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What’s a Zero-Based Budget and Why Is It Important

When you first start budgeting, I recommend being as detailed as possible. Read about how to make your first zero-based budget.

A zero-based budget is a detailed budget that assigns every dollar of income to an expense. If you have trouble budgeting and you’re tired of never knowing where all your money went, creating a zero-based budget is a great way to help you get your finances in order. In this post, I will tell you all about this form of budgeting and how to make your first zero-based budget. By the end of the post, you will understand why this is my favorite way to budget and feel at ease about making your own.

Watch my video for a brief explanation as well as a look at my free zero-based budget template, or keep reading below!

The Old Form of Budgeting

Many people think of budgeting as a very relaxed way of handling your money: first paying all the bills, taking care of all the essentials, and making sure you spend a little on fun; then, save whatever is leftover. Sometimes, there isn’t a written plan, and you don’t know how much money is actually going where.

This lifestyle may work for extremely frugal people, but this simple system provides no accountability. Paying off debt, saving, and other financial goals are often left on the back burner; and it can be easy to overspend.

My husband and I “budgeted” like this for the first year and a half of our marriage. We would hope that there would be money leftover at the end of the month. However, we often ran out of money to put towards financial goals because we didn’t plan it. Does that sound like your situation?

I call this the “old form of budgeting” because once you learn about the right way of budgeting, you’ll never go back. Basically, Income – Expenses = Money for Financial Goals.

The New Form of Budgeting

Not having a budget created a lot of stress for my husband and I because we had a low income. We didn’t want to overspend, so we would avoid spending money. Not being able to splurge a little here and there can feel very constraining. Without knowing how much money we had to spend, we would overuse our credit card when we did want to buy something extra.

Every now and then, I would say to my husband, “Maybe we should make an actual budget,” but we avoided it for the longest time. I think many people have this underlying belief that budgeting is restraining when in fact the opposite is true.

After so long of not using a budget, I finally had enough of never knowing where all of our money was going. I started googling how to budget, and I’m thankful that I learned about the concept of zero-based budgeting. Dave Ramsey and numerous other financial gurus use this approach, and I can attest to its effectiveness as well.

I remember when we first started implementing a zero-based budget, I noticed a dramatic difference in our lives. I suddenly felt richer, even though we weren’t making any more money. Budgeting gave us freedom and permission to spend because it showed us where we could spend. We no longer had to check our bank account and hope there would be enough. We were in control of our money now.

I call this form of budgeting the “new form of budgeting,” or the right way of budgeting. With this method, Income = Expenses, and you include financial goals in your expense categories.

What Is a Zero-Based Budget?

To further explain, zero-based budgeting is a system of budgeting in which you allocate every single cent of income to a budget category, and you have budget categories for every possible thing you could put money towards. You don’t leave anything for guessing or hoping.

You can have a budget category for electricity, groceries, Netflix, date nights, tithe, savings, etc. Literally ANYTHING you want to put money towards, you will include in your budget as a category. In your budget, these budget categories are called “expenses.” You may feel weird calling your savings account an “expense” in your budget, but think of it as an allocation of your income.

You have finished creating your budget when your budgeted income equals your budgeted expenses. Another way to think of a zero-based budget is Income – Expenses = 0.

Zero-Based Budget Example

Let’s look at the example budget I made to illustrate how it works:

Under Income, I entered one paycheck of $2000 (It’s possible to have multiple income categories as well.).

Under Expenses, I allocated the income to expense categories until the expenses equaled $2000. This results in an extremely detailed budget that doesn’t leave anything for guessing. I even listed what I might spend on a hair cut.

By writing out our budget, we can see ways we can save more AND spend more. In this budget, I allocated money for bills and debt, as well as fun things like eating out.

How to Make Your First Budget

Now that I’ve explained what type of budget you should make, let’s break down how to create your own zero-based budget step by step:

  1. Choose a time frame to budget. Some people like to stick with the typical monthly budget, while others prefer to budget each individual paycheck. You can choose whatever time frame works best for your situation.
  2. Choose a way to record your budget. This is where you can be creative and have fun! You can write down your budget in a bullet journal, use an app or website like Every Dollar, or enter it into a spreadsheet (download my free budget template!).
  3. Write down the income you expect to earn during this time frame. Record any paychecks, passive income, side hustle income, etc. (See how to budget irregular income in Extra Tips below).
  4. Write down the expenses you plan to have during this time frame. How are you going to spend the money that you earned? Break down your spending into specific categories, such as your bills, sinking funds, deposits into savings accounts or debt payments, and fun spending.
  5. Adjust the expenses until the amount of the expenses equals the amount of your income. First, take care of all of the important expenses, such as rent, electricity, and groceries. Then, whatever is flexible or optional, adjust the amounts, so that the expenses equal the income earned.
  6. Track your spending throughout the month. Now that you have established the budget, keep track of your spending throughout the month using a transaction log, and stick to your budget as best as possible!
  7. Review. Finally, review how well you stuck to your budget, and create a new one for the next month or pay period. Budgets naturally evolve, so you shouldn’t use the same one month after month.

Free Zero-Based Budget Template

Budgeting Tips for Beginners

  1. If your income is irregular, estimate your income as best as you can. If you really have no idea what your income will be, plan for your earnings to be on the lower side.
  2. Give yourself AT LEAST three months of budgeting to really get the hang of it.
  3. Watch budgeting videos on YouTube if you are a visual learner. There is a huge budgeting community on YouTube.
  4. If your income feels really tight right now, read my post on how to budget when you don’t make enough money.
  5. As important as making the budget itself is, keeping an expense tracker or transaction log to keep track of your spending and to help review every month is just as essential to see true results!!

How to Use a Transaction Log or Expense Tracker

You may hear other financial influencers use the term expense tracker, but I prefer to say transaction log. An expense tracker is used solely to record your expenses, whereas a transaction log is used to record all transactions, including income. It is similar to looking at your bank statement; you see deposits and withdrawals.

To use a transaction log, first log the date of the transaction. The first transaction may be your or your spouse’s paycheck.

Next, write down the category. This category should correspond to the category used within your budget, whether that’s “My paycheck” or “Hair cut” or “Groceries.”

Add an optional description if it helps you understand the income or expense. For example, if the category is groceries, you may want to record in the description which store you bought it from or what you bought there.

Finally, write down the amount. It may be helpful to add a plus sign for income and a minus sign for expenses before writing the amount. Another way to help you identify the income from the expenses is to highlight the income green.

Some people love to color code their entire transaction log by different categories. The Budget Mom has some great examples of this!

If you use a spreadsheet, such as the one that comes with my full-version budget template, you should be able to match the total at the bottom of the transaction log to the actual balance in your bank account if you use one main bank account and add the minus signs to the expenses.

Get a FREE Transaction Log!

Enter in your email, and I will send you a FREE transaction log printable that you can download and print off every single month to help you log your income and expenses.

You Can Do This!

Budgets have a bad rap for being very restrictive, but the opposite is true. With knowledge comes power! If you know your money situation, you have the power to harness it and make it work towards your financial goals.

I know facing the numbers can be scary, too, especially if you have been avoiding your bank account for awhile. Trust me, I have been there many, many, MANY times, and sometimes, I find myself there even now! It’s easy to brush your finances under the rug, but that doesn’t make it go away. I encourage you to dust off your calculator, make a budget, and get control over your finances today.

Now that you understand the method of zero-based budgeting, it’s time for you to set up your first budget! It will feel so good to know exactly where your money is going, and you will be amazed at how much quicker you can reach your financial goals.



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