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What Is Zero-Based Budgeting?

July 09, 2019 · 5 minute read

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What Is Zero-Based Budgeting?

Do you know where all of your money goes each month? Whether buying gas, paying utility bills, or eating out with friends, it can be easy to lose track of where you’re spending your hard-earned cash. Zero-based budgeting is one method for budgeting that helps you account for every penny.

How Zero-Based Budgeting Works

When building a zero-based budget , your income minus your expenses should equal zero. With zero-based budgeting, every dollar of your income has purpose.

This doesn’t mean you won’t have any money in your bank account, since you might want to allocate some of your budget to savings. Rather, using this method could help you know exactly how much you will spend, save, and invest in any given month. And depending on your monthly needs, these figures may change or stay the same.

How to Build a Zero-Based Budget

As with most budgeting techniques, you might want to start the zero-based budgeting process by making a list of your expenses. Start with your fixed and necessary expenses first, such rent, utilities, groceries, transportation, insurance payments, and debt payments.

You know that these payments have to be covered each month, so you could allocate income to each necessary expense. Tally these expenses and subtract them from your total income. The resulting figure could be the amount available for discretionary expenses.

Next, you could allocate those remaining discretionary funds. These expenses could include money that you pay to yourself to save for an emergency fund, online retirement account, or other savings goals, such as a down payment on a house. Other expenses might include entertainment, clothing, and non-essential items.

Keep in mind that some expenses might be seasonal, such as vacations or even a tax bill. You might want to determine how you’d like to save for these expenses. You may choose to allocate funds in a single month, or it may make sense to set aside a small amount over each monthly period. It might take a little bit of extra planning to figure out how much you’ll need and how to divide up the cost.

Some expenses may also be variable—for example, say you’re hit with an unexpected bill when your car needs a new transmission—and these can be tricky to deal with. One way you could build them into the budget is to have a line item such as “savings for variable expenses” to help you cover them. This line item would be different from your other savings.

A simple example of a zero-based budget for someone who makes $3,000 a month might look like this:

Rent $1,000
Utilities $100
Car payment $300
Gas $200
Groceries $300
Savings $500
Eating out $200
Entertainment $150
Student loan payments $200
Credit card payments $50
Total $3,000

In this example, the person’s income less their total expenses—$3,000 minus $3,000—equals $0.

Finally, remember that with a zero-based budget every dollar should have a purpose . So if at the end of figuring out your expenses, you find yourself with some extra cash, it needs to go somewhere. You might want to put a little extra toward savings or pay off some debt quicker.

But if you don’t allocate the funds, they might get spent. The problem is you may not know where you spent that money, and keeping track of it is the whole point of this exercise.

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Tracking Your Budget

You might want to keep an eye on your spending throughout the month to make sure you’re sticking to your budget. This process could be dynamic. If you find that you don’t need to spend as much on one budget item one month, you could shift that extra cash into another category the next month.

If you find yourself needing extra money to cover an expense, you could look for places to save. If you find yourself with little wiggle room in your budget and need to add to or boost your existing expenses, you might want to increase your budget with extra sources of income, like a side hustle.

A Zero-Based Budget on an Irregular Income

A variable income can pose some challenges to building a zero-based budget, but they’re not insurmountable. First, you could consider maintaining a buffer of cash to help cover your expenses as your income expands and contracts.

You could then use your previous month’s budget as a base for the current month, using the buffer to cover any shortfalls. You might want to replenish this buffer when you have extra money in a month. You may also try building your budget based on a low estimate of your monthly income to increase the odds that you’ll be able to stay within your budget.

An irregular income means that you might spend more time adjusting your budget as you income fluctuates.

Other Budgeting Strategies to Consider

There are other budgeting methods that may be worth a try. One rule of thumb, called the 50-30-20 rule , allocates percentages of your income to different categories. When using this rule, 50% of income goes to necessities, like housing, utilities, and food. The next 30% of income goes to discretionary spending, and the final 20% is allocated to retirement accounts and savings.

You may also consider a budgeting system known as reverse budgeting , in which you focus on savings goals rather than expenses. To use this method, you might want to determine your short- and long-term savings goals, such as a downpayment on a house, paying down student loan debt, and retirement.

You could figure out how much you need to save for those goals and then automate the savings. The money could be taken from your checking account and put into a savings account each month. You might use the money left in your checking account to pay for necessary expenses first, and the rest you could use however you’d like.

The Bottom Line

Budgeting can help you take a closer look at how you’re spending your money and how you want to be spending it. By taking time to work through a budget, you could make sure that your money is going exactly where it needs to go.

Budgeting can also help you stop spending on things that aren’t important to you (things you may not even realize you are spending money on) and can help you fund things you care about most.

It’s a good idea to find a budgeting strategy that works for you and that you’ll stick with. Budgeting apps can be a good solution to help you track your purchases.

For example, with a SoFi Checking and Savings®, you can see your weekly spending right in the app. By using a checking and savings account with SoFi, you can keep track of your weekly spending, cutting down on the time and headache of budgeting.

Get started with SoFi Checking and Savings today.

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