How to Make a Zero Based Budget

How to set up a zero based budget, for beginners.

I have been getting so many questions lately about how to set up a successful budget. I decided it was about time I talk about this important subject! Today, I will be teaching you exactly what you need to do to set up and maintain a zero based budget.

What is a zero based budget?

A zero based budget is a form of budgeting where you budget all of your expenses to equal the same amount as your income. The simple formula is: Income – Expenses = 0.

Why do I need a zero based budget?

This form of budgeting forces you to think about every single dollar. When you have to scrutinize exactly where, how and when to spend each of your hard earned dollars you will look at your spending differently. A zero based budget will keep you on track with your money goals and encourage you to spend less, while saving more.

How to set up a successful budget:

Setting up a zero based budget is really easy once you learn the basic steps.

Step 1: Write down your income.

Write down all the income you expect to receive over the next month. Don’t forget to include any money you might receive from side hustles!

Need a budgeting worksheet? Download one for free by clicking the link below!

Step 2: Write down all monthly expenses.

This is the most time consuming part of making a zero based budget, but don’t let that scare you away! You need to write down every expense you will be making over this next month. And when I say everything…I really mean everything! That $2 shake you get on your way home from work??? Yeah, include that in your expenses.

Fixed Expenses

First, write down all of your “fixed expenses.” A fixed expense are the bills that cost the same amount every month. The most common fixed expenses you should include in your budget are:

Mortgage or rent
Insurance, including health, car, home, life
Utility bills
Debt payments

Variable Expenses

Next, you will write down all of the variable expenses you will have throughout the month. Variable expenses are the items you spend money on regularly, but the amount changes month to month. Here are a few of the most common variable expenses:

Groceries
Entertainment
Eating out
Fuel
Clothing
Hair care

Seasonal Expenses

Now, write down all seasonal expenses. Seasonal expenses are those expenses you will have to pay sometime throughout the year, but usually not every month. Don’t forget these seasonal expenses in your budget:

Home repairs
Christmas
Birthdays
Tuition
Dental/Medical work
Vacation
Property taxes
HOA fees

It’s so important to plan ahead for these expenses. If you start saving for them now, you will already have the money set aside when the time comes.

The best way to plan for seasonal expenses in advance is through sinking funds. A sinking fund is like a savings account within your budget. You will add to these funds each month, and then when that home expense comes, or your HOA is due, you will already have the money saved for it. You can learn all the nitty gritty about sinking funds here.

Savings

Don’t forget to include setting aside money for saving. I highly encourage you to always be saving a little bit here and there. You might want to be saving for retirement, a rainy day, or college. Don’t forget to include these in your monthly expenses.

Step 3: Subtract Your Income from Expenses To Equal Zero

Once all of your income and expenses have been written down you will want to subtract the income from your expenses. The goal is to get the number to equal zero. This might take some trial and error, but you will find what works for you.

If your expenses are higher than your income, try to rework your budget and find areas to cut. Here are 5 things we cut from our budget to save thousands each year. Don’t think you have anything left to cut? Check out these ways to cut your budget when you don’t have anything to cut.

If you find your expenses are lower than your income, this is great, but you will still need to keep working the budget. Every dollar in your budget needs a job, don’t leave any of them sitting around with no where to go! If this is the case for you, find a category within your budget for those extra dollars. Add more money to a category, save the extra for a rainy day, or use it to pay more towards your debt.

Step 4: Track Your Spending

Now that your budget is ready to go, it’s time to track your spending! Throughout the month you will need to write down everything that you buy. Yes, everything!

Tracking your spending is important because it helps you see if you are staying within your budget….or if you are overspending in certain categories. I have also found that when I know I have to write down my spending….I think twice before spending!

Related: How to Get Your Spouse to Budget

Step 5: Check In With Your Budget

You must be checking in with your budget regularly. I recommend taking a quick glance at your budget at least once every day. Get into the habit of checking your budget before making any purchase. This helps you be sure that you have the money available.

Have a more thorough budget check in once or twice a week. This thorough check in will be the time to look through your budget and make sure your spending is right on track. Your weekly check in should take about 15-30 minutes.

Step 6: Close Out the Budget

It is now time to close out the budget! This should be done at the end of each month (or budgeting period.)

Closing out the budget simply means to make sure all spending is accounted for. You will look through your spending tracker, fill out your budget to report how much you spent in each category, and make adjustments as needed.

This is an important step to learn more about your spending habits. If you find yourself continually going over budget in groceries, you might decide you need more money in that category. Perhaps you notice a lot of overspending on clothing each month, you can use this knowledge to make a plan to spend less. Thrift shopping or using cash envelopes are both great ways to keep the clothing budget down!

At the end of each month you will rework each of the 5 budgeting steps. This is the time to rewrite your budget and assess your needs and living situation. Your budget will change from time to time, and that is necessary!

Be willing to work through these changes and put in the work to keep your budget properly maintained.

The goal is to have the amount spent equal the amount budgeted. Through time and adjustments, you will find what works best for you!

Budgeting FAQ

How much should I put into each budget category?

I like to follow Dave Ramsey’s advice when it comes to budget categories. You can find how much he recommends in each category here. We don’t follow these suggestions completely, but they make a great guideline to help us budget.

What should I do if I go over budget?

It happens to all of us! Don’t get discouraged if (and when!) you find yourself in this situation. There are a few things you can do to fix your budget.

Use money from another category. If you have already overspent in groceries, but still have money left in your entertainment category, you can use that entertainment money to cover the cost of your extra grocery spending. This will mean less entertainment for the month, but it might be necessary to keep your budget on track.
Sell something. Look for items in your house that you can sell right now to earn some money. I highly believe everyone has a few things they could make money from. This extra cash can be applied to the area you overspent in.
Side hustle. Try to find a way to earn extra money to cover your extra expenses. Need a few ideas? I have a great side hustle list here.

The most important thing is that you find a way to cover that overspending. Do not pull out a credit card. You can fix this!

What should I do if I go under budget?

The very first thing you should do if you go under budget is give yourself a big ‘ol pat on the back. Be proud! That’s great!

But. We don’t want to leave that hard earned money just sitting around. Give it a job!

Here are a few suggestions (in order of priorities) for your extra cash:

Pay extra towards your debt.
Build up your emergency fund.
Put it in one of your sinking funds. Perhaps a vacation or car you might be saving for.
Reward yourself. Treat yourself to something fun! It’s ok to use that extra cash on you!

How can I make checking my budget a habit?

Habits are so hard to form! If I’m being completely honest with you, it took us years (yes, years) to form a good budgeting habit. I hope it doesn’t take as long for you! Here are a few suggestions to make budgeting a habit:

Set an alarm on your phone. This alarm will be your daily reminder to check your budget and stay on track.
Schedule it. Write “budget” write into your daily planner/schedule. Set aside a time each week that is your budget time, and no matter what stick to this schedule. Sunday evenings are a quiet time in our house, so we use it to look over the budget.