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Zero-based budgeting, sometimes called zero-dollar budgeting, is a method that gives every dollar of your income a job to do. You should have nothing left over after you create your budget.
The formula is easy:
Your income minus your expenses equals zero.
If you budget for all your expenses in a month, and you still have money left over, you aren’t finished budgeting. Take that money and categorize it toward savings or debt. Once you have zero dollars left to budget, you’re done.
By using this method, you control where all your money goes.
Save More Money and Pay Off More Debt
You will save more money and pay off more debt when you use zero-dollar budgeting.
According to Dave Ramsey’s website, students who take his Financial Peace University classes and use zero-based budgeting pay off 19% more debt and save 18% more money than those who don’t.
Let’s say you have $200 dollars left after budgeting for all your expenses, and you just leave it sitting in your checking account (or lying around in cash). Now it’s so much easier to give in to that impulse to buy something you didn’t budget for. After all, you have some extra money just sitting around.
But if you would have given that money a job to do – such as savings, debt, or even designated some of it for spending money – you would be far less likely to splurge on unnecessary purchases.
Personally, I take any money that’s not needed to pay bills or expenses and use it immediately for its intended purpose at the beginning of the month. For example, I immediately transfer savings to my savings account or make a lump sum on extra debt.
If I don’t, I know that money is sitting in my checking account and I’ll be tempted to take a little off the top and move it to the restaurant or entertainment budget. I’m a spender by nature (not a saver), so I have to give every dollar a job and then put it to work immediately.
How to Use Zero-Based Budgeting
You can get started with a zero-based budget by following these three steps:
- Add up your monthly income. Put it on paper, use a spreadsheet, or try a budgeting app.
- Add up your monthly expenses. Include all your monthly bills and everyday expenses.
- Subtract your income from your expenses until the result is zero.
I think most people should be using a zero-dollar budget. See my post on creating a budget for a more in-depth look at using this method.
Zero-Based Budgeting with Irregular Income
It’s more difficult to budget with irregular income, but you can still use the zero-based method. Here’s how to do it:
- When you’re creating your budget, use the lowest amount you expect to earn each month for your income. If you aren’t sure, check your previous year’s earnings and use the lowest amount you were paid.
- Budget for your monthly bills (rent, electricity, etc.) first and then your monthly expenses (groceries, gas, etc.) in order of importance. If the lowest amount you earned doesn’t cover it all, budget for the absolute necessities – think things that keep you alive – and cover the rest with whatever additional money you make that month.
- Budget for savings and extra debt payments last after all your more important bills are paid.
Success with a Zero-Based Budget
Zero-based budgeting is easy once you understand how it works. Just make sure every dollar is accounted for and you’re on the right track.
You might find you need to adjust, especially in the beginning. Don’t worry about it! If you thought you could get by on $350 for groceries, but it turns out you really need $400, just adjust.
During your first month, you might be shuffling money around a lot until you figure out your needs in different categories.
If you need to take some money from the entertainment budget and move it to the grocery budget, just do it. (I would caution against taking money from the grocery budget and moving it to the entertainment budget, though. You don’t need entertainment, but you do need food.)
After a couple months, you’ll know exactly how much you need to budget in each category and you’ll be on your way to reaching your financial goals.
A zero-based budget can help you keep your expenses low, control your spending, pay off your debt, and save money for the things that are important to you.
What is your experience with zero-based budgeting? Leave a comment below and let us know!