FINANCIAL FRESHMAN #055
TL;DR → Zero-Based Budgeting is a popular budgeting approach where you plan for your net income minus your expenses to equal zero. This is an effective way to be intentional on where your money goes while prioritizing saving and debt payoff.
Zero-Based Budgeting
Since the inception of this blog, we’ve covered budgeting from a few different perspectives. You know how to stick to your 50:30:20, and you know that a solid budget can help curb lifestyle inflation. Even still, there are a number of misconceptions out there about the practice of budgeting. Many people (old me included) think about budgeting as a means to make you spend less.
Zero-Based Budgeting (ZBB) flips the script entirely. It’s about telling every dollar what to do, before you ever spend a cent. This week, let’s talk about what ZBBs are, why they work, and how to build one!
What Is a ZBB?
In short, a ZBB is any budget where your total net income minus your expenses equals zero, or as close to zero as possible. Let’s dive a little deeper to make sure the definitions of these two pieces are well understood.
Total Net Income means calculating every single cent that will hit your account on a monthly basis. Your salary may be $55,000/year, but obviously you don’t receive $4,583.33 each month. This figure doesn’t reflect what you actually make, so budgeting with it is pointless. Ensure you use net pay, and reference our guide on estimating it if you need help. This figure should also include any extra income that comes in. Does your car-pooling coworker Venmo you $50/month to help cover gas? Does your favorite credit card give you $25/month in rewards? Those get added too.
Expenses refer to the opposite—this section should encapsulate every expense that you will incur over the course of the budget month. These are not just “expenses” in the traditional spending sense, such as your grocery or phone bill. Do you want to save $500 per month in your emergency fund? For the purposes of our ZBB, that’s an expense as well.
Creating and following a ZBB is not about having no money leftover, it’s about complete and total awareness and control of where your money is going. In a successful ZBB, every dollar is assigned a job, whether that be spending, saving, or debt repayment.
Why It Works (Especially For Beginners)
ZBBs are so popular mainly because they work. There are four main benefits that you get when you subscribe to this approach to money management.
Using a ZBB forces you to align your spending with your priorities and values. Without this approach, it’s possible that habitual spending would take over, and you’d lose visibility on where your money is going each month.
With a ZBB, spending, saving, and debt payoff are all treated identically. Savings become just another line item in your budget, rather than an afterthought with leftover money at the end of the month.
No one has a completely identical budget from month-to-month, so the budgeting process you follow shouldn’t pretend that’s the case. Maybe your Amazon Prime subscription hits your account every February, or in August you need a larger restaurant budget since your friends are coming to visit you. Whatever the case may be, a ZBB easily lets you reflect the financial quirks that come with each new month.
Has the time come to swipe for that nice thing that you’ve been saving for? If it’s in your ZBB, there’s no guilt. You’re simply plugging money into the place where you planned for it to go.
How To Build One (With Examples!)
At this point this is likely intuitive, but making an effective ZBB is only four steps.
- List out your monthly income after taxes.
- List out all your possible expense categories.
- Assign your income to your categories, until you get as close as possible to having zero dollars leftover.
- Check in weekly, and adjust as needed.
If a visual helps, here’s a hypothetical ZBB for your viewing pleasure!
Final Thoughts
There are dozens of tools out there to help, but we recommend starting with a simple spreadsheet or a pen and paper. If you want to graduate to a purpose-built budgeting app, make sure that you find one that subscribes to this ZBB approach! YNAB is popular, and it’s free for a year if you’re a college student.
Creating and following a ZBB marks a huge paradigm shift towards being in control of all your money. Best of luck as you get started!
