Zero-Based Budgeting: When Living Paycheck to Paycheck Is a Smart Move

Here’s a simple question for you: Are you spending more than you earn each month?

Let’s get even more specific: Are you spending exactly what you earn each month?

If you create a zero-based budget, that’s precisely what you’ll be doing. Believe it or not, it’s a simple budget plan that guarantees you’ll spend every penny you make each month in a productive manner.

Sound scary? Trust us, it’s the furthest thing from it. We explain exactly what zero-based budgeting is and how this budgeting style can help you.

What Is Zero-Based Budgeting?

The zero-based budget — also known as zero-sum budgeting or ZBB if you’re hip on corporate finance — is a method of monthly budgeting in which every dollar you make is spent or saved in line with your goals and expenses.

Zero-based budgeting is a popular approach in business, but you don’t have to be sitting in the boardroom for the annual budgeting process to make it work for you. You can start using the wisdom of this budgeting method to start getting a handle on your personal finances.

For instance, If you have $4,500 coming in this month, you’ll allocate exactly $4,500 across all your bills, discretionary expenses, savings funds and financial goals.

How to Make a Zero-Based Budget

Budgeting gets a bad reputation. But the fact of the matter is that setting a great budget doesn’t restrict you — it actually sets you free. And compared to traditional budgeting, the zero-based budget is the most customizable and flexible budget out there.

Here’s how to make a zero-based budget that fits your finances, lifestyle and goals.

Step 1: Determine Your Income

The first step to figuring out your zero-based budget is to track exactly what you earn each month. That means all your side jobs, bonuses, tax refunds, gifts, irregular income — everything. Any deposit that’s made to your checking account should be accounted for.

For many of us, this will vary month to month. Do your best to make an educated prediction of what your income will be. You can always add to it or take away from it throughout the month.

For our example, let’s say you bring home $4,500 per month.

Step 2: List Your Recurring Expenses

Start with the bills you know you have each month, like your rent or mortgage, utilities, cell phone, internet, cable, car insurance and car payment. These expenditures should be fairly stable, so you’ll probably know how much money to allocate for these costs.

Next, go through your bank statements for the last 90 days to see what you’ve spent on discretionary purchases, like buying clothes or eating out. This can sound daunting, but you’re probably more predictable than you think, so you’ll start to see a pattern pretty quickly.

Finally, include expenses that you only pay once or twice a year. This will include bills like HOA fees or license and registration renewals.

Your list might look something like this:

Evaluate Your Current Spending

Basics Services Debt/Savings Misc Total

Housing $1,455

Insurance $275

Car payment $235

Clothes $145

Gas $200

Cell phone $145

Credit card payment $500

Entertainment $345

Groceries $400

Internet $45

Student loans $220

Eating out $400

Utilities $135

Netflix $15

Savings $0

Gifts $35




Miscellaneous $100






It’s OK if you have variable expenses or usually spend a lot of fun money on a monthly basis. Look over your previous month’s budget to see exactly how you were spending money and what categories you want to trim or expand in your new budget.

Step 3: Set Your Goals

A traditional budgeting process takes your income minus costs and puts whatever is leftover toward investments or savings. Unlike previous budgets you may have used, a zero-based budgeting system makes savings and investments part of the plan.

Before you start building your budget, take a moment to consider your financial goals. Are you excited to eliminate your debt? Trying to pad your emergency fund? Working to catch up on your retirement contributions? All good goals.

A zero-based budgeting system is great for achieving financial goals quickly, because there’s no percentage cap on how much money you can put every month toward any one category.

Step 4: Prioritize Your Expenditures

You can keep your cost categories broad (housing, transportation, goals, discretionary) or break them down in as much detail as you want. For the purposes of cost management, it may be helpful to only break out the expenses where you struggle with overspending. It’s up to you.

But however you break them down, you’ll want to prioritize these costs by importance. What’s necessary to survive should always be first, followed by the amount you want to allocate to your financial goals. Then finish with your discretionary expenses.

Step 5: Race to Zero

Depending on where you’re at after budgeting, you’ll either need to shave some dollars off your budget and lower costs or allocate some extra.

Extra dollars can easily be added to your top-priority goals or used to give a little bump to your discretionary spending. Think of this as an action you take monthly toward balancing your annual budget in line with your financial goals and priorities.

The example budget above includes $4,650 of expenses, but our income is only $4,500. So in this case, our budgeter will have to decide where to find $150 in cost savings.

If your budget is prioritized and lists expenses by importance, you can cut costs by working from the bottom or lowest priority expenditures until you’ve removed $150:

How to Trim Spending

Old spending New budget Cut









Eating out












Alternatively, you could cut costs in other areas or eliminate spending categories altogether until you refine your cost management approach.

You may have to cut back on one movie or skip a couple meals out to meet these new numbers, but it seems reasonable, right? To save money on groceries, it may simply mean keeping a closer eye on deals and not buying things you don’t really need or tend to waste.

The Pros and Cons of Zero-Based Budgeting

Zero-based budgeting is simple, but it’s not easy. It takes a lot of upfront commitment to get all the benefits. Here are some positives and negatives to weigh before you dive in.

Zero-Based Budget Pros
  • Helps identify areas of overspending
  • Allows for higher allocation of income to financial goals
  • Customizable to fit income and priorities

Zero-Based Budget Cons
  • More time-consuming than incremental budgeting
  • Involves reallocation throughout the month
  • Harder to maintain due to more rigid budgeting process

Zero-Based Budgeting 101: How to Handle Unexpected Expenses 

The biggest concern with zero-based budgeting is “spending” all your money every month. But this shouldn’t be a problem as long as you have a buffer.

Some people keep an emergency fund in a separate or linked savings account. Others will keep an extra $1,000 or $2,000 in a checking account. Still others want a full month of expenses sitting in their account before they start using a zero-based budget.

The choice of how much buffer you’re comfortable with is up to you. But you will want a buffer of some sort in your checking account to avoid being penalized for accidental overdrafting.

Zero-Based Budget vs. 50/30/20  

The 50/30/20 method is a popular alternative to the zero-based budget. But what makes them different?

In the 50/30/20 method, 50% of your monthly income goes to necessities, 30% to wants and 20% to savings and debt repayment. Some people use the 50/30/20 method by itself as a quick and easy system, but it can even be a baseline for zero-based budgeting or other methods.

While both methods are great, they serve different goals. As long as your income can accommodate the percentages, a 50/30/20 budget is perfect for those just starting out.

But if 50% of your income isn’t enough to cover necessities, or if you want to put more than 20% toward savings goals, then a zero-based budget is a better choice for you.

Zero-Based Budgeting Apps

Need help getting organized? There are budgeting apps and budgeting software geared towards the zero-based budgeting system. Our favorite is YNAB (You Need a Budget), which is an app chock full of details and tools to get you started.

Check out our recommendations for both free and paid user-friendly budgeting apps for beginners.

Is Zero-Based Budgeting Right for You?

Despite its popularity in the business world, not everyone thrives on a zero-based budgeting process. For those trying to control how they spend money, you may want to use other budgeting methods to find cost savings before going to a zero budget.

On the flip side, a zero-based budget is a great approach for those making debt payments or trying to become debt free on a variable income. It’s a budgeting method that forces your bank account balance to be allocated toward priorities and helps identify where slashing costs could make a real difference before the next budget cycle.

Tyler Omoth is a former senior writer at The Penny Hoarder who loves soaking up the sun and finding creative ways to help others. Kaz Weida, a senior writer at The Penny Hoarder, contributed