What Is Zero-Based Budgeting?

4 MIN. READ

 

Key takeaways:

 

• How do you budget when the cost of living goes up? You can try zero-based budgeting, an approach that gives a job to every dollar.
• A zero-based budget can help you keep up with saving and debt repayment goals, even if essentials cost more.

The cost of living is up. As you’re spending more on essentials, you might find yourself skipping the contributions to things like your savings fund or extra debt payments.

There is a simple way to stay on track with your different financial goals: Zero-based budgeting. Here’s how you can make it work for you.
 

What’s a Zero-Based Budget?

With a zero-based budget, you’re earmarking every dollar you make and giving it a specific job. It’s called zero-based because the goal is to allocate every dollar to a specific expense or fund.

For instance, you can earmark money for:
 

• Rent and utilities
• Car payment and insurance
• Credit card payments, including paying off extra
• A monthly grocery budget
• Childcare and school-related expenses
• Subscriptions
• Gas and transportation
• Retirement contributions and other investments
• Vacation fund
• Home maintenance and repairs

These are just a few examples. You should tailor these funds and how much you allocate to them based on your lifestyle and goals.

Keep in mind that zero-based budgeting doesn’t mean spending every dollar: It means assigning every dollar to a specific goal, which often includes saving or investing.

If you overspend in one category, you’ll have to cut back in another to balance out your budget.
 

Is a Zero-Based Budget Right for You?

One of the most common budgeting mistakes is to only plan for your bills. It’s easy to set aside money for rent, utilities and minimum payments because these obligations come with due dates (and immediate consequences if you miss them).

However, there is no clear plan for the money left over with this approach, and that money often gets spent.

Over time, this gets in the way of saving, investing or getting out of debt because you’re not making regular contributions toward these goals.
 

How Does Zero-Based Budgeting Help You Keep Up With Financial Goals?

With a zero-based budget, you’re earmarking money for a specific purpose before it even hits your credit union account. Your money has a clear job, and you can stay on track, whether your goal is to get out of debt fast or save up for an emergency fund.

It’s easy to make this budgeting method work for you because you’re in full control of how you allocate the money. You can make changes over time as your expenses and priorities change.

It’s also a good way to eliminate unplanned expenses, unless an emergency comes up.
 

How to Adopt a Zero-Based Budget

You need a simple way to track your income and expenses. Here are a few options: 
 

• Pen and paper
• A spreadsheet
• Or a budgeting app

Once you have a tracking method in place, you can follow a few simple steps to create your zero-based budget:
 

• Step 1: Record all your sources of income for the month and add them up.
• Step 2: List all your expenses and spending categories. This is where going over your account statements can help you figure out how much you usually spend on utilities, groceries, entertainment and other categories.
• Step 3: Assign an amount of money to each of these categories. Remember: Each dollar has a job to do, whether it’s covering a bill, building up your savings or going toward an entertainment fund.
• Step 4: Do the math. Does your budget balance out? You might need to cut spending in one category if you’re short somewhere else.
• Step 5: Track your expenses carefully. Do a quick weekly check-in to make sure you’re still on track and rebalance your budget if needed.

Because you’re planning ahead with zero-based budgeting, it’s easy to automate payments, as well as contributions to savings and retirement accounts.
 

Budgeting With Power Financial Credit Union

As a credit union, our mission is to support your financial goals and provide you with the banking products you need to thrive.

With a Power Financial Credit Union checking account, you can easily set up automated bill pay and keep an eye on your balance and spending throughout the month. We also have savings accounts with competitive rates, so you can set up automated contributions as part of your zero-based budget.

Interested in becoming a member? Anyone who lives, works or goes to school in South Florida can join. Find out more online or by visiting one of our South Florida branches.
 

FAQs

What is zero-based budgeting in simple terms?

Zero-based budgeting means giving every dollar of your income a specific purpose, whether that’s paying bills, saving, investing, or spending. By the end of the month, your income minus your expenses should equal zero, because every dollar has been assigned.
 

How is zero-based budgeting different from traditional budgeting?

Traditional budgeting often focuses on covering fixed expenses first and loosely managing what’s left. Zero-based budgeting is more intentional because you’re planning all your spending upfront, including savings and extra debt payments, so nothing gets overlooked.

Do I have to spend every dollar in a zero-based budget?

No. “Zero-based” doesn’t mean spending everything. It means assigning every dollar a job. That can include saving, investing, or building an emergency fund.