Zero-Based Budgeting (ZBB): What it is and How it Works

So you’re looking for a new budgeting method? Or maybe just trying to find one that's a better fit? Either way, you’re already on the winning side of this. Choosing the budget is the foundation for how to budget money for beginners. 

With almost 30% of Americans not having a budget and the average household debt being in the six figures– budgeting is quickly becoming a necessity.

Lets look at the popular Zero-based budgeting method (ZBB) and how it can help you get your money on track.

What is Zero-Based Budgeting?

Zero based budgeting is a budgeting method where every dollar gets a role in the upcoming month. You start from zero and assign each dollar to expenses, savings, debt payments - you name it. 

At the start of the month, your budget is like a blank canvas, and you're the artist deciding where each stroke of your financial brush goes. No assumptions, no "this is what we always spend on groceries." It's all planned, deliberate, and purposeful.

How Zero-Based Budgeting (ZBB) Works

At the start of each month, you take your allotted income from all sources (your salary, your spouse's salary, passive income, etc.) – add this together. This is your total income. 

Next you take every dollar and you allocate it to a new expense. This could include:

• Your mortgage
• Your car loan
• Insurance
• Groceries
• Gas
• Emergency fund
• Debt payoff

For example, say you earn $3,000 a month. ZBB would have you allocate this fully: $1,000 for rent, $500 for groceries, $200 for utilities, $300 for car payments, and so on, until you've assigned every last dollar. 

Even savings goals and debt payments get their share of the income. The key is, by the end of your budgeting session, you should have zero dollars left unassigned. 

The Benefits of Zero-Based Budgeting

Whether you're trying to pay off debt, save for a big purchase, or simply build a better budget, zero-based budgeting can help you get there. Zero-based budgeting offers several benefits including:

• Helps you eliminate unnecessary expenses: By starting from scratch, you can identify expenses that are no longer necessary and eliminate them from your budget. This can help you save money and achieve your financial goals faster.
• Encourages a more thorough understanding of expenses: Zero-based budgeting forces you to justify every expense, which can lead to a better understanding of how your money is being spent. This understanding can help you make better financial decisions and avoid overspending.
• Provides greater transparency and accountability: With zero-based budgeting, you have a clear picture of where your money is going, making it easier to hold yourself accountable for your spending. This can help you stay on track with your budget and avoid overspending.

Why Use Zero-Based Budgeting?

Zero-based budgeting provides a clear structure for your budget, allowing you to consider all the costs associated with each project or activity. This approach helps you understand the required funds for each activity and avoid wasting money.

Zero-based budgeting example

Lets look at another example of zero-based budgeting in action. 

Say you have a problem with overspending each month (we’ve all been there. You know your monthly income and your expenditures but you have a loose budgeting method that doesn’t leave you with an exact count of all your money. 

This is the perfect candidate for a zero based budget.

Oftentimes (especially with personal finance newbies) it's easy to set loose expectations and break out of your finance goals by accident. 

Credit cards are a big problem with this. When you don’t see the money physically leaving your wallet, it can get you overspending. 

Let's picture Sarah, a debit card enthusiast who loves the thrill of one-click purchases on Amazon. However, her budget often veers off the track like a rogue shopping cart. Zero-Based Budgeting to the rescue.

Sarah earns $2,500 a month. She decides to give every dollar a role, aiming to avoid those sneaky Amazon temptations and subscription surprises. Here's her ZBB breakdown:

• Rent: $800 - The big kahuna of her expenses, non-negotiable.
• Utilities: $150 - Keeping the lights on and the water running.
• Groceries: $300 - Essential, but watch out for those impulsive snack buys.
• Car Payment and Gas: $350 - Gotta get to work, after all.
• Insurance (Health, Car, etc.): $200 - Adulting essentials.
• Savings: $200 - For future Sarah, who might want a vacation or a new laptop.
• Debt Repayment: $150 - Slowly chipping away at that credit card bill.
• Subscriptions (Netflix, Gym, etc.): $100 - Time to review and cancel any that are just collecting digital dust.
• Personal Spending (including Amazon): $150 - Here's where discipline kicks in. Sarah earmarks this amount specifically for her Amazon adventures, keeping a close eye not to exceed it.
• Emergency Fund: $100 - Because life loves surprises.

Total: $2,500

In this scenario, Sarah uses her beloved debit card but keeps her spending in check by categorically assigning every dollar. Her Amazon escapades now have a budget cap, and those sneaky subscriptions? They're under control, with only the essentials making the cut. By the end of the month, her budget balances to zero, and she avoids the financial wilderness she used to wander into.

Zero-Based Budgeting vs. Traditional Budgeting

The difference between Zero-Based Budgeting (ZBB) and traditional budgeting is like comparing a custom-tailored suit to one bought off the rack. Traditional budgeting often works off historical spending, using last month's or last year's expenses as a baseline and making minor adjustments for the new period. It's like saying, "Well, I spent $500 on groceries last month, so let's start there."

On the flip side, ZBB starts from zero each time, without assuming past expenses are necessary for the future. Each month, you justify every single expense from scratch. It's asking, "Do I need to spend $500 on groceries this month, or can I adjust this based on my current situation?" ZBB doesn't care what you spent before; it's all about what you need now.

This approach can be more time-consuming but offers a laser-focused view of where your money should go, making it ideal for people looking to make significant changes in their financial habits or to meet specific financial goals.

Pros and Cons of the Zero-Based Budgeting Method

Although I feel any budget that keeps you on track is a win–Some do find the ZBB method to be the winning fit while others rely on a more top-down approach.  Here’s your advantages and disadvantages to consider. 

Advantages of zero-based budgeting

• Enhanced Awareness: ZBB forces you to scrutinize every expense, fostering a deeper understanding of your spending habits.
• Eliminates Waste: By justifying each expense every month, you're more likely to identify and cut out unnecessary spending.
• Flexible and Responsive: Adapts to changes in your income or financial situation, as every month starts with a fresh budget.
• Goal-Oriented: Makes it easier to align your spending with your financial goals, whether it's saving for a vacation or paying off debt.
• Promotes Accountability: Every dollar has a designated place, reducing the likelihood of impulsive or unplanned spending.
• Clear Financial Picture: Offers a detailed view of your finances, aiding in more informed decision-making.

Disadvantages of zero-based budgeting

• Time-Consuming: Requires more time and effort to start from scratch each month, analyzing and justifying every expense.
• Can Be Overwhelming: The level of detail and constant monitoring can be daunting, especially for budgeting beginners.
• Potentially Rigid: May not always allow for spontaneous spending or unexpected expenses, leading to a very strict financial lifestyle.
• Requires Regular Adjustment: Income and expenses can vary, necessitating frequent updates to the budget, which can be a hassle.
• May Lead to Short-Term Thinking: The focus on monthly budget cycles might detract from long-term financial planning and investments.
• Possibility of Misallocation: Without proper understanding and planning, there's a risk of allocating funds inefficiently, defeating the purpose of the budget.

6 Step to Creating a Zero-Based Budget

To create a Zero-Based Budget, let's blend the wisdom of last year with the anticipation of new challenges. This method of budgeting doesn't just modify the previous year’s budget; it reinvents it. 

Here’s how you can get started:

1. Analyze Last Year: Dig into last year’s spending. This isn’t about copying numbers but understanding patterns – where did you overspend, and what costs have changed?
2. Identify New Expenses: Life evolves. Maybe you've taken up a new hobby or moved to a different place. Recognize these new expenses that weren't part of last year's financial picture.
3. Set Financial Goals: What do you want to achieve this year? Maybe it’s paying off debt, saving for a trip, or investing in your education.
4. Lower Costs Where Possible: Use your insight from last year to find opportunities to cut back. Maybe you can reduce dining out expenses or switch to more affordable service providers.
5. Assign Every Dollar a Job: Starting from zero, allocate your expected income to every expense category, savings, and debt payments. Remember, with Zero-Based Budgeting, your income minus expenses should equal zero.
6. Track and Adjust: As the year progresses, keep an eye on your spending. If you notice overspending in one category, adjust another to keep your budget balanced.

Is Zero-Based Budgeting Right For You?

Zero based budgeting is a great option if (big ‘if’ here)- you have the time and discipline to allocate to this style of budget. 

If you have the type of income that moves up or down (like waitressing or service based), then you may find yourself re-creating the budget every week or so. 

3 Alternatives to Zero-Based Budgeting

If you’re on the fence or just want to explore other options for budgeting here are our best suggestions. Again don’t feel overwhelmed with the decision. The best budget for you is the one where your financial goals are met. Any of these options can make that happen, it just comes down to preference. 

50-30-20 Budget

The 50-30-20 budget is a simple and straightforward method of managing your finances. It suggests dividing your after-tax income into three categories: 50% for necessities like rent and groceries, 30% for wants such as dining out and entertainment, and 20% for savings or paying off debt.

This approach provides a balanced framework for spending and saving, making it a popular choice for those seeking an easy-to-follow budgeting strategy.

Subscribe (for free) and You can access our digital template for the 50-30-20 budget at the end of this post! If you’re already subscribed it will appear already.  

Top-Down Budget

This is usually something you see in corporate financial planning but can be maneuvered for a household budget. A top-down budget involves the primary decision-maker (like the head of the household) determining the overall budget based on total household income. They then allocate specific portions of this budget to different categories such as rent, groceries, utilities, and savings. 

This method emphasizes setting and adhering to an overarching financial limit before dividing it into individual expenses, reflecting the household's broader financial goals and priorities. While a top-down budget emphasizes adhering to an overall financial limit, ZBB emphasizes a detailed and deliberate allocation of every dollar, regardless of overall income or past spending patterns.

Cash Envelope System

The Cash Envelope System is a hands-on, straightforward budgeting method that involves dividing your cash among different envelopes, each labeled for a specific expense category like groceries, entertainment, or dining out. 

You spend only from these allocated envelopes, offering a clear and tangible way to manage and track your spending. It's a great tool for those who want a more disciplined and visual approach to budgeting. For a detailed guide on how to implement this system effectively and make the most of your money, read our post on the Cash Envelope System for more.

5 Tips for Successful Zero-Based Budgeting

Creating a zero-based budget for your household can be a powerful way to take control of your finances and achieve your financial goals. To help you make the most of your budget, here are some actionable and intentional tips to add value to your monthly household zero-based budget:

💡 Prioritize your expenses: When creating your zero-based budget, prioritize your expenses based on their importance to achieving your financial goals. This will help you allocate your funds more effectively and avoid overspending.

📊 Track your expenses: Keep track of your expenses throughout the month to ensure you're staying within your budget. You can use a budgeting app or spreadsheet to make this process easier.

💰 Identify areas to cut back: Look for areas where you can reduce expenses, such as 🍔 dining out or 💻 subscription services. This can help you free up funds to put toward your financial goals.

🆘 Build an emergency fund: Make sure to set aside some funds each month for unexpected expenses or emergencies. This can help you avoid going into debt or having to dip into other funds.

🔄 Review and adjust regularly: Review your budget regularly and make adjustments as necessary based on changes in your income or expenses. This will help you stay on track with your financial goals and ensure you're getting the most out of your budget.

Get More Out of Your Budget with Zero-Based Budgeting

We know budgeting isn’t the sexiest term. It’s like working out to get the body you want. The process isn’t Instagram pretty.

There’s going to be sweat and it will be uncomfortable (or it should be if you’re doing it right).

Plus like when you work any dormant muscle – it’s going to be a little sore at first. But that’s just proof that you’re getting stronger.