What Is a Zero-Based Budget? (How-to Guide and Examples)

By Indeed Editorial Team

November 24, 2021

Whether you work in a financial department or manage your personal finances, you can use a zero-based budget to organize your finances more effectively. These budgets consider all aspects of your spending patterns and typically require a strong attention to detail. Understanding how to create a ZBB can help you save money, track your expenditures, and plan for your future more easily. In this article, we explain what zero-based budgeting is, describe how to create a ZBB, discuss their advantages and disadvantages, and provide you with a helpful example.

What is a zero-based budget?

A zero-based budget is a budgeting system in which you assign a specific purpose for each dollar of your income. Traditional budgeting usually involves increasing the budget periodically, while zero-based budgeting requires justification for every dollar spent. Using this system, you may distribute the income based on essential costs, like paying rent or planning for retirement. The goal of a ZBB is to match all of your income with your planned spending categories. At the end of the budgeting process, you may typically aim to have zero dollars left unassigned.

In comparison, traditional budgeting requires you to either budget for specific milestones, or to save money without obtaining a holistic view of your finances. Incremental budgeting uses your income from your previous tax year to help you budget. When you require a budget that accounts for all aspects of your life and for your current income, ZBB may be the right solution.

How to create a zero-based budget

Here's a guide to help you develop a zero-based budget:

Develop your timeline

First, you may decide when you want your budget to begin and how long you want it to last. Many people use a monthly budget, but you can also plan annually. Regardless of the length of time, you can consider which date to start. Typically, budgets begin on the first day of a new month, but you may also choose a specific, convenient date, like your payday.

Calculate your income

During your planning stage, you may list all your income sources. This can include your paychecks, any side jobs you may have, any rent payments you receive, and your savings interest. You can also note any other money that came into your bank account over the last few months.

List your expenses

You may consider your various expenses, and list them in categories that detail your spending habits. If you go to restaurants frequently, you can use a category for restaurants. You can look through your bank statements and note where you spent the most money. You can also personalize your lists by including categories like dental and pet care. When combining your expenses into categories, identify your largest expenses. If you spend a significant amount of money on mortgage and taxes, consider categorizing them into housing or upkeep. Here are some other categories to consider:

  • rent or mortgage

  • credit card payments

  • student loans

  • phone or internet

  • healthcare

  • clothing

  • subscription services

  • groceries

  • restaurants

  • entertainment (such as concerts or movies)

Estimate your expense amounts

Now that you have a list of your expense categories, you can calculate the average cost for each. If you want to create a monthly budget, you may estimate your expenses on a monthly basis. Some expenses have a known monthly cost, like mortgages or rent payments. Other costs, like groceries, change regularly. You can budget for these by averaging how much you spent in previous months.

Disperse your income

The goal of these budgets is typically to ensure that you don't have any money left after placing it into categories. To account for every dollar in your plan, you can total your monthly income and disperse each paycheck into the categories you previously determined. You may start by paying for your basic needs, then complete other categories in order of their priority.

If you have any money left, you can consider adding it to your savings. Similarly, if you reach zero and still have categories left on your list, you can make changes. For example, if you want to place $100 in a retirement fund each month, but your budget is at zero dollars before reaching this category, you can take $100 from your restaurant expenses and move it to savings.

Choose your format

When you have your expenses planned, you can choose your budgeting format to ensure it meets your needs. Some people prefer using spreadsheets or developing hand-crafted tables. You can also use websites and phone applications. Choosing a visually appealing budgeting format that matches your personal preferences can help simplify the process of zero-based budgeting.

Track and compare spending

It's important to monitor your spending accurately to determine how you can budget more efficiently. You can evaluate your spending daily, weekly, or monthly, and contribute it to your budget. If you notice that you've spent more than you budgeted for in multiple categories, this may indicate that your budget requires adjustments.

You can use your tracked spending habits to determine which categories are the most over-funded and which may benefit most from an increase. For example, if you notice that in the middle of the month you reach more than half of your spending budget, you can remove money from your vacation fund to make more available for immediate spending.

Evaluate your budget regularly

Evaluating your budget every month can help you adapt to changing priorities quickly. Regular budget reviews can give you a more thorough understanding of how your budget may change throughout the year. For example, you may spend more money in fall than summer. Likewise, you may require more money for electricity in colder months. This added level of detail can allow you to add new spending categories as needed.

Advantages of ZBB

You can use various types of budgeting and budgeting software. ZBB has both advantages and disadvantages that determine whether it's a strong budgeting tool for your needs. Here are some advantages of ZBB you can consider:

Track your income

Budgeting this way can provide you with a holistic view of your income. Reviewing your expenses and income frequently can help you determine how much money you earn compared to how much you spend. Using a ZBB can also provide you with more information about your various sources of income and how much you typically allot in each category. This can help you make adjustments to improve your budget plan.

Set goals

When you separate your budget into categories, including your savings, you can develop more specific financial goals. For example, you can create a vacation fund based on your understanding of how much money you can save after fulfilling each category. Setting goals for your future can help increase your motivation to save more money to achieve them.

Related: Setting Goals to Improve Your Career

Customized planning

A ZBB is customizable and can allow you to target specific goals. While other budget plans may make assumptions about common priorities, zero-based budgeting involves creating categories based on your own spending patterns. You can also choose the medium you want to use for your budgeting. For example, you can create budgets through your banking application, through spreadsheet websites, or with a pen and paper.

Disadvantages of ZBB

While zero-based budgeting can be useful, you can also consider some of its risks to create a more thorough budgeting plan. Here are some of the potential disadvantages of using a ZBB:

Requires a time commitment

A ZBB requires a significant time commitment, along with organizing and planning. Other, less customizable budget plans may involve a shorter initial time commitment. Traditional budgeting can also require less frequent evaluations, giving it an additional advantage over a more thorough ZBB. After the initial difference, zero-based budgeting may require a more similar time commitment to other budgeting systems.

Changing income

Jobs with consistent income may be easier to budget for than those with frequently changing income, like seasonal employees or roles that include tips as part of wages. You can still use a ZBB in such situations by calculating your average income while also tracking your daily income to record significant changes. You can also create a separate section under savings for extra income from previous months to plan for changes.

Related: 3 Career Planning Examples (With Template and Sample Plan)

Variable expenses

There are some expenses that can change each month for any role, like gifts. You may also attend holiday parties or other events like weddings. Consistent expenses may be easier to plan for than variable ones, but you can still add a separate category to your budget and estimate how much money to save for unexpected situations.

Related: What Is Strategic Planning? (With Benefits)

ZBB example

Here's an example of a zero-based budget that you can use as a guide to creating your own:

Monthly income: $2500 (includes two paycheques and savings interest)


Rent: $800
Groceries: $350
Utilities: $100
Phone and internet: $75
Health insurance: $50
Pet care: $100
Gas: $75

Debt Repayments

Student loans: $200
Credit card: $50


Eating out: $100
Entertainment: $100
Subscription services: $50
New clothing: $50


Retirement: $200
Emergency fund: $150
Vacation fund: $50

Amount leftover: $0

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