Zero based budgeting for beginners: a 6 step guide

Zero based budgeting has an intimidating name and a very simple idea behind it: before the month starts, give every dollar of your income a job, until there are zero dollars left unassigned. Not zero dollars in the bank. Zero dollars without a plan.

It is the method behind most of the well known budgeting systems, and it works for a plain reason. Money without a job gets spent on whatever is nearest. Money with a job tends to do it. This guide walks through zero based budgeting for beginners: how to set one up in six steps, a full worked example, the mistakes that trip people in the first month, and how to keep it going.

What is zero based budgeting?

A zero based budget follows one equation:

Income minus everything you have assigned equals zero.

“Everything you have assigned” includes spending, bills, debt payments and savings. If you earn $3,800 this month, you decide in advance where all $3,800 goes. Savings count as a job. So does a small buffer. The only thing that is not allowed is a leftover amount with no label.

Compare that with how most people budget. They set a few limits (“try to keep groceries under $500”), pay the bills, and hope something is left at the end. Whatever is left is savings. Usually nothing is left, because unassigned money leaks.

Who it suits, and who it does not

Zero based budgeting is a good fit if:

• You earn a reasonable income but cannot say where it goes.
• You are paying off debt and want every spare dollar aimed at it. Once you have found the extra, our debt snowball vs avalanche comparison shows which balance to target first.
• You are saving for something specific with a date attached.
• You like a clear plan more than a rough guideline.

It is less comfortable if you dislike detail. If that is you, start with a percentage method such as the 50/30/20 rule and move to zero based later. And if your income changes from month to month, the method still works but needs one adjustment, covered in our guide to budgeting on an irregular income.

How to build a zero based budget in six steps

Step 1: Write down your income for the month

Use take home pay, the amount that actually arrives in your account after tax and deductions. Add anything else you can count on: a side job, child support, benefits. Do not include money you only hope to receive.

Step 2: List fixed expenses

These are the bills that are the same every month and are not optional: rent or mortgage, utilities, insurance, phone, internet, minimum debt payments, childcare. Check your last statement for each one. Do not estimate.

Step 3: List variable expenses

These change month to month and you control them: groceries, fuel, eating out, clothing, entertainment, personal care. If you do not know what you usually spend, look at the last two months of statements, or track for a few weeks first. Guessing low here is the most common reason a first budget fails.

Step 4: Add savings and debt goals

Savings go into the plan as a line, just like rent. So do extra debt payments above the minimum. This is the step that makes zero based budgeting different: you pay your future self on purpose, at the start, instead of with the scraps.

Include sinking funds here too. These are monthly amounts set aside for costs you know are coming, such as car repairs, annual insurance or holidays. If you have not used them before, read sinking funds explained.

Step 5: Subtract until you reach zero

Add up everything from steps 2 to 4 and subtract it from your income.

• If the result is positive, you have unassigned money. Give it a job: more to savings, more to debt, or a little more in a category that is too tight.
• If the result is negative, you have planned to spend more than you earn. Trim variable categories first, then look at whether any fixed costs can come down.

Keep adjusting until the result is exactly zero.

Step 6: Track as you go

A budget is a plan. Tracking is how you find out whether the plan is happening. Log each purchase against its category as you make it, so you can see what is left in each one. A budget tracker on your phone makes this a five second job at the till. If you would rather not connect a bank account to do it, here is how to track expenses without linking your bank.

A worked example: $3,800 a month

Here is a complete zero based budget for someone taking home $3,800 a month.

Fixed expenses: $2,030

• Rent: $1,250
• Utilities: $180
• Insurance: $190
• Phone and internet: $110
• Minimum debt payments: $300

Variable expenses: $1,095

• Groceries: $450
• Transport and fuel: $260
• Dining out: $160
• Fun and hobbies: $120
• Clothing: $60
• Subscriptions: $45

Savings and goals: $650

• Emergency fund: $250
• Extra debt payment: $200
• Sinking funds: $150
• Giving: $50

Buffer: $25

Check the equation: $2,030 + $1,095 + $650 + $25 = $3,800. Income minus assignments is zero.

Notice what the plan does. $600 a month moves toward savings and debt, on purpose, before any of the variable spending begins. That is 16 percent of income with a destination. Without a plan, most of it would have dissolved into the variable categories.

Five mistakes beginners make

Forgetting irregular expenses

The car registration, the annual subscription, the school trip. They are not in a normal month, so they are not in the budget, and they arrive as an emergency. List every cost that comes round less often than monthly, divide each by twelve and budget that amount every month.

Setting numbers you wish were true

If you spent $620 on groceries last month, budgeting $350 this month is a hope and not a plan. Start with what you actually spend and reduce it by ten percent at a time.

No buffer and no fun money

A budget with nothing in it for enjoyment and no room for small surprises lasts about three weeks. A small buffer and a guilt free fun category are what make the rest of it survivable.

Treating the first month as a test you can fail

Your first zero based budget will be wrong. Everyone’s is. You will find a category you forgot and two you underestimated. That is the budget doing its job, which is showing you the truth. Adjust and carry on. It usually takes three months for the numbers to settle.

Not moving money when plans change

When you overspend in one category, you do not abandon the budget. You move money from another category to cover it, so the total still equals zero. Dining out went $40 over? Take $40 from fun. The plan bends without breaking.

How to keep it going after month one

• Make a new budget every month. Copy last month’s and adjust. December is not the same as March.
• Hold a ten minute weekly check. Look at what is left in each category and what is coming in the next seven days.
• Automate the savings lines. Schedule transfers for the day after payday, so the plan happens without willpower.
• Give windfalls a job the day they arrive. A tax refund, a bonus or a gift goes into the equation like any other income.
• Review at month end. Compare plan and reality category by category, and carry what you learned into next month’s numbers.

Zero based budgeting with MADBU

MADBU handles the tracking half of the method. Set your monthly budget, add limits for the categories you want to watch, and log each purchase in about five seconds. The dashboard shows what is left for the month and where it has gone, and savings goals let you point money you set aside at a target and a date. The daily streak is there to make sure you keep logging in week three, which is when most budgets go quiet. The core app is free, and you can see what the paid plans add on the pricing page. If you would like a stricter zero based app, our comparison of free budget apps covers the alternatives.

Common questions

Does zero based budgeting mean my bank balance should be zero?

No. It means every dollar of this month’s income has a purpose. Many of those dollars are assigned to savings or a buffer and stay in your accounts.

What if I earn more than I planned?

Assign the extra as soon as it arrives. The usual order is: any category that is short, then your emergency fund, then debt, then longer term goals.

What if I have money left at the end of the month?

Give it a job before next month begins. Rolling it into savings or an extra debt payment is the simplest choice.

How is this different from the envelope method?

Envelopes are a way of enforcing a zero based budget with cash. The plan is the same. The envelope is just a physical version of the category limit.

How long does it take?

About an hour for the first budget, twenty minutes a month after that, and a few seconds per purchase to track.

Build your first one today

You do not need next month to start. Take what is left of this month’s income, list what still has to be paid, and assign the rest. A partial month is good practice, and the numbers you collect will make next month’s budget far more accurate.