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Example Of Zero Based Budgeting: A Detailed Explanation

example of zero based budgeting

In a world of constant financial pressures, the desire to minimize spending and maximize savings is a universal goal. We all know the feeling of a paycheck disappearing faster than we had liked, leaving us to wonder where our money went and how we can get a better handle on our finances.

Rather than simply adjusting last month's numbers (the traditional approach), which feels like a futile effort to fix a broken system, zero-based budgeting offers a more effective way to gain control over your finances. It's a powerful approach that helps you achieve real financial clarity.

Zero-based budgeting (ZBB) is not just another budgeting method; it's a revolutionary way of thinking about every single dollar you earn. Instead of simply tracking where your money went, ZBB demands that you justify where every dollar will go.

In this article, we will be looking at an example of zero-based budgeting and some zero-based budgeting apps.

Example of Zero-Based Budgeting

Zero-based budgeting (ZBB) is a budgeting method that requires all expenses to be justified and approved for each new budget period. Instead of starting with last month's budget and making minor adjustments, you start from a "zero base," meaning you allocate every dollar of your income until your income minus your expenses equals zero.

This approach forces a thorough review of every expense, which can help identify and eliminate unnecessary costs, improve efficiency, and ensure that all spending aligns with current goals. While it's most commonly used by businesses, the same principles can be applied to a personal or household budget.

Let's imagine you are an individual with a monthly take-home income of $5,000. The goal of a zero-based budget is to make sure that your income minus your expenses equals zero. Every dollar is "given a job."

Here is how your budget might look, with a clear purpose assigned to every dollar:

1. Calculate Total Income

2. List and Categorize All Expenses

Next, you would go through all of your recurring and non-recurring expenses for the month. You are not just listing them; you are justifying the amount you are allocating to each.

a. Housing:

b. Transportation:

c. Utilities:

d. Debt Repayment and Savings:

Here is how to save money even on a tight budget.

e. Food:

f. Insurance:

g. Personal and Entertainment:

h. Miscellaneous:

3. Subtract Expenses from Income to Equal Zero

Now, you would add up all of your planned expenses to see if they equal your total income.

Total Expenses:

$1,600 + $350 + $150 + $75 + $50 + $40 + $250 + $100 + $1,200 + $450 + $100 + $120 + $150 + $40 + $100 + $75 + $50 + $30 + $50 = $5,000

4. The "Zero" Outcome:

Income ($5,000) - Expenses ($5,000) = $0

Why this is an example of zero-based budgeting:

This is an example of zero-based budgeting because:

  1. Every Dollar Has a Job: Notice that every dollar of the $5,000 income has a specific purpose. There is no "leftover" money sitting in a checking account without a plan.
  2. No Incremental Budgeting: This budget was not created by simply taking last month's budget and increasing each category by a small percentage. Instead, each category was re-evaluated and assigned a specific amount based on current needs. For example, if you had a car repair bill last month, you wouldn't just carry that expense over. Instead, you'd justify the gas and maintenance budget for the new month based on your actual needs.
  3. Proactive and Intentional: The process requires you to be very intentional with your money. If you have extra money in a category at the end of the month, you can decide to move it to savings, pay down debt faster, or carry it over to next month's fun money category—you are actively making a decision rather than letting the money sit unassigned.

Here is a detailed guide on: What Should Be Prioritized When Creating a Budget.

Zero-Based Budgeting App (Application):

Zero-based budgeting can be done with a simple spreadsheet, but apps can significantly streamline the process, especially for real-time tracking and automation. Here is a look at some of the most popular zero-based budgeting apps:

1. You Need A Budget (YNAB)

YNAB is arguably the most famous zero-based budgeting app. Its entire philosophy is built around four rules:

The app is designed to help you plan ahead for financial decisions rather than just tracking past transactions.

Features:

YNAB has the following features:

  1. Detailed Categorization: Allows for granular control over your spending categories.
  2. Goal Tracking: Set goals for savings (emergency fund, down payment), debt payoff, etc., and assign money towards them.
  3. Bank Syncing (Optional): Connects to your bank accounts to automatically import transactions, but encourages manual review and assignment to budget categories.
  4. Robust Reporting: Excellent tools to see where your money is going and how your budget is performing.
  5. Educational Resources: Extensive library of workshops, articles, and a supportive community to help you master the method.

This is best for those who are serious about taking control of their finances, want a structured system, are willing to pay for a powerful tool, and are motivated to actively manage their money.

  • Pros: Highly effective for changing financial habits, strong emphasis on education, excellent customer support, and a supportive community.
  • Cons: Can be expensive, and the learning curve can be steep for new users who are not accustomed to this hands-on approach.

Note: YNAB is a Paid subscription ($14.99/month or $99/year) after a 34-day free trial. Can be use on Web, iOS, Android.

2. EveryDollar:

Created by financial guru Dave Ramsey, EveryDollar is a straightforward zero-based budgeting app that aligns with his "Baby Steps" financial plan. It's designed to be simple and easy to use.

It has a Free version (manual entry only) and a paid "Plus" version ($99/year) that includes bank syncing. 

Features:

Here are key features of EveryDollar:

  • Zero-Based Framework: You allocate your entire income to budget categories.
  • Simple Interface: Easy to understand and navigate, especially for beginners.
  • "Baby Steps" Integration: Aligns with Ramsey's debt-reduction and wealth-building plan.
  • Manual Tracking (Free Version): Forces you to be involved with every transaction.
  • Bank Syncing (Plus Version): Automates transaction import for faster budgeting.

It create a new budget each month, track your spending, and see your progress toward your financial goals. The paid version, EveryDollar Premium, offers bank account syncing, but the free version requires manual entry.

The premium version is relatively expensive for what it offers compared to competitors.

3. Goodbudget

Goodbudget uses the classic "envelope system," a physical version of zero-based budgeting, in a digital format. You divide your income into digital "envelopes" for different spending categories (e.g., Groceries, Rent, Fun Money, Savings). When you spend money, you "take it out" of the corresponding envelope.

Features: Sync and share your budget with a partner, create spending "envelopes," and visualize your spending with reports.

This is great for couples or families who want to manage their finances together. The free version is quite functional, allowing for a certain number of envelopes and accounts.

However, the free version does not sync with bank accounts, so you must manually enter every transaction. Some users find the interface less modern than other apps.

Best for: Couples and families who want to budget together, individuals who prefer manual transaction entry for better awareness, and those who like the visual of an envelope system. The free plan is a great way to try it out.

4. Monarch Money:

Monarch is an all-in-one personal finance tool that includes robust zero-based budgeting features. It provides a comprehensive view of your entire financial picture.

Features: Customizable budgeting tools, investment tracking, and net worth tracking. You can add household members to your subscription at no extra charge, making it ideal for couples.

  • Pros: Clean and user-friendly interface, excellent for couples, and offers a holistic view of your finances beyond just budgeting.
  • Cons: No free version available; you have to pay a subscription fee.

5. PocketGuard:

PocketGuard is known for its "In My Pocket" feature, which shows you how much money you have left to spend after accounting for bills, savings goals, and necessary expenses. While not exclusively zero-based, you can align its features with a zero-based strategy.

It automatically calculates how much "spendable cash" you have for the month by taking your income and subtracting:

  • Recurring bills and subscriptions: The app automatically identifies these from your linked accounts.
  • Savings goals: Any money you've allocated to savings.
  • Budgeted expenses: Money set aside for categories like groceries, gas, or dining out.

This single number gives you a quick and easy way to see how much you can spend on discretionary items without going into debt. It's a powerful tool for visual and immediate accountability.

Key Features of PocketGuard

  1. Account Syncing: PocketGuard securely links to your bank accounts, credit cards, and loans to automatically import transactions. This reduces the need for manual data entry, which is a significant advantage over some other budgeting methods.
  2. Budgeting and Categories: The app automatically categorizes your transactions, and you can create custom categories to personalize your budget. The paid version, PocketGuard Plus, offers unlimited categories and the ability to split transactions across different categories.
  3. Bill and Subscription Tracking: It automatically tracks and organizes your recurring bills and subscriptions, helping you avoid late fees and giving you a clear view of your fixed expenses. The app also offers a bill negotiation service for PocketGuard Plus members.
  4. Debt Payoff Planner: For those with debt, PocketGuard can create a personalized payoff plan based on your accounts, interest rates, and monthly payments. This feature is particularly useful for visualizing your progress toward becoming debt-free.
  5. Goal Setting: You can set and track multiple savings goals, whether for an emergency fund, a vacation, or a down payment. The app helps you determine realistic monthly contributions to stay on track.
  6. Security: PocketGuard uses 256-bit SSL encryption, the same level of security used by major banks. It also requires a PIN or biometric authentication (like Touch ID or Face ID) for added security.

PocketGuard has a free version and a premium subscription called PocketGuard Plus.

  • Free Version: The free version is functional but limited. It allows you to link a limited number of financial accounts and has a cap on the number of budget categories you can create. It's a good way to test the app's core functionality before committing to a paid plan.
  • PocketGuard Plus: This paid subscription unlocks all of the app's features, including unlimited accounts and categories, a debt payoff plan, and bill negotiation services. Pricing varies, with options for monthly, annual, and even a lifetime membership, which is sometimes offered at a discounted rate.

PocketGuard is excellent for quickly seeing your "safe-to-spend" amount, requires less manual effort than other apps, and has a simple, clean interface.

However, it is not as strict or educational as YNAB, which may be a drawback for people who need a more hands-on approach to changing their financial habits.

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Why You Should Use a Zero-Based Budget:

Using a zero-based budget can be a transformative experience for your personal finances. Here are some of the key benefits:

1. Total Control and Awareness: You become hyper-aware of where every dollar is going. This contrasts with more passive budgeting methods where money can slip through the cracks. By actively assigning a purpose to each dollar, you gain a sense of control and confidence over your money.

2. Reduced Wasteful Spending: ZBB forces you to scrutinize every expense. You will be asking questions like, "Do I really need this subscription?" or "Is this spending category truly a priority for me right now?" This process often reveals and eliminates unnecessary or redundant costs.

3. Alignment with Your Goals: Since you're rebuilding your budget from scratch each month, you can prioritize your spending based on your current financial goals. If you're trying to pay off debt, you can allocate more to that category. If you're saving for a down payment, you can make that a top priority.

4. Increased Accountability: Zero-based budgeting fosters a sense of personal accountability. You are responsible for every spending decision and for making sure your expenses align with your income. This can be a powerful motivator to stay on track.

5. Flexibility: While it seems rigid, ZBB is actually very flexible. Because you create a new budget each month, you can easily adjust for one-time or irregular expenses, like a birthday gift or an annual car insurance payment, without derailing your entire financial plan.

Conclusion On Zero-Based Budgeting:

Zero-based budgeting (ZBB) is a powerful financial method that requires you to allocate every dollar of your income until your budget balances to zero. Its core strength lies in promoting intentional spending, forcing you to consciously decide where your money goes rather than letting it slip away.

This level of self-awareness and control is particularly effective for achieving specific financial goals, such as paying down debt or saving for a major purchase, as it ensures your spending aligns directly with your priorities. While more demanding than other methods due to the need for constant vigilance and a fresh start each month, ZBB can be a transformative tool for those who have struggled with passive budgeting and are ready to take full ownership of their finances.

Ultimately, the effectiveness of a zero-based budget hinges on your commitment to the process. It is not a set-it-and-forget-it solution but a dynamic system that provides a clear and honest picture of your financial life. By regularly scrutinizing and justifying every expense, you can eliminate wasteful spending, build stronger financial habits, and empower yourself with a sense of security and control.

For anyone willing to put in the effort, zero-based budgeting offers a path to not only better financial outcomes but also a deeper understanding of your own relationship with money.

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