Zero-based budget

What It Means

A zero-based budgetBudgetA plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it. See more gives every dollar of a month's income a specific job before the month begins, whether that job is a bill, groceries, savings or an extra debt payment. You keep assigning until income minus everything assigned equals zero. The zero describes the plan. Your bank balanceAccount balanceThe money in a bank account once posted deposits and payments are counted, also called the ledger balance; pending card purchases aren't subtracted yet. See more doesn't have to reach zero, because money assigned to savings stays in your account.

How It Sounds at Home

• "Every dollar needs a job this month."
• "I've still got $80 left to assign."
• "We budget to zero on the first."

The Breakdown

How to build one

1. Add up the take-home payTake-home payThe money that actually reaches you from a paycheck after taxes and other deductions are taken out, also called net pay or net income. See more you expect this month.
2. List fixed billsFixed expensesCosts that stay about the same every month, such as rent, a car payment or an insurance premium, usually due on a set date. See more, like rent, insurance and your phone.
3. Add variable costsVariable expensesRegular costs whose amount changes from month to month, such as groceries, gas, utilities and eating out. See more, like groceries and gas, plus any irregular bill that falls due this month.
4. Give savings and debt payoff their own lines.
5. Adjust the amounts until what's left to assign is $0.

Worked example. Take-home pay of $3,600 for the month:

That leaves $100 without a job. Putting it into savings, or into an extra debt payment, brings the plan to zero.

What the result means. Anything above $0 left to assign is money with no plan behind it. Below $0, you've promised more than you'll earn, so a category has to shrink before the month starts. At exactly $0, every dollar is accounted for.

Good to Know

In this method, savings, investing and debt payoff count as assigned money, which is why reaching zero leaves your savings untouched. The Consumer Financial Protection Bureau's free monthly budget tool works as a first sheet for listing income and each category. When income changes from month to month, planning on the smaller amount you can count on, and assigning any extra once it arrives, keeps the plan from coming up short.

Related Terms and Categories

• Budget

  A plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it.

• 50/30/20 rule

  A budgeting guideline that splits after-tax income into 50% for needs, 30% for wants and 20% for savings and paying down debt.

• Envelope budgeting

  A budgeting method that gives each spending category its own envelope of money, and spending in a category stops when its envelope is empty.

• Budget category

  A group of similar costs, such as housing, groceries or transportation, that a budget plans and tracks together with its own amount.

• Irregular income budgeting

  Planning spending and saving when your pay changes from month to month, such as freelance, commission or seasonal income, around your lean and average months.

• Sinking fund

  Money set aside in small, regular amounts for a known future cost, so the bill doesn't land on a single paycheck.

Household money and budgeting