How the Zero-Based Budget Method Works

How many budgeting methods leave you with $0 at the end? Just one. But despite its name, the zero-based budgeting method can give a big boost to your finances by encouraging mindful spending and saving. Every dollar is given a specific purpose, helping you reach your goals and feel better about your bottom line.

Zero-based budgeting is a spending strategy that assigns every penny of your monthly income to a job. It might sound like you’re spending all your money, but this budgeting technique should help you bring the same focus to your savings and debt repayments as you do to expenses. By the end of each month, you should have “zero” dollars just sitting in an account without a purpose.

Here’s a broad example of how zero-based budgeting could work with a monthly net income of $4,000: 

• $2,500 toward recurring expenses such as rent/house payments, gym memberships, etc.  
• $800 for savings and investments  
• $500 for debt repayment 
• $200 for discretionary spending 

That leaves you with $0 at the end of each month. There’s no more money just sitting in a checking or high-yield savings account without a purpose — every dollar now goes toward a specific goal.

Like many other budgeting methods out there, the zero-based budget requires you to take a close look at your finances. This is a feature, not a bug — allocating your entire income to different jobs each month should help you achieve more mindful spending and saving.

Here’s how to start gathering the information you need to build your own zero-based budget.

Figure out your monthly income  

The zero-based budget method ultimately depends on your monthly income. If you have a fixed salary, you can check your paystubs or your bank account deposits to figure out your monthly take-home pay after taxes.

On the other hand, if your income fluctuates each month, take a look at your earnings over the past year and identify the month when you made the least. If that’s too much of an outlier, you can also take the average of a few months when you earned less income than normal.

Whatever you decide, use that figure as your income to prevent you from creating a zero-based budget that causes you to overspend. During the months when your income exceeds this number, you can put the extra money towards savings or discretionary spending.

Look at your expenses  

Once you’ve calculated your monthly income, move on to your expenses and savings goals. List everything you plan to spend, categorized by housing, groceries, medical bills, credit card debt, student loans and discretionary spending. Then, subtract these from your income. Ideally, you should arrive at a balance of zero. If you end up with a negative number, it may indicate that you’re spending beyond your means and need to cut back on expenses.  

If you need help managing your budget, you can try a budgeting app like You Need a Budget (YNAB), which is specifically designed around the zero-based budgeting method. For $109 per year or $14.99 per month (after a 34-day free trial), YNAB lets you sync your bank accounts, credit cards, and investment accounts, allowing you to assign every dollar you earn into customizable categories. 

Simplifi by Quicken is another option that provides a personalized spending plan based on your income and expenses, adjusting in real time as you spend. For just $5.99 a month, with a free trial available, you can also plan and track your monthly spending seamlessly. 

Review your results 

Look at the results of your budgeting and see how it panned out. Did something cause you to spend more than you expected? Was it an emergency expense? Or an impulse buy? Moving forward, you can adjust for upcoming months.  

For example, if you happened to make less than expected one month and didn’t have enough to put toward savings, don’t fret. Instead, take this as an opportunity to analyze your spending patterns from previous months. If you notice seasonal expenses or trends, you can plan ahead by allocating extra funds during the months leading up to those periods. Plus, if you managed to underspend in certain categories previously, consider using that surplus to cover unexpected costs or boost your savings.  

A great way to grow those savings is in a high-yield savings account, where you can earn extra money for holding your funds in an account.

The LendingClub LevelUp Savings, for example, offers one of the highest yields on the market, along with zero monthly fees and no minimum balance requirement. You can also use your funds to pay bills, send money to friends and family and make internal and external transfers, which is less common for a savings account.

How you choose to budget depends on what works best for you. The zero-based budget requires a fair degree of micromanagement to assign every dollar a job, but it’s an effective way to make sure your spending and saving match with your goals.

If assigning your income to different tasks until you hit zero makes you uncomfortable, you could flip zero-based budgeting on its head. Marcus Holzberg, a CFP at Holzberg Wealth Management suggests you start at zero, then build a budget by adding in your most essential expenses first (like housing costs) and then work your way down to discretionary, “fun” spending (however you define that).

“I don’t think there’s a right or wrong way of doing these things,” Holzberg says. “These are all just rules of thumb and you just want to do your best.” 

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed  Marcus Holzberg, a certified financial planner at Holzberg Wealth Management.

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