If you’re like most Americans, your top financial priority is to save more money, whether you’re running a business or a household with kids and teens. That means if you haven’t already, you’ll want to adopt an effective savings strategy. Instead of creating a traditional budget, many individuals are opting for an old-school method called “zero-based budgeting.” It can be an effective financial planning strategy for personal or business use.
Zero-Based Budgeting Defined
Zero-based budgeting is a sum-total approach to finances that requires all expenses to be justified and approved in each new budget period or year, starting from zero. In a nutshell, it assigns a job to every single dollar of your monthly income based on necessity rather than budget history. Using this method, your income minus expenses will equal zero.
Zero-based budgeting is not a new concept. It rose to popularity in the 1970s when President Jimmy Carter promised to use it to balance the federal budget. However, as economic conditions improved, the zero-based model fell out of style. It started to slowly regain popularity around the time of the 2008 recession and is now commonly used for personal finances.
If a zero-based strategy sounds like your speed, then buckle up! It requires more upkeep than a traditional budget, but it also has huge potential for saving. How does a zero-based budget work? Explore more, plus pros and cons of zero-based budgeting and how it can change your financial trajectory, in the details below.
How Does Zero-Based Budgeting Work?
As an idea, zero-based budgeting is simple. It is a financial management tool that is built from the ground up, starting at zero. After the budget is set, its user must allocate all income to expenses, savings or debt payoff. Maintaining a zero-based budget is more complex than most traditional budgets, but the potential for savings is much higher.
For zero-based budgeting to work, its subscribers must be utterly committed to accountability. If you’re not ready to assign a purpose to every dollar you spend, this budget isn’t for you. However, if you’re interested in taking ownership over your financial goals through discipline, this approach can get you there.
How to Get Started
To get started, list out all your income sources. Then identify all your expenses, such as rent or mortgage, credit card payments, groceries, medical bills, entertainment, subscriptions, etc. Next, organize your expenses into more general categories like needs, wants, savings and debt repayment. Your savings, for example, might include money for vacations, home renovations and retirement.
Then allocate each dollar into a specific category, knowing you have the flexibility to move money around in the budget if you plan ahead. For example, if you want to set aside $100 in a retirement fund monthly, but you are at zero dollars in your budget before reaching this category, you could take $100 from your eating out expense and move it to savings.
Zero-Based Budgeting vs. Traditional Budgeting
It’s important to understand what makes a budget a zero-based budget. When people sit down to make traditional budgets (also called incremental budgets), they typically start by listing out their current expenses or by building from the previous year’s budget. These approaches can be problematic because they don’t require the budgeter to ask whether historical expenses are actually necessary to maintain.
In contrast, when someone sits down to make a zero-based budget, they start by calculating their projected income for the year. With that number in mind, they design expense categories and assign a dollar amount to each. If an expense doesn’t fit within their budget, then it’s cut. All spending must be justified.
Whereas traditional budgets allow unused income to sit in a checking account, a zero-based budget does not. A zero-based strategy requires every dollar of income to be spent or reallocated. That means if you use this system, you won’t be left wondering where all your money went.
| Traditional Budgeting | Zero-Based Budgeting |
| Simple preparation | Complex preparation |
| Based on the previous year’s budget | Start from scratch each year |
| Based on previous expense levels | Requires justifying new expenditures |
| Cost accounting-oriented | Decision-oriented |
| Justification is not typically required | Cost and benefit justification is required |
| Some money is accounted for and can sit in a bank account without being allocated for a specific category | Every single dollar is accounted for and placed in a budget category |
| Allows for inefficiencies in how money is being spent | Exposes inefficiencies |
Zero-Based Budgeting Example
Let’s take a look at a basic example to illustrate how this financial strategy works. Here’s how someone with a monthly income of $6,000 might create a zero-based budget:
Income
Full-time job: $5,000
Side hustle: $1,000
Expenses:
Needs
Rent: $3,000
Groceries: $500
Utilities: $200
Transportation: $250
Health Insurance: $400
Debt Payments
Credit Card: $200
Wants
Restaurants: $300
Other entertainment: $200
Hobbies: $100
Gym membership: $100
Clothing: $150
Massage: $100
Subscriptions: $100
Savings
Emergency Fund: $100
Investments: $300
Total Expenses/Savings: $6,000
Advantages of Zero-Based Budgeting
Adopting a zero-based strategy allows you to design your own financial destiny. Instead of waiting to see what you can and can’t afford, you can decide what you want to afford. The zero-based strategy offers many potential benefits, including the following:
- Insight: The zero-based model requires you to take a detailed look at your cash flow. If you do this budget correctly, you’ll come face-to-face with your spending habits.
- Intentionality: When you need to be able to justify every expense, you learn how to be more intentional. You’ll have to decide whether a single purchase is worth throwing off your budget and compromising your financial goals.
- Efficiency: This budget will expose inefficiencies and obsolete processes. Are you getting charged an avoidable bank fee or still paying for a subscription you never use? This money management strategy helps you address these charges and avoid them.
- Agency: When you use zero-based budgeting, you’re steering the ship. Current expenses don’t dictate spending habits; your goals and decisions do.
- Responsibility: There’s no room to shift blame in the zero-based model. You made the budget, and your decisions will make it succeed or fail.
- Savings: When you don’t have a plan for your extra income, it’s amazing how quickly it slips away. In a zero-based system, money you may have spent on a dozen little purchases can accumulate to substantial savings.
Disadvantages of Zero-Based Budgeting
Before you start designing your zero-based budget, you should know it’s not for everyone. For people who thrive with a lot of structure and discipline, it can be highly beneficial. For other individuals, it can be challenging. As with any other money allocation system, zero-based budgeting has its flaws. What is a disadvantage of zero-based budgeting? Here are some of its potential downsides:
- Time: Depending on your finances, maintaining this budget—or even setting it up—can eat up a lot of time. If you can’t commit to regular accounting sessions, it may not work.
- Incompatibility: This budget doesn’t play well with unpredictable income. If you’re a freelancer or work on commission, zero-based budgeting may be impossible.
- Rigidity: Whereas traditional budgets primarily serve to monitor spending, zero-based strategies assign an objective to every dollar of income. That means there’s no room for unjustified spending. For some people, that level of rigidity can be stressful.
- Variability: Your definition of a need may not be like everyone else’s. For example, you may classify a massage as a monthly need, whereas others may see it as frivolous spending. A highly subjective budget won’t produce ideal results for all individuals.
While zero-based budgeting can be beneficial for businesses as well, there are some downsides. For example, it can be resource-intensive and there is a risk of the funds being manipulated and higher budgets being awarded to some departments over others.
Is Zero-Based Budgeting Right for You?
There are clear zero-based budgeting advantages and disadvantages, and there’s no shame in saying you’re not ready for a zero-based budget. It isn’t ideal for everyone. Luckily, it’s not your only option. There’s more than one way to create a budget and save for the future. You may want to explore alternatives like the 50/20/30 strategy, priority-based budgeting, budgeting apps, or the “pay yourself first” budget. You can also start slow by dedicating a percentage of each paycheck to savings.
The key to spending responsibly and controlling your finances is finding a system that works for you. When you assume full responsibility for your finances, a funny thing starts to happen. You begin to embrace your personal agency, and that confidence can ripple out through every area of your life. Instead of things happening to you, you make informed choices that have foreseeable consequences—and that’s a freeing way to live.
Making Your Finances Work for You
There’s no denying that people who budget are more likely to create wealth and experience financial security than people who don’t. You’ve now learned what is a zero-based budget and why it is important. Zero-based budgeting can help you better manage your finances, both at home and at work, by determining exactly how each dollar is spent. With this approach, you will always know what is being saved and spent, so you can find peace of mind while building a better future.
This article was updated May 2025. Photo by wavebreakmedia/Shutterstock.com
