Making Every Penny Count With A Zero-Based Budget


Maybe you use one of those nifty little budgeting books from the office supply store. Maybe you've created an impressive spreadsheet with pre-programmed formulas to calculate your cash. Or maybe you keep track of your green with sticky notes tucked inside the back of your checkbook.

It doesn't matter how you do it - unless your a multi-billionaire, budgeting is just a way of life. And if you do it right, if you pinch pennies, shop wisely and post-pone splurging on that sizzling leather coat you've been eyeing, you may just have money left over when you finish paying all your bills. After all, that's what the budget is for, isn't it?

But what happens to that leftover cash?

If you're like most, that's free money. Woo Hoo! Bills are paid and you've got cash leftover. That's money that isn't allocated anywhere for anything, meaning you can choose to spend it as you please, right?

Well... no.

At least, not if you're trying to get the most from your paycheck. And this is where the zero-based budget comes in.

Traditionally, your budget includes two basic columns: your income and your expenditures. If your income is $4000 a month and your expenditures total up to $3500 per month, then you've got $500 free and clear each and every month to spend. End of budget.

With a zero-based budget, you still have two columns. You still list your income and you still list all of your monthly expenses. But when you get to the end, you have nothing left over - zilch, nada... not one penny.

Where did that $500 go?

In a zero-based budget, you account for things that you normally just "leave to fate". Your gas for example, running money for the week and that $5 to buy the latest issue of Cosmo or Maxim or whatever it is that adorns your coffee table. In this type of budget, you list everything and I mean ev-er-y-thing, until you have absolutely nothing else left to spend.

Sound scary?

Of course it does! What happens if you have a flat tire and need to buy a new one? Or if your co-workers unexpectedly invite you out for the $3.99 lunch buffet? What happens if you run out of milk, bread or have a craving for a Snickers that just can't wait? What do you do then?

That's why you have to account for everything.

When building your zero-based budget, start out by listing all of your normal expenses. Rent, car, insurance, etc. - these are fixed payments that come due around the same time every month. Next, you're going to list your long-term items such as property taxes, annual vehicle inspections or medical checkups. Any big purchases your planning - that new plasma TV for example, can go into this list as well and then you break up the total cost into twelve equal payments.

But you're not through yet.

Equally as important is your "miscellaneous money". You need to allocate money for gas, groceries, movies or DVD rentals, parking meters, subway tolls or anything else you tend to spend money on. You can even create a "mad money" category if it makes you feel better, so that you have an allocated amount going into a fund just in case there's something you've left off your list. A savings account should be included here as well because if you're not saving, you're not really getting ahead.

You'll also want to create an emergency fund and this is oh-so-important in the zero-based budget process. The reason is that you're not likely to allocate money for flat tires and broken water heaters. Those things pop up unexpectedly and usually when you don't have money to spare. The emergency fund takes care of this - just be sure to keep it funded so that you don't end up short when an emergency actually occurs.

If you added everything up and came up with a leftover balance of zero, then yea for you! You now have a workable zero-based budget. If on the other hand, you ended up in the red, you now know why you've been having trouble keeping cash in your pocket. 

Let's face it: those magazines, fast-food runs and trips to the beer store all add up. $5 here, $10 there... and before you know it, you've just blown through $200 and have nothing to show for it.

That's where the zero-based budget can really help. By allocating money for absolutely everything, you can fine-tune how much you spend on eating out, going out and pleasure spending. Simply tweak your numbers until they fit with your income and you'll discover that you can live on a budget after all. 


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Guest's picture

My husband and I did a version of this. We calculated out our expenses, income, and savings, and the leftover (around $100 or so dollars) we called "slush fund" and left it alone to cover overages in other areas. Really helped us not dip into the money dedicated for savings.

Kate Luther's picture

We all could use a healthy "slush fund" couldn't we? :) And I agree - it really helps you leave the savings account alone.

Guest's picture

what you have said is sooooo insightful. Actually it is also my principle to save every penny that counts!


Kate Luther's picture

Thanks! I'm glad you enjoyed the read. Its a great thing when you have a plan that works for you.


Anthony Marrone's picture

Great first post! I personally use YNAB (Excel-based budgeting client) to achieve a zero-based budget, mainly because I'm too lazy to program all the formulas into the spreadsheet myself. Zero-based budgeting is great and should be taught in all high school classes as I think it would save tons of people a lot of headaches later on in life.

Guest's picture

I started a budget like this a few months ago. I'd like to add some comments regarding how it's going so far, from my point of view.

In theory, this budget system is fantastic. It helps me plan for future expenses, while making sure that I still have monthly money for bills, rent, etc. In practice, this is the most difficult budget system I've found (but that's exactly how you get on track with this budget - knowing every penny, in and out).

The hardest part for me is keeping track of all the expenses - especially that little stuff... And when that category gets to zero, there's no more spending unless the money comes out of a different category... Which brings me to my next point...

Tweaking the budget numbers to figure out your budget certainly doesn't happen overnight. In fact, I'm a few months in, and I'm still having trouble balancing my food/grocery money and my "entertainment" fund (which includes going out with friends, buying "want" items, etc). But it's getting closer each month.

I used to just get my paycheck, figure out what needed to be paid that month, and then the rest would suddenly disappear. I had over $500 that I had no idea where it was going, and living paycheck to paycheck. As it turns out, I was spending it on going out to eat and silly little things like magazines and candy. Not exactly where I wanted to focus my cash.

Sorry for the long rambling post, but I just wanted to say that this system is the only thing that's worked for me, and if you can tackle the hard part of keeping track of every penny, this system really helps you feel like you have control over your bank account! (finally!)

Guest's picture

I agree that budgeting should be taught in high school! I'm 26 and just now realizing how important budgeting is... I had no idea how to even start one until a year or so ago, and it took me a few tries to figure out which system works best for me. Starting to plant the idea of fiscal responsibility should start early!

(and not just saying "you should be smart with your money" because that teaches nothing)

Guest's picture

but I feel like I've found a few tricks along the way that help.

First, I request receipts from every purchase throughout the day, and I spend 5 minutes every night updating my excel sheet to record the day's expenditures, along with notes as to where and what for exactly.

Second, I've gotten pretty good (and this took a loooong time) at keeping my spending low while out with friends. For example, if I'm going to Sunday brunch with friends, I eat at home first, and then simply get a cup of coffee when out with them.

Great point about how quickly $5 or $10 can add up. And by keeping track of every single penny can really slap you in the face as to what your spending habits are even when you don't want to admit it.

Guest's picture

I'm on a zero-based budgeting system as well, and while it trips me up here and there (overspent on Travel to see BF for example), it tends to work out pretty good because I want to see how low I can keep my other variable expenses...

Guest's picture

I just learned about this from the Total Money Makeover. This is my first month trying to use this system. If you'd like to take a look, click into my new blog. Don't laugh at my measly salary/income, compared to my debt payments. I'm working on it! (-:

Guest's picture

This is how we started off back on September. Its awesome because every dollar does indeed have a job and there's something about it that makes the budget WORK.

Guest's picture

Make sure that you consider 10% into monthly savings as a "bill". Pay it faithfully, as though Guido the Knee-and-Knuckle repo man was just waiting for you to slack off. Because that's what it'll feel like if unexpected expenses hurt your budget.

Kate Luther's picture

You absolutely have to pay yourself by tucking some away in savings, especially with the zero-based budget, otherwise you'll never get any kind of "cushion" behind you. Good point :)

Guest's picture

You might like the old book "Your Money or Your Life". They did this kind of budgeting.

When I did this kind of budget analysis, I used dollar-sized slips of paper with a small expense recording form for recording a day's spending. It's a real eye-opener!

Guest's picture

My left over balances get put other debts or next month's budget. For example; if I overspent by $10 on Entertainment, then I knock $10 off my Clothes budget to balance things out and make sure I'm not getting a free ride. If I have a good month and have $20 left over in my Clothes budget which doesn't go towards another expense, I leave it in my budget so next month I have $20 more to spend!

This way, if I overspend I punish myself and the money is coming from somewhere. If I underspend I can enjoy the money more next month!

Guest's picture
Andy Zook

I too use a zero budget system of my own design. One thing that I have learned over the past 4 years of using this system is that it is extremely difficult to track every expense.

My wife and I have three accounts - one for paying bills, and one account each for personal (going to lunch at work, gas, misc). We direct deposit $50/wk into the personal accounts and the balance goes into the main account. This way we only have to track the bill paying account.

Guest's picture

What is the best way to keep track of expenses. I don't want anymore accounts. I liked the idea of saving the receipts but my receipt keeping is my better quality. Does anyone use a small note pad? Any other thoughts about tracking?

Guest's picture

A friend told me recently about a free online personal budgeting utility, I have used it for over three month now and it is too good to be free. "Out Of The Dark" (OOTD) is simple, powerful, and anonymous to use (no poking into your personal identity or bank accounts), and it's packed full of good guidance and information from the developer and the community of users. I dumped my excel budget once I started using this free online utility and now I can use it from anywhere I have internet access.

You can find it at:

Happy budgeting.

Guest's picture

YNAB is a great program (and support community) for tracking your spending and your accounts while keeping your budget front-and-center.

I personally don't use it (I tried it for a month and a half and requested a refund) but only because I am able to program an excel spreadsheet with just as much functionality. But many people don't know how to do that (using array formulas, the SUMIF command, and multiple sheets in the workbook) and for them I think YNAB is the best I've seen for zero-based budgeting. Much more useful than Quicken and the like for controlling your spending.

Guest's picture

What works for me for expense tracking is 1) I always get a receipt when I spend, and put it in my wallet. 2) if there's no receipt available, I make one out myself. Something like "$5.46 Cash Food Out". This also goes in my wallet. Also if I do an online banking transaction, I make out a paper receipt and put it in my wallet. If I don't have a piece of paper, I make a mental note and borrow one as soon as possible to make the receipt.

All receipts from my wallet go into a jar by my computer.

Once a week I pull the receipts and enter them into my Excel transaction register. Then I take a look at how the budget totals are looking for the month and see if I need to adjust either my spending or my budget.

The jar by the computer really turned out to be the missing link for me that made my expense tracking really work well.