Zero-based budgeting

The name is borrowed from the business practice of building each period's budget from zero rather than from last year's figures, and in a household it means one equation: the month's income, minus every amount assigned to a category, equals zero. Rent and groceries are assignments, and so are the emergency fund transfer, the extra loan payment and the monthly share of the car insurance, at the same standing. Zero is the amount left to assign, not the amount left in the account, the misunderstanding the method most often has to clear up; the checking balance ends the month wherever the timing of the bills leaves it. A dollar with no assignment is the one thing the method forbids, because a dollar that reads as available is spent without a decision.

In a sentence

• "With zero-based budgeting, the $4,500 that comes in is assigned to the last dollar before the month starts."
• "Zero-based budgeting doesn't mean the account hits zero; the plan does, and the account holds whatever the bills' timing leaves."
• "The envelope system caps each category. Zero-based budgeting also decides what happens to every dollar that is left."

How it works

1. Write down the month's take-home income. If pay is irregular, assign only the money already in the account, and assign the next paycheck when it lands.
2. Assign the fixed bills first, at their exact amounts.
3. Assign the goals next: the emergency fund, extra debt payments, and the monthly shares of annual bills and repairs. Putting them before the variable categories is what makes them happen.
4. Assign the variable categories from three months of real spending, rounded.
5. Assign the last dollar. If income exceeds the assignments, the remainder goes to a goal; if the assignments exceed income, cut categories until they fit. A plan that spends more than arrives is not allowed.
6. When a category runs over, move money to it from a category with room, and write the move down. The total stays the same.
7. At month end, assign whatever was unspent again, to a goal or to next month's set-aside, rather than leaving it in checking.

Income − every assigned amount = 0

An example

Take-home income is $4,500.

The four lines at the bottom, $1,000 between them, got their amounts before dining out and shopping did, which is why they exist. On the 22nd, groceries reaches its $600 with a week left, so $60 moves from shopping, at $150 with $40 spent, to groceries; shopping is now $90 for the month, groceries $660, and the total is still $4,500. At month end, dining out has $30 unspent and entertainment $25, and the $55 is assigned to the emergency fund rather than left in checking.

Why it matters

The method's value is the order of the assignments. Saving and debt payments are given their amounts before the variable categories and at the same standing as rent, which is why a zero-based month builds savings where a budget that only says "spend less than you earn" does not: filled in the other order, the variable categories take last month's figures and the goals get what is left, which is nothing. The equation also forces the trade-off into the open before the month makes it silently; a plan that does not fit has to be cut on the first, category by category. The cost is ceremony. Every month, every dollar, and every change in income means reassigning, and a household that stops recording the moves by the third month has a plan and a reality that have parted.

Zero-based budgeting versus the 50/30/20 rule

Zero-based budgeting makes one decision per dollar; the 50/30/20 rule makes three, capping needs at half of take-home pay and wants at 30% and putting a floor of 20% under saving, without saying which category gets what. The rule is a check on the shape of a month that takes ten minutes; zero-based is a plan for the month that takes twenty minutes to set and a few minutes a week to keep true. Run the rule once to learn whether the problem is the shape or the discipline, then assign the dollars. See 50/30/20 rule and Envelope vs. zero-based vs. 50/30/20 budgeting.

Common questions

Is zero-based budgeting the same as the envelope system? They overlap. Envelopes cap each category at its amount; zero-based adds the rule that the amounts must use up the income exactly, and that money moves between categories rather than appearing from outside. Most envelope budgets are zero-based in practice. See Envelope system.

Does zero-based mean my bank account should be empty at the end of the month? No. Zero is the plan's remainder. A household assigning $350 to the emergency fund and $300 to extra debt has $650 leaving for places it chose, and the checking balance ends wherever the bills' timing leaves it.

What happens to money I did not spend? It gets a job, the same as income does: the emergency fund, the next extra debt payment, or next month's set-aside. What it cannot be is unassigned, because unassigned money in checking is spent by the 10th.

Does zero-based budgeting work with irregular income? Well, because it never plans on money that has not arrived. Assign what is in the account to zero, and when more arrives, assign that.

Go deeper

• How zero-based budgeting works, with a worked month assigns a month line by line, moves money when a category runs over, and sweeps the leftover at month end.
• Envelope vs. zero-based vs. 50/30/20 budgeting runs all three systems on the same month and compares them by how many decisions each asks for.
• The Budget calculator splits your monthly take-home pay into needs, wants and savings with the 50/30/20 rule or shares of your own, which is the shape to check before the dollars are assigned.

Where it shows up in Zypper

Zypper gives you the equation without forcing it. You give each category a monthly amount; nothing has to add to zero, and a category is only under or over its amount, never funded or unfunded. Left to budget, above the category list, is your expected income minus everything budgeted for spending, with every amount standardized to a monthly figure: at zero the plan is zero-based, and a negative figure means you have planned to spend more than you expect to earn. The mid-month move is made by changing the two amounts for this month only, with Apply to [month] forward unchecked, and the set-asides for car repairs and annual bills use Roll over unspent budget, so their unspent balance carries into the next month on its own. See Creating your budget and Rolling over unspent budget for the details, or get started with Zypper to see your own figure.