A zero-sum, or zero-based, budget is based on assigning a purpose for every dollar of your income.
If you make $3,500 per month after taxes, a zero-based budget has you plan where all $3,500 will go. Use the zero-based budget calculator below to get a feel for what your monthly budget would look like using this method:
The Zero-Based Budget Explained
To create a zero-sum budget, start with your after-tax income.
You can split your budget into sections such as fixed expenses, variable expenses, sinking funds, debt payments, and savings.
Fixed expenses remain the same from month to month. These include things like your mortgage or rent, subscriptions, and your cell phone bill. Variable expenses, like groceries, eating out, and entertainment, may change each month.
Next, add in your monthly debt payments. Any credit cards, car loans, personal loans and other debts should go here.
Then come your sinking funds. This category is for setting aside money for short-term savings goals like Christmas, a friend’s birthday, car insurance, or vacation. Divide your goal amount by the number of months you have to save. For example, if you want to save $1,000 for Christmas and you have 10 months until you need to start shopping, you’ll need to save $100 each month.
Add each sinking fund as a line item in your zero-based budget.
Once you’ve accounted for regular expenses and sinking funds, add in your longer-term savings goals such as retirement investments or a down payment on a house.
Allocate what’s left over to your highest priority goal until every dollar of your income is accounted for.
What the Critics Say
While a zero-based budget works great for some, not everyone is a fan.
Some people believe planning for and tracking every dollar is stressful. However, there are ways to make it less cumbersome. You can use an app that automatically captures your transactions and allows for easy categorization. Reviews on the You Need a Budget app cite it as the best tool for this type of budget.
Other critics say that the zero-sum budget has too steep of a learning curve. It’s true that it can take some time to get used to tracking every dollar. However, this method allows for the greatest control over your finances. Having an overview of exactly where your money goes can help you catch spending leaks and direct your income toward your most important goals.
Who the Zero-Based Budget Is Best for
This budgeting method is best if you:
- Live paycheck to paycheck
- Want maximum control over your finances
- Want to reach your goals as quickly as possible
If you fall into any of those categories, then you’re a prime candidate for the zero-based budget.
On the other hand, if you’re comfortable with your current situation, already saving money every month, and are on track to reach your financial goals, then you may prefer a more laid back approach to budgeting.