Zero-Based Budgeting: What It Is And How It Works

In zero-based budgeting, your income minus your expenditures should equal zero. Savings goals, debt paydown and fun are all included.

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Edited by other Updated Jan 27, 2025 The zero-based budgeting method, also known as the ZBB budget, encourages you to use every penny of your monthly income. But that doesn’t mean spending it on a shopping spree. Important goals, such as saving money and paying off debt — as well as spending on fun stuff — are all part of the plan. The idea behind the zero-based budget, sometimes also called the zero-sum budget, is to give every cent a purpose. » MORE: How to choose the right budget system » MORE:

What is zero-based budgeting?

Zero-based budgeting is a method that has you allocate all of your money to expenses for needs and wants, as well as short- and long-term savings and debt payments. The goal is that your income minus your expenditures equals zero by the end of the month. The difference between zero-based budgeting and living paycheck to paycheck is that all of your financial needs are met. You can repeat expense categories and amounts every month, or mix it up. If you come in under budget in a certain category at the end of the month, add the remaining amount to next month’s budget, or move it to another category, such as your emergency fund. emergency fund It’s the same concept as the envelope system, which involves distributing money for different expense categories into envelopes. envelope system » MORE: How to choose the right budget system » MORE: How to choose the right budget system

How to start a zero-based budget

Before implementing this budget, take a few steps to ensure you're realistically planning your spending: Know your income. Total your paycheck, benefits and other sources of monthly income to find out how much money you have to work with. Know your income. Track your expenses for a few months. Knowing what you typically spend — and on what — creates a framework you can use going forward. You’ll spot areas in which you can cut back and in which you want to allocate more. Track your expenses for a few months. Categorize your expenses. Identify all of your priorities and expenses, including your needs and wants, emergency fund and other savings goals, plus your debt repayments. Categorize your expenses. How much should you allocate to each category? NerdWallet recommends the 50/30/20 rule. With this approach, 50% of your income goes to needs, 30% to wants, and 20% toward debt repayment and savings.

Zero-based budgeting example

Let’s say you make $3,000 per month. Your budget might look like this: Note that once you've budgeted for the essentials, the other spending categories can be for anything else. Want to pay off a credit card in six months? Build it into your budget. Buy a house? Set aside money for the down payment. Big vacation? Pad that travel fund with a few more bucks. Build your ZBB budget with an app — such as YNAB or Goodbudget — a spreadsheet, or pen and paper. YNAB Goodbudget » MORE: Explore our roundup of best budget apps for 2025 » MORE:

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The pros and cons of zero-based budgeting

The pros

The zero-based budget keeps you aware of how much money flows in and out. This can prevent you from spending what you don’t have. “If you haven’t tracked where your money is going, or if you feel like you don’t have control of your money or spending, then I think that this is a really good method,” says Catherine Hawley, a certified financial planner in Monterey, California. This system is also customizable, which can be especially useful if you're new to managing your money. managing your money

The cons

Following a zero-based budget eats up quite a bit of time. To hold yourself accountable, you’ll have to closely and consistently monitor your spending. And that’s not the only challenge you may experience. “I think one thing that can be problematic with it is that there are a lot of variable expenses,” Hawley says. “If you don’t account for your irregular expenses, the zero budget is going to potentially not leave you with enough money on average.” These variable expenses might include holiday purchases, traveling to a friend’s wedding or replacing a broken phone. variable expenses But there’s a way to solve this: Set aside money specifically for these costs. Create a savings fund, separate from your emergency fund and other savings goal funds, and contribute to it each month. The zero-based budgeting method might also pose a problem if you have an irregular or unpredictable income, for example if you’re a freelancer or an hourly worker whose schedule fluctuates. If you don't always know how much money you’ll have to allocate, consider using the previous month’s income for the current month’s budget. Note that you’ll need to save up a month’s worth of income as a buffer first.

See if zero-based budgeting is right for you

Now that you know what the zero-based budgeting system is all about, you’re ready to give it a shot. If it doesn’t work for you, try another budgeting method. If your financial situation is complex, you might benefit from speaking to a financial advisor. Watch this video to learn about other budgeting methods that may better align with your personality and lifestyle. Explore more on About the authors Schwahn Lauren Schwahn is a writer at NerdWallet who covers credit scoring, debt, budgeting and money-saving strategies. She contributed to the "Millennial Money" column for The Associated Press and managed a team of writers producing content for the series. Her work has also been featured by USA Today, MSN, The Washington Post and more. Lauren has a bachelor’s degree in history from the University of California, Santa Cruz. She is based in San Francisco. Published in Ayoola Elizabeth Ayoola is a Lead Multimedia Producer and Co-Host of the "Smart Money" podcast. Before delving into the podcast world, Elizabeth acquired over ten years of experience as a writer, and seven were spent covering personal finance topics. Her journey to finance writing started with a goal to learn as much as she could about how to attain financial freedom and share information with others about how to do it, too. This led her to Debt.com, where she covered topics relating to mortgages, debt and credit. Her articles have appeared on platforms like Washington Post, The Associated Press, The Washington Post, Yahoo, Essence, The Knot, PopSugar and Parents.com. Elizabeth has also done extensive spokesperson work and appeared on multiple renowned national networks like Good Morning America, ABC, NBC, and Fox to discuss money. Published in How to Budget Money in 5 Steps Free Budget Template: A Simple Tool to Help You Track Your Money 28 Proven Ways to Save Money How to Set Financial Goals: A Step-By-Step Guide Free Budget Template: A Simple Tool to Help You Track Your Money By Lauren Schwahn, Amanda Barroso 50/30/20 Budget Calculator By Amanda Barroso, Elizabeth Ayoola The Best Budget Apps for 2026 By Amanda Barroso, Lisa Mulka, Laura McMullen How to Choose the Right Budgeting Strategy: 4 Methods to Consider By Lauren Schwahn Is the 60/30/10 Budget Right for You? By Tiffany Curtis, Amanda Barroso What Is Cash Stuffing? How to Use the Envelope Budget System By Lauren Schwahn, Elizabeth Ayoola Pay Yourself First: Reverse Budgeting Explained By Lauren Schwahn, Amanda Barroso