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A Beginner’s Guide to Zero-Based Budgeting (ZBB)

Create a budget where you account for every dollar.

November 28, 2022

Budgeting is crucial to get the most out of your money and to avoid running out of it, yet it’s something many people struggle to stick with. One recent study suggests 73 percent of Americans don't regularly follow a budget. If you’re one of them, changing your method and trying out zero-based budgeting (ZBB) may just do the trick.

Sound interesting? We’ll explore what ZBB is and how to do it for yourself, along with the benefits and drawbacks.

What is zero-based budgeting?

Zero-based budgeting is all about ensuring you spend every dollar you earn and not a penny more. 

However, that doesn’t mean blowing your money on whatever you like instead of trying to save. Rather, it’s a budgeting process that involves allocating every dollar you earn to a purpose (which can include savings) so that you have exactly zero left by the end of the month. 

For example, if your monthly take-home income is $3,000, you’d adjust your budget so your expenditures also equal $3,000. Zero-based budgeting is, therefore, a top-down system; you start with your income and then work out the allocation of your money.

Zero-based budgeting can also refer to a cost management method for businesses, but this isn’t what we’re referring to here.

Zero-based budgeting vs. traditional budgeting

There are various budgeting methods out there. However, traditional budgeting generally focuses on setting a maximum amount you’re willing to spend on certain categories each month. For instance, you might decide you’ll spend up to $500 on food or a maximum of $300 per month on entertainment. 

Therefore, it’s more of a bottom-up approach.

But unlike zero-based budgeting, it doesn’t account for every penny, and many people don’t explicitly include savings in their budget (assuming they’ll save whatever is left over). Using the example above, if you planned to spend less than $500 on food but actually ended up spending $200, you should have $300 left by the end of the month to put into savings. Yet, in reality, you may see that your account balance looks healthy and decide to spend it on something that isn’t part of your budget, like clothes.

How to start zero-based budgeting

The thought of following a new budget system or starting budgeting for the first time can seem intimidating. However, the ZBB process is simple to stick to once you get used to it.

Here's how to get started.

1. Add up all your monthly take-home income

First, look at your monthly take-home pay. Don't calculate this using your pretax income or you'll come up short every month. The best place to find the right number is on your paycheck.

However, if you just started a new job and haven't received your first paycheck yet, you can estimate your take-home pay through a paycheck calculator

If your income is irregular (for example, you work on commission or as a contractor), you’ll have to put some more work in and start a fresh “budget cycle” each time your income changes. However, don’t let that put you off the use of ZBB — it can still work.

2. Add up your monthly expenses

Now we come to a trickier part of the process: working out your expenses. You need to track both regular, weekly and monthly expenses and irregular expenses (one-off or less-frequent payments).

Regular bills may include:

Irregular expenses may include longer-term items like:

  • Car insurance payments (quarterly)

  • Car registration

  • Vehicle maintenance

  • Property taxes 

  • Vacations

  • Gifts (e.g., birthdays or anniversaries)

It’s helpful to refer to previous bank account statements to work out exactly how much you spend each month. 

Irregular expenses can be tricky, so you may want to calculate their overall annual cost, then spread that out over 12 months. For example, if your quarterly car insurance is $250, that would equal $1,000 per year or $83.33 per month in your zero-based budget. You can apply a similar logic to expenses like birthdays — work out how much you’d spend over the year and break it down every month. 

Or, if you prefer, simply make a “miscellaneous” category to account for them.

3. Subtract expenses from income

Now for the main event. Subtract your total monthly expenses from your monthly take-home income. If your expenses equal your income, you already have a zero-based budget and can skip the rest of this section.

However, in most cases, you’ll either end up with an income shortage or a surplus. 

If you’ve gotten a negative number after subtracting your expenses from your income, you have an income shortage. One way to tackle this is by boosting your income by asking for a raise, moving to a better-paying job or seeking out an additional income stream (like freelancing).

Or, you can opt for cost-cutting. Take a look through your expenses to find items you can cut. Streaming services, unused software subscriptions and similar things are often easy areas to cut out. In some cases, you may have to make more dramatic changes, such as selling your car to buy a less expensive vehicle.

If you have an income surplus, you have a much easier job at hand: figuring out where that extra money will go. Resist the temptation to use it as extra spending money; instead, put it toward debt or savings. If you haven't created an emergency fund yet, this should be your first priority. Then, consider retirement savings or any other financial goals you have. 

4. Track your expenses and reset

With your budget firmly set, it's time to track your spending and see if it really is hitting zero at the end of the month. To do this, categorize and account for every dollar you spend. For example, if you go to the movies and spend $50, deduct that $50 from the “fun money” or “entertainment” line item in your budget. 

You can track your expenses in many ways. Some people prefer a simple notebook and pencil, while others may create a spreadsheet or use a budgeting app, like Rocket Money or Mint.

Realistically, you’re unlikely to be left with precisely zero in the first month — zero-based budgeting is a process of tweaking. At the end of the month, review your budget to see where you overspent or underspent compared to your budget. Make any necessary adjustments to your budget the following month. For instance, you might realize you need to allocate more to your food budget.

As time passes, you’ll improve your financial foresight. Eventually, you may be able to create a monthly budget template that’s 95 percent accurate and only requires mild tweaks.

Is zero-based budgeting right for you?

Zero-based budgeting is a great fit for many, but this method of budgeting isn’t right for everyone. Let’s run through the pros and cons. 

Advantages of zero-based budgeting

If you’re goal-oriented and organized, the ZBB model will be perfect for you. It offers an empowering system to show you exactly how your money is working and helps you meet your personal finance goals. As a result, it may feel more motivating than other budgeting methods.

It’s also a great system for anyone trying out a budget for the first time. ZBB can be an eye-opener when it comes to getting real about your spending levels — no dollar is forgotten.

Therefore, even if you can’t keep the system up forever, it can be an invaluable learning experience. 

Drawbacks of zero-based budgeting

Zero-based budgeting can be a time-consuming process. You have to be proactive about tracking your spending every single month, which can be hard to keep up. If you have an irregular income, this can be especially frustrating if you have to change your budget frequently.

Ultimately, it all boils down to you and your needs.


Get your budget started

Zero-based budgeting offers a strategic way to meet your financial goals and get the most out of your money. By accounting for every dollar, you hold yourself accountable for every purchasing decision and ensure you keep a close eye on your finances. But whatever budgeting system you prefer, there’s no time like the present to get started.

ZBB can help you to meet financial goals like paying off debt, but it shouldn’t be the only tool in your arsenal. The Tally† credit card repayment app takes your higher-interest credit card debt and turns it into a lower-interest line of credit to make your debt more manageable.

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.