The Complete Guide To A Zero Based Budget

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zero based budgetDo you feel like your financial situation is hopeless? Are you unsure where your money is actually going?

If you’re struggling with money, the first thing that you should do is get yourself on a zero based budget.

Budget? Most of us are excited to budget like we’re excited to stop barefoot on Lego when we get up to pee at 2am.

Take a deep breath, and stick with me. It doesn’t have to be complicated. In fact, you could write up a simple budget on a piece of paper on your lunch break.

In my opinion, the best system is zero-based budgeting. Whether you’re using plastic or cash, it’s the simplest way to get your spending on-track.

What is a zero based budget?

A zero-based budget is a method of budgeting where every single penny that you earn is spent or allocated. Basically, at the end of the month, you have zero dollar left over.

That’s it…seriously.

It seems a bit counterintuitive. It feels like leaving ‘spare money’ leftover at the end of the month would be better for your finances right

Nope.

I don’t always agree with what Dave Ramsay says, but I think he nails this one right on the head

If you want to get out of debt and grow your money, you need to control it. Every little bit of it.

To control it, you need to get on a budget. Keep reading and I’ll show you exactly how to do it.

How to get started on a zero based budget

Everybody needs a budget. It doesn’t matter if you’re rich, poor or somewhere in between. It’s difficult to keep track of where your money is going without a good budget.

Fortunately, making one up isn’t very hard and as I mentioned above, you can get started in less than ten minutes.

I actually put together this quick video last year showing you how to put together a budget in Google Sheets in less than 4 minutes. If you’re not into video, stick with me, I’ll show you how to get on a zero-based budget below.


There are several different methods of budgeting. Some folks insist that you should use paper because it forces you to be more aware. Some folks use apps like YNAB, Mint or EveryDollar.

I like a good, old-fashioned spreadsheet. You can set up simple formulas to calculate the numbers for you (so you don’t screw it up), and it can come with you on all of your devices. 

Zero-Based Budget Basics

  • No matter what budgeting method you use, you should review it every single month. Why? It’s simple – your life, your expenses and your priorities can shift from one month to the next. If you need new work boots, you might want to allocate more money one month for clothing. No two months are the same, so I recommend you review your monthly budget every single month. Once you’re set up and running,  it should only take you ten or twenty minutes per month.
  • I recommend using Excel or Google Sheets to create your budget. You can also do it on paper if you prefer. Some say that actually writing it out by hand will help you remember. Honestly, I tried doing my first budget by hand but ain’t nobody got time for that. I use Sheets as it’s accessible from any computer as long as I’m logged into my account.
  • If you’re married, it’s a good idea to get your spouse involved. Even if one of you handles the finances, it’s important for you both to be on-board with how much money you’re allocating to each category every month.
  • Every month, your net income minus your expenses should equal zero!

Budget Categories

In order to budget effectively, you need to separate your spending into logical categories. Here are some categories that everybody should use in their budget with sample expenses for each category:

Housing

Your home mortgage or rent, property taxes, insurance. This is also a good place to include money for home repairs/upgrades.

Food

Groceries, dinners or lunches out, toilet paper, paper towels and the like. We also include our diaper budget here.

Transportation

Vehicle payment, gas, car insurance as well as repairs and upgrades, bus pass, toll fees, parking, Uber rides…anything related to transportation.

Health

Insurance payments, prescriptions, supplements, gym membership, as well as other health costs such as massage.

Utilities/Bills

Power, gas, water, home phone, mobile phone, garbage pickup, internet, cable, Netflix, Spotify etc.

Debt Repayment

Student loans, credit card payments, lines of credit, anything else that you have financed.

Savings

Money saved for an emergency fund, vehicle savings, down payment for a home, new computer etc.

Clothing

This can include casual clothes, work clothes, work boots, clothing for events such as weddings, workout clothes etc.

Spending Money/Allowance 

This is ‘free money’ to do with what you want. Extra clothes, morning coffee, eating out, tech upgrades, movie tickets, park admission etc.

These are a good starting point, but if your financial situation is a little more colorful, you might want to break these up into smaller categories or add others. Transportation for example could be broken down into individual budget categories for fuel, insurance, repairs, and saving for a new vehicle.

Some other categories you might want or need to include in your budget are:

Donations

Tithe, charity, political etc.

Investments 

Retirement, market, real-estate.

Seasonal expenses

Some things come due irregularly. Car insurance, home insurance, sprinkler blow-out and Christmas gifts are good examples.

I like to keep an account that’s specifically for seasonal expenses. I figure out how much I plan to spend on an item annually, divide it by the number of pay periods I have in a year, and put that much in a separate account that’s just for that purpose.

Sample zero based budget based on a 6k monthly income.

CategoryAmount BudgetedPercentage of income spent
Housing $2000 30%
Food $600 10%
Health $300 5%
Utilities/Food $400 6.6%
Debt Repayment $300 5%
Savings $700 11.6%
Clothing $200 3.3%
Spending Money $200 3.3%
Donations $400 6.6%
Investments $600 10%
Seasonal Expenses $300 5%

Problems To Look For

Your overall spending exceeds your income

zero based budgetingThere are only two ways to deal with this problem: make more money or cut from the budget. Though I think everybody should find a side hustle that makes them extra cash and try to get a raise at work, it’s easier and faster to cut from your budget.

Start by cutting from non-essentials such as eating out, holidays, unnecessary clothing purchases, technology upgrades and the like.

Too much spending in one category

Everybody spends money differently, so while you’re budgeting you need to decide how much is reasonable to spend in each category. For some people, spending $100/mo to expand their scented candle collection is completely reasonable, for others, it’s ridiculous.

Now that you’re making the move to zero based budgeting, you need to scrutinize every category of your budget. You’re looking for leaks, or places where you’re losing too much money every month. Every extra dollar that you spend on something is a dollar that you can’t allocate to debt repayment, savings, investments or charity.

Money that you can’t track

There are some things that are notoriously difficult to track. Morning coffee that you pay for with change, money spent buying things on Amazon, fast food and other such things.

I highly recommend that you allocate “extra money” for these things. My wife and I each receive an allowance semi-monthly that we’re free to spend on whatever we want. We don’t track every dollar but we do track the total amount spent within that category.

When I want to indulge in something – this is the money I save up to do that. Dinners out, upgrade for my car, camera drone…whatever. This is the money I use. And when it’s gone, it’s gone.

What to do when you’re out of money and there’s nowhere left to cut

Here’s the thing – for some of you, this is going to be really, really hard. If you’re living on a tight income as it is, zero-based budgeting can leave you feeling like you need to allocate more money than you have every month.

The best way to deal with this is to take a really honest look at what you need. Do you need a cell phone? Could you get by with a voip home phone for a few dollars per year instead? Do you need a car, or could you take the bus for a while?

If you don’t know where to cut from, I recommend picking up my checklist – 45 ways to cut from your budget when there’s nothing left to cut. This checklist will show you some creative ways that you can cut costs to help you get your finances on track. Use the sign up form in the sidebar to download the checklist for free now.

Remember to have fun

A zero based budget shouldn’t mean that you can’t take vacations or have regular spending money. In fact, the idea here is that you will have MORE money for the things that are important to you, whatever they are.

You’re simply being intentional about ensuring that you know where every dollar goes.

Making a zero based budget when you have an irregular income

Some careers have irregular pay. This could be due to bonuses, commissioned sales or other irregularities. It is possible to get on a zero-based budget even if you don’t have stable income, it just takes a little bit of planning.

Here’s how you do it.

You’re going to need a baseline. A good rule of thumb is to base your expected monthly income on your worst month last year. Make that your net income in your budget.

Now just as you would in any other budget, go down your list and make payments by priority (food and shelter first, and then transportation, heat etc.)

In months when you receive more than you baseline income, whether you took on a new client, made a big sale or whatever, take that extra cash and first pay off any outstanding bills from the previous month. Then, take what’s left over and put it into a seperate account where you won’t be tempted to blow it on something for which you haven’t budgeted.

Now that you have some cash set aside, you can decide how much of it to add to your income and how much to save, give, invest, pay down debt or what have you.

Related Post: 11 Smart Ways To Spend Your Tax Refund

Your Unique Situation

Everybody’s financial situation is unique, but the principles of the zero-based budget don’t change. If you’re making 50k per year or 200k per year, the idea is to allocate every single dollar that passes through your bank account.

Over time, you will likely discover that you have more money than you realized.

Tips To Stick With It Long-Term

Get your spouse on board

Your odds of succeeding on a zero based budget are much higher when you do it together with your spouse. Even if you’re the one who handles the money in your home, it’s important to make sure that your spouse understands the budgeting method that you’re using and why.

This also gives you a built-in accountability partner to help you stick it out and reach your goals together.

Reminders in phone

I use my Google calendar to remind me to do our budgeting (move money into different accounts, pay bills etc.) when I get paid. There are also bills that are taken directly from our credit card each month (thanks Google Play), so I need to go in and make sure that they’re paid back asap.

Lastly, there are lots of great tools out there to help you with budgeting.

Some great budgeting tools to help you out

Here are a few tools that can help you on your journey to a zero-based budget.

Personal Capital – Similar to Mint but more geared towards investors and those trying to actively grow their net worth. Personal Capital is a little clunkier to use but works well nonetheless. Unlike Mint, Personal Capital can help you plan for future goals such as saving for college, saving for a car, retirement or buying a home.

Mint – a budgeting/financial management app for android and Iphone. Mint’s interface is very simple and easy to use. You can access Mint from any web browser or mobile device. You can manage all of your accounts from within Mint including bank accounts, credit cards, car loans, mortgage and investments. 

Google Sheets – Similar to Microsoft Excel, but completely free. This is where I manage our budget. Check out the video below where I show you exactly how to put together a quick budget in Google Sheets in under five minutes.

Conclusion

This info should get you well on your way to creating a zero based budget for your family. Honestly, getting on a budget has been the best thing that has happened to my family financially. It’s so much easier once we got used to it and I can sleep better at night knowing that we’re completely in control of our money.

Budgeting can be really hard to do at first, but stick with it, after a few months it will be second nature and you will be surprised how much money you really have.

Question for you:

What budgeting tools does your family use?