What Is a Zero-Based Budget?



A zero-based budget is a method of budgeting where you assign all of your money to budget categories that cover expenses, debt payments, and savings. Rule One of the YNAB method, Give Every Dollar a Job, is a fundamental element of zero-based budgeting. And doing so will make your financial life delightfully uneventful.

I’ve never heard anyone say, “I just want to live a boring life.” It’s not really in our nature probably. Everybody wants some excitement, some new happenings, some big news to come their way. Everyone likes to have things to look forward to, anticipate, and enjoy. There’s probably a little bit of a kid inside each of us that still longs for a good, old-fashioned roller coaster ride.

Except when it comes to one thing: personal finances.

In our personal finance life, everybody probably wants a bit more consistency, less ups and downs, the ability to anticipate a bit better what large, unexpected happenings are coming their way. We all would like to have our personal finances be regular and—let’s face it—boring.

That’s right, zero-based budgeting (ZBB) is about the most boring, uneventful thing you can possibly imagine with your money. It’s so simple, anyone can do it. As boring as a zero-based budget is, it is extremely effective when applied to your personal finance situation.

What is Zero-Based Budgeting? 

Basically,  zero-sum budgeting means that you allocate all of your budgeting dollars to line items in your monthly budget. If you have $100 in your bank account, you might budget $50 to food, $25 to clothing, $15 to toiletries, and $10 for streaming subscriptions. You now have zero dollars left to allocate (and later spend). If you decide you want $15 for entertainment, then you cover the overspending from one of those other categories.

So, let’s pretend your take-home pay is $36,000 per year. That equates to $3,000 of monthly income. At the beginning of each month, you would take that $3,000 and allocate it to all of the different spending categories you’ve decided to use—which forces you to scrutinize your expenditures more closely. Many people use the envelope system in conjunction with a zero-based budget. The YNAB budgeting app uses four simple rules and software to simplify the process. 

With zero-based budgeting, it’s important to account for variable expenses, which are the irregular expenses that don’t repeat monthly. That’s the second rule of the YNAB method: Embrace Your True Expenses. You take your large, infrequent costs such as car insurance premiums, holiday spending, potential vet bills, etc. and you set aside money in smaller, more manageable chunks so that you can fully fund these expenses when they pop up.

Either way you cut it, the zero-based budgeting process is extremely effective in helping you reign in your spending, and spend with a plan, instead of just shooting from the hip.

Disadvantages to a Zero-Based Budget

Well, I think I just developed writer’s block. I’ve been sitting here at my keyboard staring into space, trying to think of one single disadvantage to operating with a zero-based budget. I promise I’ll update this article if I think of one.

(Editor’s note: Jesse originally wrote this post in 2005. He’s still trying to think of a disadvantage to zero-based budgeting.)

Do you see why the zero-based principle is so powerful? Every dollar must be accounted for and assigned a job. You do not let one single penny slip through your fingers without first being given a job. It’s easier to make sure your spending aligns with your priorities when you have an intention set for each dollar. 

The real work comes about when you have a variable income—although in all honesty, the variable income problem can be easily solved.

Start Zero-Based Budgeting

Keep things simple when you start operating with a zero-based budget. Don’t worry if your budget needs to be altered. That’s a fact of life. Above all, once you’ve allocated where those dollars belong, stick to your budget. If you budgeted $50 for entertainment, then by all means, go out and have $50 worth of entertaining fun and don’t feel guilty about it. That’s the point of the zero-based budget. You decide what you want to do with your money, you do it, and you feel great about it. A zero-based budget works because it gives you total control of your money. 

Take zero-based budgeting for a test run by setting up a new budget using a budget template or, even easier, take advantage of YNAB’s free 34-day trial.