Zero-based budgeting: Definition, example and if it's right for you

As you work to make the most of your money, budgeting skills keeps your spending on track. But fine-tuning your budget could help you even more.

Zero-based budgeting is an approach where you account for every dollar earned and earmark it for a specific purpose. Also known as a zero-sum budget, it is designed to leave no money to float in your bank account monthly. Instead, you channel that money elsewhere—to pay down debt or save for unexpected expenses, a family vacation or important financial goals down the road.

With zero-based budgeting, every dollar of your monthly income should be set aside for a particular purpose. It was originally designed as a style of business budgeting to prevent money from falling through the cracks. This strategy gives you a tighter rein on your funds so you can reach your short- and long-term financial goals.

The "zero" in zero-based budgeting refers to the idea that there's nothing left over, that you've allocated everything. That doesn't necessarily mean you spend every dollar every month. It means that even money you save is dedicated to specific savings accounts or line items, like a future fund for car repairs, vacations, your kids' college expenses or your retirement.

Zero-sum budgeting works particularly well if you're focused on planning ahead for certain savings goals. It's detail-oriented and can take time to manage, but it can help you be very intentional with your money. It's easier to use if you have consistent income and expenses each month, but you can use it even if your income and expenses vary.

Young man is working on laptop

A young man with a laptop at home, he is working and writing notes in a notebook

How do you budget for savings?

Saving money amid monthly expenses is sometimes easier said than done. "Paying yourself first" can help you prioritize long-term financial goals. 

Learn what paying yourself first means

Let's see how zero-based budgeting works in practice. While everyone's budget will look a little different depending on income and life stage, this example shows how a young family of 3 bringing home $6,000 a month might allocate their funds with a zero-sum budget.

After accounting for essential living expenses, the family divides the remaining money among several savings funds. But still, those funds are flexible depending on the family—and they can change with time.

This means that while zero-based budgeting can be a more stringent budgeting method, it ultimately provides financial flexibility. You're prepared for any major expenses that pop up.

Zero-based budgeting can help families avoid casual spending and instead save for important long-term goals. However, it's not for everyone. Here are some of the benefits and drawbacks of this strategy.

The main urge that zero-based budgeting tames is impulsive spending. While you might set up a specific allocation for purchasing "wants," you won't be tempted by bad spending habits. When your goals and budget are carefully thought-out, it's easier to stick to.

Also, it's customizable: You don't have to save for just one future goal. If you reach one goal, like saving for a down payment on a house, you can change your allocation to a new one. While a given month's budget is rigid, you can switch priorities as you move through life.

Zero-based budgeting is work intensive. It requires time to set up your system and then to track your monthly expenses and savings. It also can be difficult without a stable income—say, if you're a freelance worker, or you work hourly and your schedule changes often.

However, it's still possible to make a zero-sum budget work. You can plan your monthly budget based on your minimum monthly income. This still can help you avoid unnecessary spending and lets you add more to your savings when you do make more than your minimum.

Budget better with free money coaching

Is the zero-based budgeting system right for you, or is there something else? Explore budgeting styles, manage your cash flow and tackle your expenses. Our free Money Canvas^TM program gives you 1:1 sessions and personalized recommendations from a financial coach.

Book your first session

If, after considering the advantages and drawbacks, you're ready to pursue zero-based budgeting, the steps are simple:

1. Review your last six months of spending and saving. Figure out an average for your spending and saving.
2. Make a first month's budget based on your realistic spending and saving, as well as any small changes you'd like to see. This could include less casual spending and more saving for your family's future needs.
3. Adjust the spending and savings plan each month for the first few months to make sure it feels sustainable long-term.

While zero-based budgeting can be a useful tool, the best budgeting system is the one that works for you. If this method doesn't suit you, the 50/30/20 budgeting method could be another option.

A local financial advisor can introduce you to new budgeting styles that fit your family's rhythms, while ensuring you get the most out of your money and move toward your long-term financial goals.