What Is a Zero-Based Budget + How I Found $10k

This article originally appeared on Parent Portfolio and has been republished here with permission.

Call me “The Penny Hunter.”

Well, that’s the name my husband teases and calls me. And, he’s right. 

I look for every penny, nickel, or dime when I balance our books. One time, I followed up with a friend to make sure they got my payment because the amount never cleared from my bank account.

But that’s NOT budgeting. I was accounting.

Budgeting is about having a plan for your money, whether for bills, traveling, or saving. I identified where I SPENT my money versus where I PLAN to spend money to put it into perspective.

How did I survive without proper budgeting? I was fortunate that a few things worked out together in my favor:

  1. I always paid off my credit card every month.
  2. I’m not a big spender.
  3. I have a decent income.

If I were to slip up in any one of these categories, I would have been in big trouble. For example, some can only afford to pay the minimum on a credit card. Their debt would eventually accrue interest, impact their credit score, and their household income wouldn’t be able to keep up.

However, regardless of one’s income, anyone can be financially responsible with the right kind of budget. Check out one of my articles, “How Much Money Is Enough?”

I’ve found success with a zero-based budget! 

It has made me confident about my finances for the future. I’m no longer waiting on my next paycheck to pay back my credit cards. Instead, I’m aware of my limitations and know that I can achieve my goals!

  1. What Is a Zero-Based Budget?
  2. Why Do You Need a Written Budget (Even If You Can Afford It)
  3. Why Do Budgets Fail?
  4. Why Is a Zero-Based Budget the Best Method?
  5. How to Create a Zero-Based Budget
  6. What Should Your Monthly Budget Include
  7. What to Do If Monthly Expenses Exceed Income?
  8. Should I stop contributing to my retirement accounts?
  9. Conclusion

What Is a Zero-Based Budget?

A zero-based budget is a budgeting method where a person takes their monthly household income minus every expense to make the difference equal to zero dollars

This method doesn’t mean that a person needs to spend their entire income. Instead, it means giving every dollar a plan, whether that means spending it on bills, saving up for a trip, or using it to invest in retirement. 

Every dollar has a purpose!

For example, imagine a person with a monthly household income of $2,000. Below is a breakdown of their expenses:

  • Bills (i.e. rent, utilities, insurance): $1,000
  • Groceries: $300
  • Shopping: $100
  • Dining: $100
  • Vacation Fund: $200
  • College Fund: $200
  • Savings: $100

The total of their monthly expenses is $2,000. Subtract that amount from their income, and it equals zero! 

Notice how expenses don’t necessarily mean bills. Instead, these expenses also include goals, such as saving up for a vacation and a college fund. 

Every dollar of their income has an assignment!

Why Do You Need a Written Budget (Even If You Can Afford It)

I can safely say I make a decent income. However, I still wasn’t wise with my money. Instead, I was overconfident with my purchases. 

There would be months where I would have to wait for my next paycheck to back pay expenses I incurred on a family trip. Or, I would have to deplete my family’s savings to pay for annual expenses, such as life insurance policies.

Although I could technically afford it, I carried an uneasy feeling about my finances. I was guessing our money and potentially hurting mine and my family’s future. 

That is why everyone needs a written budget regardless of their income.

A budget can help someone be efficient with their money and be confident with their purchases. It will help them know that they can truly afford it and prepare for more considerable expenses.

Why Do Budgets Fail?

I applaud those who want to take control of their finances and start budgeting. However, it’s essential to manage expectations.

Imagine a person who wants to prepare for a marathon. On Day 1, a new runner doesn’t begin by jogging for 30 minutes straight! Instead, a new runner paces themselves and slowly builds up their stamina.

With budgeting, it’s also essential to set realistic expectations

There should be a limit on how much a person spends in a particular category. However, when starting, the budget shouldn’t be too restrictive.

When a budget feels too restrictive, a person will feel more discouraged than motivated.

Another reason why budgets fail is that some people forget to take into account unexpected or irregular expenses

A person may budget for their daily needs. An unexpected can wipe it all out, such as losing a job or a car breaking down.

Therefore, it’s also important to budget for an emergency fund. I recommend at least building a cash reserve worth three to six months of monthly expenses.

Why Is a Zero-Based Budget the Best Method?

It’s essential to review other traditional budgeting methods and compare them to understand why the zero-based budget is the best method.

50/30/20 Rule Budget

This budgeting method is implemented by dividing up one’s income into three categories: 1) Needs, 2) Wants, and 3) Savings. 

This method is also known as “proportional budgeting.” Proportional budgeting is assigning a percentage of one’s income to one of those categories. 

The most well-known proportion is 50% for needs, 30% for wants, and 20% for savings. 

However, a person can adjust those proportions—for example, 60% for needs, 20% for wants, and 20% for savings.

I started my budgeting journey following the 50/30/20 budget for years. After having children, I had to adjust to a “60/20/20 budget.” The cost of daycare is astronomical!

The issue I had with this system was that at the end of each month, I wasn’t accounting for the areas that we were overspending or underspending. I wasn’t accounting because I do make a comfortable living. 

Spending a little extra once in a while didn’t impact my family’s overall financial situation. It was just irresponsible

For instance, I set a $200 eating out budget for the month, but I spent $500. 

I’d justify it because I didn’t do any traveling that month. All those categories fall under the “Wants” bucket and usually fell right around the 20% allocation. 

This method posed a problem when there was a family trip to plan. I didn’t have anything set aside for it.

With a zero-based budget, I’m able to plan for a family trip properly. I can set a target amount and contribute monthly toward this goal. 

“Pay Yourself First” Method 

This budgeting method focuses on contributing a portion of someone’s income primarily toward their goals and savings. Hence, the name “Pay Yourself First.” Whatever remains from their paycheck can be at their discretion.

For example, imagine a person wanted to “pay themselves first” with 20% of their income: 10% goes towards a retirement account, 5% towards planning a vacation, and 5% towards preparing for a car purchase. 

The person can use the other 80% for everything else, such as rent and bills. The purpose is for the person to save money towards their personal goals.

The issue with this method of budgeting is that it doesn’t budget for someone’s expenses. This approach is more of an “I hope I have enough money to pay my bills” strategy.

Although I think it’s essential to save up for retirement and plan for a vacation. The first thing a person should do is to make sure they don’t go further into debt!

Envelope System 

The envelope system requires that a person set aside a certain amount of money from their income and place them in different envelopes. The person spends the cash that is in the envelope. 

The purpose of these envelopes is to limit spending for a person in a set month. 

For example, a person can have an envelope dedicated to shopping, groceries, and dining out. Each envelope has $100 of cash. Once a person spends $100 on eating out, they cannot dine out anymore until next month.

For those who have an issue with using plastic, I would say the envelope system is an excellent place to start. You reduce the temptation of the simplicity of swiping for your purchases. 

Some have implemented a zero-based budget with the system. For my family, moving to an all-cash system for variable expenses wasn’t practical. It’s not part of our routine

Tracking my family’s expenses and paying off the credit card is already part of my everyday routine. Being more mindful of how we’re assigning our dollars is more feasible! 

How to Create a Zero-Based Budget

Creating a budget can be a little overwhelming. When I started with zero-based budgeting, I had statements spread out across my dining table.

Below is a step-by-step path to avoid stress and confusion of the budgeting process.

Step 1: Track All Expenses for a Month

Consolidate all expenses into one location. This consolidation can be done via an online spreadsheet or performed by hand in a notebook. The key here is to SEE all the expenses for one month.

My recommendation is to start tracking at the beginning of a month. This tracking proves helpful when taking into account one’s paycheck(s).

Step 2: Identify Bills and Variable Expenses

At the end of the month, identify each expense as a bill or a variable expense. Bills identify as anticipated costs. A variable expense is an expense that may or may not happen in a month, or the amount spent fluctuates.

Here are a few examples of bills:

  • Rent
  • Utilities
  • Internet
  • Daycare

Here are a few examples of variable expenses:

  • Grocery
  • Gas
  • Eating out
  • Home maintenance

The goal is not to get too hung up on what is a bill or a variable expense. Instead, it’s just to help a person get a clear understanding of the type of cost (i.e., a need budget versus a want budget). 

Step 3: Set a Budget for Each Bill/Variable Expense

The next step is to set a realistic budget for each bill and variable expense. For example, if a phone bill is $100/month, then the budget for that expense can be $100. 

However, if a person spent $104 on groceries in the past month, the month’s budget can be $150. They add extra money to the actual expense because it’s a variable expense. As mentioned earlier, setting up a budget that is not restrictive will set you up for success!

Step 4: Compare the New Budget to the Monthly Income

Sum the new budget amounts and subtract that amount from the monthly income. Is the difference positive or negative

Even though the difference may be a positive amount, a person needs to reflect on their habits and lifestyle, especially when it comes to variable expenses. 

Can some expenses be reduced by lowering a set budget amount?

For more details, check out the section “What to do if monthly expenses exceed Income?

Step 5: Fund Goals

If there is any amount left over after budgeting for bills, it’s now time to use the extra money to fund goals. Make a list of short-term and long term goals as well as the set target amount.

Here is are examples of goals:

Next, create a budget to contribute to one or many goals. It’s not necessary to fund all the goals for the month. The idea is to have a plan for the money. 

For example, imagine a person has an excess amount of $300, and they have two goals: Emergency Fund and a Vacation. They can set a budget to contribute $200 towards an emergency fund while donating $100 towards a vacation.

A person gives every dollar from the excess an assignment. Thus, called the zero-based budget!

Step 6: Review and Evaluate

At the end of the month, it’s time to review if a person could stay within their new budget. If a person can remain below their budget, they might consider adjusting their budget and reallocating the difference to a different expense for the next period or month.

For example, a person budgeted $100 for dining out but only spent $60. If they feel confident that they can repeat the same discipline, they can re-budget the expense to be $70 instead and reallocate the $30 to different money goals.

Step 7: Repeat

At the end of every month, a person should review all their expenses in the previous budget. They should make adjustments to their budget for the next month. 

For example, when looking at plans for the following month, if there’s an event that requires spending, set a budget for that event.

What Should Your Monthly Budget Include   

Below is a list of bills and variable expenses that I keep track of when doing a zero-based budget. This list gives an idea of what expense categories someone can track:

  • Daycare
  • Electric Bill
  • Phone Bill
  • Internet
  • Gas Bill
  • Mortgage/Rent
  • Media Streaming Services
  • Student Loan Debt
  • Grocery
  • Dining out
  • Hair & Beauty
  • Home maintenance
  • Shopping
  • Charity

What to Do If Monthly Expenses Exceed Income?

If someone’s monthly expenses exceed their income, there are two ways to help the problem: 1) an increase in revenue or 2) cut back costs. 

A person can increase their income by progressing in their position and get paid more. Or, they could work a second job or side hustle.

People can reduce their expenses by paying off their debt(s) or reducing their spending habits. They could also negotiate to reduce their bills, such as car insurance and internet providers.

Should I stop contributing to my retirement accounts?

Although someone could reduce or even stop contributing to their retirement accounts to increase their monthly income, it’s essential not to forget one’s retirement. 

Prioritize paying off debt first! The freed-up money can go towards other debt payments or a savings account.

When it comes to prioritizing retirement and personal finance, the question “How much money is enough?” is revisited. 

A person doesn’t achieve retirement at a certain age. Retirement is a financially stable status based on how much a person has set aside. 


A budget is not a “set it and forget it” event. Instead, it is an ever-evolving practice. It may sound like a lot of work, but it will give a person confidence and even control their money.

Before, I never was truly budgeting. Instead, I was accounting. It wasn’t until I adopted the zero-based budget that I had discovered over $10,000 sitting cumulatively across multiple bank accounts. 

No more dollars are sitting idle without a purpose. Now every dollar has an assignment, and I am more assured about my family’s finances.

Whether you use zero-based budgeting or another traditional budgeting process, having a plan is vital. Make zero-based budgeting or any budgeting method a priority.

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