’s a simple question for you: Are you spending more than you earn each month?

Let’s get even more specific: Are you spending exactly what you earn each month?

If you create a zero-based budget, that’s precisely what you’ll be doing. Believe it or not, it’s a simple budget plan that guarantees you’ll spend every penny you make each month in a productive manner.

Sound scary? Trust us: It’s the furthest thing from it.

Read on to learn exactly what zero-based budgeting can help you do.

What Is Zero-Based Budgeting?

The zero-based budget, also known as zero-sum budgeting or ZBB if you’re hip on corporate finance, is a method of monthly budgeting in which every dollar you make — no more, no less — is spent in accordance with your goals and expenses.

If you have $4,500 coming in this month, you’ll allocate exactly $4,500 across all your bills, discretionary expenses, savings funds and financial goals.

How to Make a Zero-Based Budget

Budgeting gets a bad reputation. But the fact of the matter is that setting a great budget doesn’t restrict you — it actually sets you free. And the zero-based budget is the most customizable and flexible budget out there.

Here’s how to make a zero-based budget that fits your finances, lifestyle and goals.

1. Determine Your Income

The first step to figuring out your zero-based budget is to track exactly what you earn each month. That means all your side jobs, bonuses, tax refunds, gifts, irregular income — everything. Any deposit that’s made to your checking account should be accounted for.

For many of us, this will vary month to month. Do your best to make an educated prediction of what your income will be. You can always add to it or take away from it throughout the month.

For our example, let’s say you bring home $4,500 per month.

2. List Your Expenses

Start with the bills you know you have each month, like your rent or mortgage, utilities, cell phone, internet, cable, car insurance and car payment. These should be fairly stable, so you’ll probably know how much money to allocate for each.

Next, go through your bank statements for the last 90 days to see what your discretionary purchases have been. This can sound daunting, but you’re probably more predictable than you think, so you’ll start to see a pattern pretty quickly.

Finally, include expenses that you only pay once or twice a year. This will include bills like HOA fees or license and registration renewals.

Your list might look something like this:

  • Housing $1,455
  • Utilities $135
  • Groceries $400
  • Gas $200
  • Car payment $235
  • Insurance $275
  • Cell phone $145
  • Internet $45
  • Credit Card Payment $500
  • Student Loans $220
  • Savings $0
  • Netflix $15
  • Clothes $145
  • Entertainment $345
  • Eating out $400
  • Gifts $35
  • Miscellaneous $100
  • TOTAL $4,650

3. Set Your Goals

Before you start building your budget, take a moment to consider your goals. Are you excited to eliminate your debt? Trying to pad your emergency fund? Working to catch up on your retirement contributions? All good goals.

Zero-based budgeting is great for achieving financial goals quickly, because there’s no percentage cap on how much money you can put every month toward any one category.

4. Prioritize Your Expenses

You can keep your categories broad (housing, transportation, goals, discretionary) or break them down in as much detail as you want. It may be helpful to only break out the expenses you struggle with overspending on. It’s up to you.

But however you break them down, you’ll want to prioritize them by importance. What’s necessary to survive should always be first, followed by the amount you want to allocate to your financial goals. Then finish with your discretionary expenses.

5. Race to Zero

Depending on where you’re at after budgeting, you’ll either need to shave some dollars off your budget or allocate some extra.

Extra dollars can easily be added to your top-priority goals or used to give a little bump to your discretionary spending.

The example budget above includes $4,650 of expenses, but our income is only $4,500. So in this case, our budgeter will have to decide where to cut $150.

If they’ve prioritized and listed their expenses by importance, they can shave money off from the bottom until they’ve removed $150 from the budget:

  • Clothes $145
  • Entertainment $345
  • Eating out $385 (-$15)
  • Gifts $0 (-$35)
  • Miscellaneous $0 (-$100)

Alternatively, they might cut down in other areas or cut spending categories altogether.

You may have to cut back on one movie or skip a couple meals out to meet these new numbers, but it seems reasonable, right? To save money on groceries, it may simply mean keeping a closer eye on deals and not buying things you don’t really need or tend to waste.

The Advantages and Disadvantages of Zero-Based Budgeting

Zero-based budgeting is simple, but it’s not easy. It takes a lot of upfront commitment to get all those benefits. Here are some positives and negatives to weigh before you dive in.


  • It can help you identify areas of overspending.
  • It allows for a higher allocation of income to financial goals.
  • It’s customizable to fit your income and priorities.


  • It’s more time-consuming than incremental budgeting.
  • It involves a lot of reallocation throughout the month.
  • It’s harder to maintain if you don’t like rigid parameters.

Handling Unexpected Expenses When You “Spend” All Your Money

The biggest concern with zero-based budgeting is “spending” all your money every month. But this shouldn’t be a problem as long as you have a buffer.

Some people keep an emergency fund in a separate or linked savings account. Others will keep an extra $1,000 or $2,000 in a checking account. Still others want a full month of expenses sitting in their account before they start using a zero-based budget.

The choice of how much buffer you’re comfortable with is up to you. But you will want a buffer of some sort in your checking account to avoid being penalized for accidental overdrafting.

Zero-Based Budget vs. 50/30/20

The 50/30/20 method is a popular alternative to the zero-based budget. But what makes them different?

In the 50/30/20 method, 50% of your monthly income goes to necessities, 30% to wants and 20% to savings and debt repayment. Some people use it by itself as a quick and easy system, but it can even be a baseline for zero-based budgeting or other methods.

While both methods are great, they serve different goals. As long as your income can accommodate the percentages, a 50/30/20 budget is perfect for those just starting out.

But if your income is too low for 50% to cover necessities, or if you want to put more than 20% toward savings goals, then a zero-based budget is a better choice for you.

Zero-Based Budgeting Template

Need help getting organized? These budgeting worksheets include our favorite zero-based budget spreadsheet as well as other sheets you can customize to work with.

You’ll be amazed at how quickly you can get ahead without feeling like you’ve robbed yourself of the fun activities you like. You can still do them — you just need to factor them into your budget so you’re not dipping into your savings.

Tyler Omoth is a senior writer at The Penny Hoarder who loves soaking up the sun and finding creative ways to help others. Catch him on Twitter at @Tyomoth.