How to Make a Zero Based Budget

by Ryan Guina

If you have ever listened to Dave Ramsey on TV or the radio, then you have probably heard him refer to a Zero Based Budget.

A zero based budget is a very straight forward budget which works on the premise of assigning each dollar of income a task – or to put it another way, at the end of the month, there shouldn’t be any money left over in the budget. That doesn’t mean spend it all, it just means assign each dollar a job. For example, excess funds can go toward savings, paying down debt, investing, etc.

How to Make a Zero Based Budget

A note on steady vs. irregular income. If you receive a regular and steady income as an employee, creating a zero-based budget should be a relatively easy task. It’s much more difficult if your income comes from irregular sources, such as self employment or commissions. If you receive both a regular paycheck and irregular income, you may want to work on a zero based budget for your regular income only, and use a different method to manage your irregular income.

Step One: Make a list of your monthly income

Using a spreadsheet or a piece of paper, list all sources of monthly income. Income may come from paychecks, self employed salaries, child support or alimony, etc. See how to make a cash flow plan for more information.

Step Two: Make a list of your expenses for the month

For this step, don’t concern yourself with any bills that are paid semi-annually, annually or anything other than monthly unless the payment is due THIS month. Just list all of your accounts and amount due for anything you have to pay this month. Your monthly expense list might include:

  • rent or mortgage
  • phone(s)
  • car payments
  • cable television
  • internet
  • insurance payments
  • utilities (electric, water, gas, etc)
  • credit cards
  • loans
  • child care
  • donations
  • groceries
  • entertainment / dining out

Step Three: Make a list of your non-monthly expenses

Here is where you’ll record anything that is paid on a schedule other than monthly. Divide the amount of each account on this list by the number of months between now and the day your bill is due. If you’re making your budget in June, and your life insurance is $120 and due in September, you’ll need to budget $30 each month to have enough money available when it’s due. Once you pay a bill that is paid non-monthly, you’ll divide the total amount of the bill by 12 months (if it’s paid once a year) to determine how much you need to budget each month so that you’ll have enough to pay it when it comes due again.

Some typical non-monthly accounts might include:

How do you track irregular expenses? An easy way to track your targeted savings is to use a sinking fund or personal accrual account to save up for your semi-regular or irregular expenses. See How to Open a Sub Account at Capital One 360 for more information about how to easily set up a sinking fund at Capital One 360.

Step Four: Make a list of savings goals and debt reduction goals

On this list, include anything that is not a required payment or savings contribution, but something you really want to do (and can afford to do). This might include:

  • emergency fund savings
  • education savings
  • vacation savings
  • extra payments to pay off credit cards/loans faster
  • retirement savings

Step Five: Subtract expenses from income and modify until your budget “zeros out”

The goal of the zero-based budget is to create a spending plan where your total income minus all of your monthly expenses will equal zero. If you do this the first time and end up with a negative number, you need to decrease expenses. Start by decreasing items that are not essential – like entertainment. If it’s still negative, look at your savings goals and debt reduction goals and see if you need to decrease any of these payments temporarily.

If you subtract expenses from income and get a positive number, you’ll need to increase your “expenses”. Instead of buying something new on credit to give yourself another payment however, you’ll want to increase your savings goals or debt reduction goals until you get a zero.

Need help with your zero based budget? Try You Need a Budget

If you are struggling with making a zero based budget work by using paper and pencil, then try using You Need a Budget (YNAB). YNAB is a software program specifically designed for building a zero based budget that works. The program is easy to use will get you moving in the right direction in no time!

One word of advice: It takes a little practice to get your zero based budget working smoothly. Expect it to take a couple months to fine tune it. But once you get it running smoothly, you’ll be happy knowing where your money is going each month!

Published or updated August 26, 2016.
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{ 9 comments… read them below or add one }

1 Kirk Kinder

Very good post about budgeting. As I read your steps to zero based budgeting, the thought kept going through my head that we need to be teaching this to high school students. Just think how many people could get off to a great start if they possessed this information.

For those beyond their high school years and are behind due to debt, this post can really work magic for their finances.


2 Peter

I love using zero based budgets because it ensures that money doesn’t just slip through the cracks – it is always assigned to one category or another. Of course, it is all dependent upon you having the discipline to continue doing the plan, and that’s where I tend to slip up!


3 Zengirl @ Heart and Mind


I have not been here in a while but thought of coming by and say hello again. Thank you for being inspiration for me to come out of writing under pseudo name and reveal my name like you did. You and others are my courage and inspiration point who are successful bloggers.

Thank you. I love Dave Ramsey a lot and although I do not quite use zero based budget, I use similar way to plan my budget as we are minimized our expense so that I can be home with my 2 kids.


4 Bucksome Boomer

I’ve been using a zero-based budget about a year now and it’s helped me stay on plan by accounting for every dollar.


5 Doug Warshauer

I am a big fan of this type of budgeting, and I love the step by step process you’ve laid out, which makes it easy to follow.

Although it’s a bit of a pain, I find it really helps to make a more effective budget if you spend the time tracking what you spent in the prior year. You need to look at every credit card statement and canceled check and total them up. Without doing that, you can’t possibly capture all your expenses, and you’ll end up going over budget in most months.


6 Iaian Filippini

I am a financial planner also, I liked the idea and concepts very much.


7 Tekabe

This is a good starting point for me.


8 sarah

Need help on kick starting my budget. I like the zero dalance down idea but how do i pay my bills thats due now and plan for next month?


9 Ryan Guina

Sarah, I just wrote this article to give some tips for trying to get ahead of the game: Stop Living Paycheck to Paycheck – How to Break the Cycle. The key is to get ahead of the curve, then set up an emergency fund to act as a buffer to help prevent falling behind again. The article lists some helpful tips. I hope this helps!


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