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Budgeting

How to Create a Zero-Based Budget

If you’re in the market for a budgeting method that’s the best for your money, might we suggest the zero-based budget? (We might. We will.) But what makes it the best? And how do you make (and keep) a zero-based budget?

Let’s answer all that. Right now.

What Is Zero-Based Budgeting?

Zero-based budgeting is when your income minus your expenses equals zero. Perfect name, right?

So, if you make $3,000 a month, everything you give, save or spend should add up to $3,000. Every dollar that comes in has a purpose, a job, a goal. Nothing is left hiding or getting mindlessly spent on fancy coffees or $1 bin deals.

Quick callout: This doesn’t mean you have zero dollars in your bank account. It just means your income minus all your expenses equals zero. Keep yourself a little buffer of $100–300!

zero based budget

How to Make a Zero-Based Budget

Before you start making your zero-based budget, log in to your bank account or grab those bank statements out of your drawer. They come in handy when you’re wondering how much you normally make or spend on stuff. You can also check out these budget percentages and averages.

1. List your monthly income.

You can do this the old-fashioned way with a sheet of paper, or you can use our free budgeting app, EveryDollar. (We suggest the second way. Because the math that’s coming up is way easier with EveryDollar.)

Money

Start budgeting with EveryDollar today!

What counts as income? Your regular paychecks and anything extra you plan to bring in during the month (think side hustles or child support). Write it all down and add it up! That’s your total monthly income, aka what you’ve got to work with this month.

P.S. If you want to start on paper to get all these numbers down, and then switch over to EveryDollar, that’s cool too.

2. List your expenses.

You know what’s coming in—now plan for what’s going out. Think of everything you spend money on during the month. List out your expenses like this:

  • Giving (This should be 10% of your income.)
  • Savings (This depends on your Baby Step, which we’ll explain later.)
  • The Four Walls (These are the top bills to cover: food, utilities, shelter and transportation.)
  • Other essentials (We’re talking about insurance, debt, childcare, etc.)
  • Extras (Here’s the fun part: entertainment, fun money, restaurants, etc.)
  • Month-specific expenses (Any holidays, celebrations or semiannual expenses due this month?)

Don’t forget to give yourself a miscellaneous category too so you have a little extra cushion in your spending. That way, anything that pops up unexpectedly isn’t a problem—it’s in the budget.

3. Subtract your income from your expenses to equal zero.

When you subtract all those expenses from your income, it should equal zero. If you don’t hit zero at your first pass, welcome to the majority! Yep, that’s right. Practically no one gets this right the first time. That. Is. Fine. But let’s talk about how to fix it!

Got money left over? First, throw some confetti and do a celebration dance. Like, for real. Then, put that money to work!

Where?

On your current Baby Step!

What’s that?

The 7 Baby Steps are the proven, guided path to save money, pay off debt, and build wealth. (Aka how to win with money.) They are the seven money goals that will take you from where you are to where you want to be.

Now, let’s talk about what to do if you subtract your planned expenses and end up with a negative number. This means you’re spending more than you make, and that just won’t work. But don’t freak out. You can get the number to zero.

Get out your metaphorical hedge clippers, and trim that budget. That can mean lowering your planned spending amounts where you’re able, or it can mean cutting spending. (FYI, start with the restaurant line! Food is where we Americans tend to overspend the most. Meal planning can help you get the most out of your food budget.)

You can also up your income by starting a side hustle, selling stuff, or finding some other way to make extra money.

That’s it for making the zero-based budget, but we’ve got two more steps that’ll help you actually stick with it.

4. Track your expenses (all month long).

So, you can’t just set up that budget and leave it. That gets you literally nowhere with your money. You’ve got to get in there and track your transactions. Every single one. That means any money that comes in or goes out gets put into the right budget line.

When you make $100 from your side hustle, add that to the side hustle income. When you pay the rent, subtract that expense from Housing. When you fill up the gas tank, subtract that from the gas budget line under Transportation.

This is how you stay on top of your spending. This is how you keep from overspending.

By the way, you can streamline this process with the premium version of EveryDollar, available only in Ramsey+. You’ll connect your bank to your budget so transactions stream right in. Then, you just have to drag and drop them into place!

5. Make a new budget (before the month begins).

While it’s true your budget won’t change a ton month after month, it will change some. So, create a new zero-based budget every single month. Remember those month-specific expenses we mentioned in the second step? This is where they really come into play.

Also, do this before the month begins so you’re ready, ahead of time, for what’s coming your way.

Example of a Zero-Based Budget

Here’s a really basic example of a zero-based budget so you can see how the math works out.

example zero based budget

Advantages of Zero-Based Budgeting (Over Other Budgeting Methods)

1. 50/30/20 Rule

The 50/30/20 budgeting rule follows these percentages: 50% of your income goes toward your needs, 30% goes toward wants, and 20% goes toward savings. Though it’s nice to have some numbers to help you start budgeting, these numbers leave a lot to be desired.

First of all, if you’re using our Baby Steps (which you really should), you aren’t always putting money toward savings. You’re taking your goals one (baby) step at a time. That kind of focus brings quick wins and lasting wealth.

Second, the 50/30/20 rule lumps debt into needs—but requires you to make minimum payments only. You can’t make maximum progress with minimum payments.

And finally, those three percentages stay the same no matter where you are in life. If you’ve got a ton of student loan debt—50/30/20. If you’re debt-free and investing in retirement—50/30/20.

Your budget should change based on your income, goals and life stage. This budgeting method just doesn’t have room for that.

2. 60% Solution

In the 60% solution method, you cover all your wants and needs with 60% of your budget. The other 40% is for saving. Then, that 40% gets divided up into these savings categories: 10% for retirement, 10% for long-term savings, 10% for short-term savings and 10% for “fun.”

First of all, that’s a lot of dividing. Second, we love savings—but if you’ve got debt, you shouldn’t be putting 40% of your money into savings. You should be destroying that debt. Hardcore. And after that, you should put as much as you can into building your fully funded emergency fund. And after that, you should invest 15% in retirement.

This method falls short too. It just doesn’t account for every budgeter’s individual situation.

3. Reverse Budgeting

Many budgeting methods have you set aside money for spending first and savings second. With reverse budgeting, it’s the opposite. (Hence the name.)

In this method, you set your budget for saving and investing first. Then you put everything else in there (like housing, gas, food, insurance, debt and the nonessentials).

So, we love the emphasis on savings not being an afterthought! Because it’s too easy to forget about it.

But again, this method locks you into a strategy that might not fit the money goal you’re in the middle of! If you’re on Baby Step 2, you aren’t thinking savings first. You’re focused on kicking debt out of your life forever.

4. Set It and Forget It

Okay, you’ve got to start somewhere with a budget. If you’ve never made one, getting all your numbers down (income and expenses) is your first step. But you don’t stop there. You don’t just leave those numbers on the page and hope you’ll live by them.

This is the “set it and forget it” budgeting method. And it really doesn’t work. It helps you see where your money should go—but it doesn’t make you accountable for where it actually goes. And it’s a great way to overspend.

5. Zero-Based Budgeting

You can probably see why we love zero-based budgeting so much. It’s way more customizable to where you are in your life. You get to decide how much to put toward debt, savings, retirement, etc. Every. Single. Month.

You can also adapt your zero-based budget as you go through the Baby Steps. That’s what it’s made for! Every single dollar is working for you. Always.

Can You Make a Zero-Based Budget With an Irregular Income?

Yes! If you have an irregular income (meaning your income isn’t the same each paycheck or comes at different times in the month), you can still use zero-based budgeting. It’ll just look a little different for you.

  • When you’re listing your income, find out what you’ve made the last few months. (This is another place your bank statements are helpful.)  
  • Take the lowest amount you made in that time and list it in the budget as this month’s planned income.
  • You can adjust the income later in the month if you make more.

When you’re listing your expenses, follow the list we gave you earlier. Just know that the extras might have to wait. Cover the most important things first. If you get paid more than you planned, add that extra money to your Baby Step or another budget line.

You can use our Irregular Income Budget Planning form to get started!

So, Why Is Zero-Based Budgeting Important?

Here’s the deal. If you want to make any progress with your money, you need to make a monthly budget. People say budgeting takes them from wondering where their money went to telling it where to go. That. Is. Empowering.

And a zero-based budget? Even better. Because you’re telling every single dollar where to go. You work hard for your money—all of it. So all of it should work hard for you.

And don’t forget EveryDollar—the free way to create your zero-based budget. You make the money, and it does the math. What a beautiful relationship.

Listen: Whatever your money goal, whatever your Baby Step, wherever you are in your personal finance journey—a zero-based budget is what will get you (and keep you) moving forward.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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