Zero-Based Budgeting: What Is It? And How To Do It?

By Zach Buchenau

Last Updated: July 20, 2021

Disclaimer: This post may contain affiliate links, meaning we will get a commission (at no cost to you) if you click through and make a purchase. Please read our affiliate disclosure for more information.

If you’re tired of living paycheck-to-paycheck and struggling with financial anxiety, then zero-based budgeting is the perfect solution for you.

This method of budgeting, championed by Dave Ramsey, has helped countless people stop living paycheck-to-paycheck and start managing their money well.

But what is zero-based budgeting?

And how do you set up your first zero-based budget?

That’s exactly what we’re going to cover in the rest of this guide.

Let’s dive in!

What Is Zero-Based Budgeting?

Zero-based budgeting is a method of budgeting wherein you plan how you’ll use every dollar of income you earn. Starting with your total monthly income, you subtract the amount of money you want to put toward giving, saving, investing, and living expenses until you’re left with $0.

In other words, with a zero-based budget, you give every dollar of your income a specific purpose.

I realize this kind of specificity might sound a little overwhelming. But honestly, it’s worth every bit of effort.


Because zero-based budgeting gives you unequaled control over your money—and thus, financial peace of mind.

As long as you log your expenses and track your progress, your budget will tell you everything you need to know and help you make the wisest possible spending decisions throughout each month.

And assuming you stick with it, month after month, you’ll eventually start discerning whether certain recurring expenses are worth paying for.

For example, you might notice that you’ve been paying for certain subscriptions you barely use or that you’re spending way too much money at restaurants.

Zero-based budgeting gives you a complete picture of where your money is going, enabling you to make conscious changes that can help you reach your financial goals faster than you ever thought possible.

What is zero-based budgeting? Plus 5 steps to create your first zero-based budget | Be The Budget

5 Steps To Create A Zero-Based Budget

Now that you know what a zero-based budget is, how do you create your own?

Well, to make things as easy as possible, I’ve distilled the whole process into five simple steps.

And the best part is, you don’t need any kind of fancy software. All you really need is a pencil, paper, and a calculator.

Though, if you’d prefer, you can opt for a spreadsheet or a budgeting app like EveryDollar.

Ok, are you ready to create your first zero-based budget?

Let’s get to it!

Step 1. Start With Your Income

Before you can start deciding how you’re going to spend your money, you first need to know how much you’re working with.

If you’re like most people, you can easily find out your monthly income by looking at your last few paychecks.

On the other hand, if you have an irregular income (because you’re a freelancer, you’re self-employed, or you work variable hours), you may need to do some digging to figure out your income.

But don’t worry – you can still use and benefit from a zero-based budget.

If your income varies month-to-month, look back at how much money you’ve made throughout the course of the last six months, and write down your income from your lowest-earning month.

This will be a good conservative baseline to help form your budget.

Remember, if you earn more than your baseline amount, you can always go back into your budget and allocate the excess after getting paid.

Oh, and when you’re determining your monthly income, be sure to include all of the money that hits your bank account.

This might include paychecks, the money you earn from a side hustle, residuals, refunds, and any other cash you bring in.

Add it all up, and use the total as the starting point for your zero-based budget.

Step 2. Subtract Giving And Saving

After you’ve determined your monthly income, it’s time to start budgeting for your expenses.

A good place to start determining your expenses is to decide what percentage of your income you’ll save and how much you’ll give away.

Why start here?

Because when you give and save first, it forces you to live (i.e. spend money) within the boundaries that are required for you to meet your financial goals.

This is often referred to as “paying yourself first,” and it is one of the most important habits you can adopt if you want to improve your financial situation.

It’s also why zero-based budgeting is so important. Since creating a zero-based budget forces you to plan out every dollar of your income at the start of each month, you can confidently give and save without worry that you’ll have enough money left over to survive.

Step 3. Plan Your Expenses Down To Zero

After planning your giving and saving, the next step is to plan out the rest of your expenses until you have zero dollars left to budget.

Side Note: You can plan out your budget using an Excel spreadsheet or a budgeting tool like the EveryDollar app by Ramsey Solutions.

During this step, you’ll give every dollar of your income a specific purpose, including any money you want to spend on recreation and fun.

Remember, zero-based budgeting isn’t about limiting yourself to the bare necessities.

It’s about identifying your spending priorities and teaching yourself to live within your means.

To do this, create different spending categories like housing, food, insurance, automotive, entertainment, gift-giving, debt and anything else you tend to spend money on throughout the month.

Then, within each category, create a line item for every single expense you will have to pay.

For example, within the housing category, you might include items like: rent, mortgage, water, electricity, gas, and trash.

Meanwhile, within your food category, you might allocate money into 2 line items: groceries and restaurants.

If you’re not sure how much money to allocate to each category, take a look at your previous bank statements to learn from and refine your existing spending habits.

And remember, the goal is to live within the amount of income you have remaining after giving and saving. Therefore, I recommend starting with the most important categories and then cutting back on less important expenses.

To give yourself some extra flexibility, we also recommend including a “miscellaneous” spending category in your budget. This way, you’ll have a buffer zone in case you overspend in one area, or you forgot to plan for a particular expense.

Remember, when you’re done creating your budget, your total expenses should equal your total income.

If you end up with a deficit, you’ll have to make some hard choices about your spending habits. In some cases, you may even need to figure out ways to boost your income—which is why we spend so much time talking about side hustles around here.

Step 4. Log Your Expenses To Track Your Progress

Once you’ve created your budget for the month, the next step is to log all of your expenses to make sure you’re staying on track.

After all, what’s the point of creating a plan if you don’t implement and abide by it?

While it might take some getting used to, we recommend logging expenses into your budget daily. It only takes a couple of minutes each day, and it will make it much easier for you to stay on track.

Log your expenses using the same tool you used to create your budget.

If you have access to the place you built your budget on your smartphone, you can even log your purchases immediately after you make them. Otherwise, make it a habit to enter your expenses at the end of each day.

Whatever you do, just don’t wait until the end of each month to log all your expenses into your budget. Not only will that take a ton of time, but you won’t be able to make adjustments to your spending habits if you start to get off-track.

Logging your expenses daily allows you to check in with how you’re doing so far and to adjust your spending habits so you stay on track with your goals.

The better you monitor how much you’re spending, the more likely you’ll be to stick to the budget you created for yourself.

Step 5. Assess And Adjust Your Budget

At the end of every month, take some time to assess what worked and what didn’t.

Review your budget and look for areas where you allocated too much money and others where you allocated too little.

Zero-based budgeting is a learning process, so it’s ok if you don’t create the perfect budget for yourself the first time you try. Just keep learning as you go and make adjustments to your budget as needed.

Also, it’s important to acknowledge that your spending priorities may shift and change over time.

For example, when you first start budgeting, your goal might be to get out of debt or build an emergency fund. However, over time, as you achieve your goals, your priorities will likely shift to things like investing in retirement, saving for a house, or putting your kids through college.

Some months, you might even run into surprise expenses like medical bills, home repairs, or maybe even a speeding ticket.

Whatever life throws at you, just use your budget to adjust your spending, reallocate money to different categories, and spend within your means.

While some months will be easier than others, over time, your budget will become a well-oiled machine.

And that’s when you’ll really start to experience the power of zero-based budgeting.

Want to improve your financial life through the simple power of budgeting? Here’s some other content we think you’ll like:

Final Thoughts

Zero-based budgeting is a simple but mighty method that can drastically change your life.

That may sound a little dramatic, but it’s true!

Seriously, the moment you create a zero-based budget, you put yourself back in control of your money.

Not only will it help you make better financial decisions, but speaking from personal experience, it will help you stretch your income further than you ever thought possible.

Put simply, with the help of your budget, you can reach your biggest financial goals.

So give it a try! Just don’t forget to wave good riddance to your financial struggles when you do.

Zach Buchenau

About The Author:

Zach Buchenau is a self-proclaimed personal finance nerd. When he isn't writing about budgeting, getting out of debt, making extra money, and living a frugal life, you can find him building furniture, fly fishing, or developing websites. He is the co-founder of BeTheBudget, and Chipotle's most loyal customer.

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}
30-day Financial habit tracker bundle | Be The Budget

Download Our Free 30-Day Financial Habit Tracker Bundle

These easy-to-use habit trackers will help you stay accountable and motivated on your journey to financial success.