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It’s no secret that one of the best ways to win with money is to pay close attention to all income and expenses. At FinanceSuperhero, we believe the zero-based budget is the most effective way to do so. IT also happens to be Dave Ramsey’s budgeting method of choice.
Unlike other budgeting methods, the zero-based budget is a way of budgeting in which your total income minus your total expenses equals zero at the end of the month. We prefer it over other budgeting methods because it forces you to pay attention to every single penny that you earn and spend in a given month.
As the saying goes, “If you take care of the pennies, the dollars will take care of themselves.
In this post, we’ll show how to make a zero-based budget, show you why it’s an extremely effective budgeting method, and walk you through some of the major benefits of creating a new zero-based budget every month.
The Exact Steps to Make a Zero-Based Budget From Scratch
The good news is that creating a budget doesn’t require any advanced math or sophisticated formulas. In fact, you can make a budget with a pencil, sheet of paper, a calculator, and a small dose of common sense.
Step 1: Start By Adding Up Your Monthly Income
First, list all of your income sources and totals at the top of your sheet of paper. Include income from each and every source, including paychecks, child support or alimony, business income, side-hustle earnings, rental income, and any other sources. If it’s money that finds its way into your possession, consider it income!
Your budget should be based upon your net income (after state and federal taxes, employer deductions, and insurance premiums). Whether you are paid bi-weekly or weekly, this figure, too, may vary from month to month.
Step 2: Take Note of Your Current Savings Totals
Second, take a quick moment to jot down the cash total of your savings account. For most people, we’ll consider this your emergency fund, which is an important factor to consider when budgeting.
If you don’t have an emergency fund right now, that’s OK. We’ll make note of this so we can be sure to make building an emergency fund a top priority.
Step 3: Record All of Your Monthly Expenses According to Category
Now that you have your income and current emergency fund figures calculated, it’s time to make a projection of your anticipated monthly expenses. We’re going to create a budget that uses categories to sort your spending—this might seem a little daunting, but it’s worth the extra bit of effort!
A quick note about budget categories: We use the categories below, but everyone is different. You should use the categories that represent areas of significant expense in your budget, delete those which do not, and add any important categories which may be missing.
At FinanceSuperhero, we recommend sorting all of your expenses into the following categories:
Giving/Charity
Saving
Housing
Utilities
Food
Transportation
Clothing
Health/Medical
Personal
Recreation
Debt
With categories organized and spending projections made, now it’s time to record each of your monthly expenses by category. We recommend going through your receipts and checking account statement with a highlighter and sticking to one category at a time; it will go faster than you think!
Here are a few examples of expenses which qualify under each of the suggested categories from above:
Giving/Charity: Tithes and offerings to church/religious organization, charitable donations
Saving: Emergency fund savings, retirement savings (401k, 403b, Roth IRA, Traditional IRA), college savings (ESA, 529), vacation savings fund, sinking funds
Housing: Rent, mortgage (including property taxes and insurance in escrow), home maintenance
Utilities: Electric, Gas, Water, Trash, Home/Mobile Phone, Cable/Internet, Home Security
Food: Grocery, restaurants, fast food, coffee and drinks
Transportation: Fuel, auto insurance, auto maintenance, bus passes, train tickets, Uber fares, tolls, miscellaneous transportation costs
Clothing: Includes shoes, outerwear, work wear, accessories
Personal: Discretionary spending, disability/life/identity theft insurance premiums, miscellaneous spending
Health/Medical: Insurance co-pays, prescription co-pays, miscellaneous medicine, gym memberships
Recreation: Movie tickets, concert tickets, sporting events, local/regional travel, miscellaneous recreation
Debt: Student loans, car loans, home equity loans, credit cards
Step 4: Add Up Your Total Expenses and Subtract From Your Total Income
Finally, it’s time to add up the total of your monthly expenses and subtract this total from your monthly income. Remember, the goal of a zero-based budget is for this final number to equal zero, but it may not happen your first time. It takes practice!
If your final number is negative, that means you probably have a spending problem. Of course, this can be corrected by adjusting your spending on non-fixed expenses. If you’re having trouble cutting your expenses to achieve a zero-based budget, this could mean that you need to take steps to make more money or pick-up a side-hustle.
On the other hand, if you still have money left over at the end of the month, this is actually a good problem to have—and one that we can solve quickly. If your emergency fund is under $1,000, it’s a wise idea to add left over money to it before doing anything else. You could also use this money to pay off debt, invest in your kids’ college fund, or start a sinking fund.
Step 5: Review Your Categorical Spending Percentages
Now that you’ve completed an entire month of zero-based budgeting, let’s review your spending and see which categories may need adjusting. Within each category, your expenses should fall within or close to the following typical ranges:
| Category | Recommended Percentages In Relation to Total Income |
| Giving/Charity | 0-10% |
| Saving | 5-15% |
| Housing | 25-35% |
| Utilities | 5-10% |
| Food | 5-15% |
| Transportation | 5-15% |
| Clothing | 2-7% |
| Personal | 5-10% |
| Health/Medical | 5-10% |
| Recreation | 5-10% |
| Debt | 0% |
Your figures may or may not fall neatlywithin the categorical ranges above. For example, if your Housing costs represent 24% or 36% of your monthly budget, this is not a serious problem. The percentages above are only suggestions for a healthy budget.There is room for give and take, particularly if you are a very low or very high income earner, as long as your percentages add up to 100%.
Keep in mind that some of the categories above cover fixed expenses, such as Housing, Debt, and Utilities. Others address what we will call variable fixed expenses—you will spend money in each of these categories during a typical month, but the amounts may vary slightly from month to month. Think Food, Transportation, Clothing, and Personal.
Finally, the remaining categories, including Giving, Saving, and Recreation, are what we will refer to as discretionary expenses. You may choose to allocate money within these categories, but it is not mandatory for your family’s survival.
I strongly believe that Giving is important, and we choose to include it as a fixed expense within our budget. Your values will determine how you choose to handle this category in your budget.
A Sample Zero-Based Budget
| Category | Dollar Amount Allocated | Allocations as Percentage of Budget | Recommended Percentages |
| Giving/Charity | $500 | 10.00% | 0-10% |
| Saving | $250 | 5.00% | 5-15% |
| Housing | $1,500 | 30.00% | 25-35% |
| Utilities | $500 | 10.00% | 5-10% |
| Food | $700 | 14.00% | 5-15% |
| Transportation | $400 | 8.00% | 5-15% |
| Clothing | $150 | 3.00% | 2-7% |
| Personal | $500 | 10.00% | 5-10% |
| Health/Medical | $200 | 4.00% | 5-10% |
| Recreation | $150 | 3.00% | 5-10% |
| Debt | $150 | 3.00% | 0% |
| Totals | $5,000 | 100.00% |
As you can see in the sample zero-based budget above, the total of all categories combined equals $5,000. This budget sticks closely to the recommended percentages, and it even manages to stay below the recommended percentage ranges in the Health/Medical and Recreation categories.
The Benefits of Making a Zero-Based Budget
As you are doing your first few monthly budgets, you are likely to encounter the following problems or trends:
- Spending more than the allocated targets in one or more categories
- Spending less than the allocated targets in one or more categories
But the good news is that your budget is a flexible document that can be changed at any time.A budget is a rough prediction. Think of it as a rough draft of an essay. You will return to it and refine any errors at the end of the month. The previous mistakes you made will influence and impact your thought process as you create later budgets.
If you consistently commit to creating a new zero-based budget every month, you will find that you spend less time questioning where your money is being spent every month. In fact, you willknowhow it’s being spent.
Another benefit to zero-based budgeting—you are telling your money where to go and how it will be spent, on paper, before the month begins. A zero-based budget puts you in charge!
Next Steps
Now that you understand the nuances of a zero-based budget, get started on yours today. A budget can be time consuming, but the rewards are incredible.
Remember, a budget doesn’t require sophistication, manipulation, or secret wisdom. It requires patience, intentionality, and a desire to be in control of your money.Even if you suck with money, you can do it!
If you’re serious about getting on a budget but you feel like you need a little more help, good news: we have a course for you!
Our latest course, Financial Foundations, contains all of the skills and techniques that my wife and I used to pay off debt, get control of our money, and start building a better future for our family.
Financial Foundations will help you:
- Learn the important financial basics that you should have been taught in school, then provide a simple framework for implementing them.
- Identify your biggest long and short-term money goals, then provide a detailed plan to help you achieve SMART Money Goals.
- Build a unique monthly cash flow plan for each and every month – and still get to have some fun with your money, too!
- Implement several quick wins right away to help you save more money. (Many, if not most, students may actually save enough to cover the entire cost of the course!)
- Learn to keep track of your income, expenses, and savings goals all in one place.
- Navigate the trickier aspects of personal finance, including investing, insurance, finding ways to make extra money, and much more.
- And most importantly, gain control of your finances –once and for all!
More good news: Financial Foundations is now available for a new low price of only $49.
Here’s a close look at the full course curriculum:
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Readers, how do you plan your monthly budget? Do you create a zero-based budget? Do you use automated software? Excel? Paper and pencil? How much time do you spend on your budget each month? Share your thoughts and burning questions in the comments section below.
