What is zero-based budgeting?

Financial goals — you've got 'em, but you may not be sure how to reach them. Maybe you've tried traditional budgeting in the past but it didn't stick. However, there's more than one type of budget, and it takes trial and error to find what makes sense and is attainable.

Zero-based budgeting takes a different approach to money management than other budgeting methods, and it could be an approach that works for you.

What is zero-based budgeting?

With a zero-based budget, your income minus expenses, spending and savings should equal zero every month. Unlike most other budgeting methods, you use the money you have on hand rather than the money you expect to be paid later when determining how much to allocate to each spending or saving category.

The reason some people like zero-based budgeting is that it gives every dollar a clear and immediate job. There isn't any money left over, so there's less risk of going over budget in a particular category or spending more than you have for the month.

The concept of a zero-based budget dates back to the 1970s and was first used to help the government and corporations balance their budgets. Since then, it's become popular in personal finance.

Step-by-step guide for a zero-based budget

Before you begin divvying up your dollars for your zero-based budget, review your receipts, credit card statements and bank statements from the past few months. Doing so will give you an idea of where and how you're spending your money. It's also helpful to reflect on your goals and what you want your money to do for you going forward.

Then, you can get started making your budget:

• Figure out your monthly take-home amount. Add up all your sources of income but use the amount you actually bring home after taxes and any other deductions are taken out. Your monthly income can include your paycheck plus any earnings from a side hustle, interest, dividends, child support and alimony.
• Determine how much your fixed expenses are. Add up the expenses that stay the same from month to month, such as your mortgage or rent, car payment, insurance, utility bills and care.
• Pinpoint how much your variable expenses usually are. Add up the costs that tend to fluctuate monthly, such as groceries, going out to eat, certain utilities, fuel, clothing and personal care. Review your bank and credit card statements to estimate each category.
• Set your savings and debt repayment goals. Decide how much you want to put toward paying down debts and building up savings each month.
• Subtract all the expenditures from your income. Once you know what's coming in and going out, you can do the math. Ideally, you'll be at zero. If you have some money remaining, consider adding a bit more to your savings or debt payoff goals or use it to treat yourself during the month. If you get a negative number, look at ways you could trim the less essential categories, such as entertainment or dining out, to bring the number to zero.

Your life doesn't stay the same from one month to the next, so your budget shouldn't stay the same either. That's the beauty of a zero-based budget. You can revisit it monthly and adjust as needed to keep the difference between your expenses and income zero and to keep on track with your goals. Setting up automatic bill payments and using financial tools, like Citizens Savings Tracker®¹, can simplify your financial life even more and help you reach your goals.

Example of the zero-based budget in practice

Everyone's zero-based budget will look slightly different, depending on their financial goals and monthly expenses. Here's an example for someone who brings in $4,000 monthly after taxes and workplace benefit costs have been taken out.

Like all budgets, the zero-based budget needs adjustments from time to time. Maybe this example setup works well for most of the year, but in June, it turns out you need $300 for car repairs. In that case, you might skip spending $200 on clothing, give $75 less to charity and put $25 less toward vacation to keep the budget exactly at zero for the month.

Advantages and disadvantages of zero-based budgeting

The zero-based budget can work well for people who are encouraged by striking a perfect balance, but its detailed structure and high maintenance are not for everyone. Before you get started, consider the potential advantages and drawbacks.

Advantages of zero-based budgeting

• It's flexible. A zero-based budget lets you do you with your money. You can make your own expense categories and adjust them from month to month.
• It can help you reach your goals. Saving and debt payoff are built into zero-based budgeting. Since you assign each dollar a role, you decide upfront how much you're going to save or use toward debt.
• It forces you to reflect on your money. A zero-based budget can help you cut back on impulse spending as it makes you reflect on each purchase and consider how it fits into your categories.

Disadvantages of zero-based budgeting

• It can be time-consuming. It takes considerable effort and planning to put together a zero-based budget, which can be a turnoff.
• It can get complex. Depending on the number of savings goals and expenses you have, your budget can quickly become a muddle of too many details.
• It can be tricky with unpredictable income. With a zero-based budget, you start with money you already have rather than waiting for your paycheck to arrive. That can be tricky if you don't get paid regularly or if your income changes often.

If you have a steady income and are ready to tackle your financial goals, a zero-based budget could be the method you've been looking for. Try setting up the budget and sticking to it for a few months. If it works, great. If not, another method may be a better fit for you.

Ready to start budgeting your finances?

Wherever you are in your financial journey, Citizens is here to help — with banking that stands with you and grows with you. A Citizens savings account is ideal for the "savings" part of your budget. With automatic transfers from your checking to your savings account, you can set money aside and watch your savings grow.