Zero-Based Budgeting: A Job for Every Dollar


October 8, 2020

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You may have heard us say this before, but there is no one-size-fits-all way to budget. We know that everyone’s financial situation is unique. So next up in our budgeting blog series, we’re sharing a system called Zero-based budgeting. Before we get started, this is a great time to fill out your budgeting spreadsheet (if you haven’t already done so!).

Zero-based budgeting offers a lot of control over your money. The premise is fairly simple – you should end each month at zero. This does not mean your accounts are at zero each month, but instead that your budget is at zero. Essentially, you’ve figured out where every single dollar you will bring in for the next month will go. Any surpluses or deficits at the end of the month should be examined and corrected in next month’s budget.

If right away this budget doesn’t seem right for you, check out our post about the 50-30-20 budget. Or, stay tuned for our next few blog posts where we break down some other budget types.

Pros and Cons of Zero-Based Budgeting

Adding this type of budgeting into your everyday life is a little intimidating, and it does take some planning every month. The benefits are that it gives you complete control and insight into your spending and saving habits. If you stick to it, you have an exact, allocated amount of money to spend on groceries, gas, childcare, and entertainment or extras.

For example, if you haven’t budgeted for a coffee and bagel on your way into work and you grab them anyway, it could throw off your budget. If a friend asks you to get dinner and drinks but your entertainment budget has already been spent, then it’s probably not a great idea.

How to Get Started

Open up your spreadsheet and take a look at your expenses and income. Make sure that everything still looks correct. Have you increased or decreased your car payment recently? Are you spending less on gas than you once did? Has your electric bill gone up because you’re starting to use your heat? These are all subtle changes that should be reflected in your spreadsheet.

Step 1 – Add savings as an expense. Since we’re trying to get this to equal zero, you can’t “aim” to have 20 percent of your income as savings. Instead, that amount should be added as an expense. We promise it will make sense when we’re done!

Step 2 – Look at your flexible entertainment and fun budget. Start accounting for everything that’s not considered essential. Do you buy a $3.50 coffee 4 days a week and leave $1.50 tip each time? That’s 16 trips at $5 each, so budget $80 for coffee. Getting as detailed as possible shows you exactly where every dollar is going.

Step 3 – Look at your food budget. You may have a round number in that column. But depending on the week and what you need, that number is sure to be slightly different than what you really spend. So after you put away the groceries, sit down with the receipt and compare it with your budget. If you’ve gone over, subtract that money from the next trip. If you stayed under, then that’s extra money for your next trip. At the end of the month, if you’re under your total, move that extra to savings.

Step 4 – In every category, add up every bill throughout the month and see where your estimates are off. Are there overages that you can cut? Can you put more into savings than you realized? Or maybe you’re not spending as much as you thought and can start a separate savings account for new furniture or a down payment on a car.

Maintaining the Zero-Based Budget

The trick to using this budget is consistency. Be sure to save receipts and update your spreadsheet weekly, if not every few days. If you wait until the end of the month, you’re likely to have holes or forget certain purchases that could make a difference.

This budget is great if you have a hard time with overspending. Keeping your spending in mind makes it easier to eat the leftovers you brought from home and decline going out for lunch for a $12 salad.

Lastly, keep specific savings goals separate from this budget. After you feel like you have a solid emergency fund, you can start putting money away for a vacation, new phone or other bigger purchases. It may even entice you to save more, since seeing “vacation fund” fill up with money feels a lot more exciting than just transferring money to a general “savings.”

We know that sometimes emergencies happen before you’ve built up your savings. If you find yourself in need of an immediate loan, simply fill out our online application and we’ll reach out with options.