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What is Zero-Based Budgeting (ZBB) and How to Use It

Being strategic about your finances is more than just placing money into investment accounts. Financial mindfulness is also a great way to plan! Zero-based budgeting is a popular way to save for the things that are currently important to your life, like your next family vacation or a down payment on an investment property.

If you are doing a Zero-Based Budgeting technique, you’ll allocate all of your monthly income to different monthly expense categories – like savings, household expenses, debt payments, transportation expenses, etc. The goal of a ZBB is to make sure that your monthly income, minus all your monthly expenses, equals zero (income – expenses = zero). Keep reading to find out how it works and how it can work for U.


  • Your budget is created around the needs for each period, per month for instance.
  • Both Envelope Budgeting and Zero-Based Budgeting are used to track expenditures.
  • Zero-Based Budgeting helps U tackle costs and make sure you’re using every penny wisely and thoughtfully.

What is Zero-Based Budgeting?

Zero-Based Budgeting is when your monthly income minus your monthly expenses equal zero. So, if you make $4,000 a month, everything you save and spend throughout the month should add up to $4,000. Every dollar that you earn or bring in each month has a purpose, a designated expense. This means that none of your money is getting mindlessly spent on things you won’t even remember you have the following month.

Please Note: This doesn’t mean that your goal is to have zero dollars in your bank account. It just means your monthly budget minus all your expected monthly expenses equals zero. A zero-based budget would require that you move those extra funds to other goals like savings, debt payoff, and investments.

If structure and efficiency are important to you, then this system might be just what U are looking for.

How does Zero-Based Budgeting work?

With a zero-based budgeting system, you want your income minus your expenses to equal zero at the end of each month. You will want to keep track of 100% of everything that you spend money on. The goal is to assign all of your income to specific categories until there’s zero left over.

How do I begin a Zero-Based Budget?

It’s easy. Each month, you will have standing budget categories that you will assign funds to. In addition to creating categories for your living expenses, you should also create categories for your financial goals, whether that be for savings or paying off debt. If you need to budget for travel or save up for a new car, those should also be categories. If you find that you come in under budget in a category at the end of the month, add the remaining amount to next month’s budget or move it to another category, such as an emergency fund. It’s the same concept as the Envelope Budgeting System, which involves distributing money for different expense categories into envelopes.

You can build your ZBB with a spreadsheet, an app, or good ol’ pencil and paper + some math skills. For example, let’s say you make $4,000 per month. Your budget might look like this:

Monthly Income $4,000
Rent or Mortgage $1,325
Groceries $400
Restaurants $200
Utilities $250
Insurance $150
Car Loan Payment $350
Gas (Car) $200
Apparel $100
Entertainment $100
Credit Card Payments $200
Student Loan Payments $175
Retirement $100
Savings $150
Emergency Fund $100
Travel Fund $100
Unexpected Expenses $100


Okay, what’s next?

1. Calculate your monthly income

Take a look at your last pay stub. Make a note of what your income is after taxes and any other deductions are taken out of your paycheck.

Now account for any other sources of income you might get. Income from interest (we see U, smart saver!), side hustles, child support… you name it. Make sure to deduct any taxes you may owe, especially for those of you who are gig workers, consultants, and independent contractors.

Add that all up for your total “NET” income.

2. Give your expenses a name and assess them

List out all your monthly expenses and what you think or want to spend on them. A good rule of thumb is to base your budget on actual historic expense amounts. Just have a look at your statements and make an educated guess as to what future months can look like, or you can be fancy and do an average of what you actually spent in the last few months and base your budget amount on that number!

To get you going, see below for this handy list of standard expenses:

  • Rent/Mortgage
  • Utility bills
  • Food
  • Transportation
  • Minimum debt payments (credit card, loans)
  • Child care
  • Entertainment

Don’t forget to set aside funds for expenses that don’t happen on a monthly schedule, like quarterly insurance bills or bills for medical check-ups. You can set money aside for these infrequent but expected expenses using the same methodology, even if you won’t dig into it monthly.

Here are a few common irregular expenses:

  • Car maintenance
  • Glasses and contacts
  • Apparel
  • Gifts and holiday expenses
  • Vet bills and pet expenses
  • Personal care services (like haircuts)

Don’t forget to save! Having a savings category is not only smart, but good for your financial wealth and mental health. We love a win-win!

Now add up your estimated expenses and associate that number with the category you’ve named.

3. Balance your income against expenses…

If your expenses are greater than your income, that’s totally okay. We’re here for U.

First, split up your expenses into “need-to-have” and “nice-to-have.” Look at your “need-to-have” list (aka essential expenses), and see if you can reduce any costs by saving on streaming services (yes we have a blog for that) or cutting back on those long but gas-guzzling drives down the PCH.

Now for the “nice-to-have” list, just consider and organize what is really important and what you can go without. (Keep in mind you don’t have to go without it every month, but maybe move that item to a quarterly expense…)

To give yourself a bigger buffer, take another look to examine if there’s more you can realistically cut from your budget. Small cautionary note: Try your best to have your income be greater than your budget with healthy padding. If your expenses end up outpacing your budget, you are likely to go over-budget and then (understandably) get discouraged.

Mark up your categories and get ready to roll!

Using your list of expenses from step #2, mark up your categories

and attach the cost of the overall expense to each category.

And hey, it’s not a bad idea to be specific, either! For example, you might want to have one category for groceries and one to spend on restaurants. (Some of us personally need a separate line item just for coffee.)

Most importantly, take a deep breath because you’ve done something amazing for your wallet, your mind, and your future self!


Is Zero-Based Budgeting for U?

The Pluses

  • You know exactly how much you’re spending. It makes it obvious where you need to cut back on expenses and how you can do so.
  • It’s flexible: Your expenses don’t usually stay the same every single month. You’ll most likely need to make adjustments. With a zero-based budget, you’re tracking your spending in real-time so you can easily make adjustments as needed.
  • It will prevent spending more than you’re making: The last thing you want to happen is to find yourself spending over your budget. Since you’ll be allocating all your income to specific categories, this helps to prevent you from spending beyond your means. If you keep up with your zero-based budget, overspending will be hard to do.

The Minuses

  • You’ll need to allocate time: Any budgeting practice can be time-consuming. You’ll have to be consistent in tracking your spending, and inputting all of your expenses.
  • Doesn’t work great with variable expenses: It’s more than likely that you’ll find yourself spending money on expenses that you didn’t anticipate from time to time. These are called variable expenses, and a zero-based budget doesn’t always account for them.
    • Variable expenses (meaning the money you don’t spend monthly such as a bachelorette party or your niece’s quinceanera) can throw you for a loop — but if you create an Unexpected Expenses category for those variable expenses, you can stay on top of all of it!
  • The ZBB method might also be harder to wrap your mind around if you are a freelancer or an hourly worker with a schedule that changes week-to-week. If you don’t always know how much money you’ll have to allocate, consider using the previous month’s income for the current month’s budget. Read more about our helpful tips on this blog post: Budgeting for Gig Workers (A.K.A. Freelancers, consultants, and hourly employees).

Ready, Steady, Go!

Now that you know what a Zero-Based Budgeting system is, you’re ready to give it a shot! If it doesn’t work for you, consider trying another budgeting method like Envelope Budgeting or stay tuned for our next budgeting blog post on the 50/30/20 budgeting strategy! And if you feel that your financial situation is a bit more complex, you might benefit from speaking to a UMe Personal Banker. If you have any questions, please give us a call at (818) 238-2900 or email us!


Disclaimer: U matter to Me (all of us) at UMe — and that’s why we do our best to deliver helpful information on our blog. Please note the following: (1) UMe Credit Union works hard to make certain that the information we post here is as accurate as humanly possible. But as you know, information can change and evolve quickly. While we try to update the blog on a regular basis, the content of some older posts may not be correct or up-to-date. (2) Some destinations on the World Wide Web that we link you to will exist on external websites. UMe Credit Union does not officially endorse any connected sites, nor do/did we compensate or get compensated by any entities to be featured in our posts (unless otherwise noted). (3) Everyone’s situation is unique and we advise you to consult with our personal bankers or your finance, tax, or legal professional for advice individualized to you!