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Zero-based budgeting (also known as the “zero-sum budgeting” or the “envelope” system) is a system for allocating your money in which every dollar has a job. That means you have to find a use for every dollar you receive in income and have zero dollars “left over” in your budget at the end of the month.

The premise is simple: income – expenses = zero. If your monthly income is $2,500, then you want all of the line items in your budget to come to $2,500, leaving you with zero.

With this system, you’ll make a new budget each month, and you don’t carry over last month's budget automatically. This allows you to create new categories for both income and expenses if you need to. It also allows you to track spending habits and see where you’re succeeding in hitting your budget and where you might need to tighten up.

Say you received $100 from your grandma for your birthday. With zero-based budgeting, you need to assign that $100 to a category. You can create a new budget line for something like a facial or a concert ticket with that $100. Next month you won’t have that $100, so you eliminate that category.

It can be beautifully effective. Giving every dollar a job eliminates stress and worry about where your money is going and how much should be saved and spent. There’s no uncertainty in this budget.

Let’s get into the nitty-gritty of creating a zero-based budget for yourself and talk about the pros and cons of budgeting this way. Then I’ll tell you why I don’t use this method for myself.

Here’s how to make it work

  1. Monthly Income — You can do this on a sheet of paper, in an Excel spreadsheet, or with an app. (YNAB works well with zero-based budgeting.) Your income includes work paychecks, small-business income, side hustles, royalty checks, child support, alimony, and that check from grandma. List everything.
  2. Monthly Expenses — Rent, food, utilities, Internet, phones, student loans, etc. — all of them go on the list. Your expenses may vary from one month to the next. For example, I pay my car insurance once every six months, in June and December. In those months I have a line item for car insurance. Things like that are why you must create a new budget every month.(Keep in mind, with zero-based budgeting, “expenses” includes not only bills and necessary spending such as groceries, but also any monthly saving or investing goals you have.)
  3. Subtract Your Income From Your Expenses — Ideally, you want this to equal zero. Don’t worry if they don’t balance each other out at first. That just means you’ll need to do something to bring in more money or eliminate some expenses (or both!). Budgeting takes practice.The key is to account for every single dollar. You can’t spend what isn’t accounted for. Zero-based budgeting works only if you’re honest with yourself about your spending. Stick to your budget.


  • Every dollar has a job. By giving every dollar a job to do, you drastically cut down on mindless spending. If you know your $2,500 a month gets broken down as in the budget below, you know where every single dollar you earn is going each month.

    • $700 goes to rent
    • $150 goes to utilities
    • $500 goes to savings
    • $300 goes to your 401(k)
    • $300 goes to your car payment
    • $150 goes to food
    • $300 goes to loans
    • $100 goes to fun

    You know all your bills are paid, and you know you’ve saved something. And you don’t have to pull from one area to cover another.

  • Total control. You’re in total control of your budget. If you need to change something, you can! You get to see the full financial picture of your life, and you can adjust as need be.

  • Great intro budget. If you’ve never budgeted before, this is a fantastic way to get a handle on your money. It familiarizes you with your current accounts and your spending habits and teaches you how to handle your money.


  • Time consuming. With zero-based budgeting, there’s no “set it and forget it” option. Income and expenses can vary month to month with things like car insurance or registration or a tax refund coming in. You need to sit down each month and create a new budget for that month’s numbers. That’s time consuming and can be tedious.
  • Difficult to do with irregular income. If your income fluctuates quite a bit month to month, zero-based budgeting might be difficult. You might to eliminate whole sections of your budget for low income months, which can increase stress.
  • Not for rebounders. “Rebounders” are those people who shoot to the opposite end of the spectrum when they feel constricted. They start going crazy with spending if they feel they’re being too controlled, or they control too much if they think they’re out of control.

Many, many people find zero-based budgeting freeing. However, it drives many others nuts. (If you think you might be one of them — and you’re not alone — there are alternatives to zero-based budgeting.)

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Why I don’t use a zero-based budget

Personally, I am a fan of this budgeting method. I think it’s smart, I like the level of control it gives you, and I think getting an in-depth look at your money is good for everyone. So why don’t I use it?

At this point, I don’t feel I need a zero-based budget. I’ve paid off my student loan debt, and my priorities are my savings. My lifestyle expenses are fairly stable month to month, and I’m in tune with my finances. I don’t feel I need to sit down and go over my budget item by item every month, because not much shifts.

In my heart, I’m a set-it-and-forget-it kind of girl. I like the ease of automated savings and chasing financial dreams through them. I understand my priorities and what it takes to get them. A zero-based budget would be overkill for me. If you also think that a zero-based budget won't work for you, there are plenty of other budgeting styles out there.

And if you like the idea of automating important financial aspects like savings and investing, check out Acorns. With Acorns Smart Deposit you can automatically set aside a portion of your paycheck into your checking, investing and retirement accounts. Plus right now you can get $75 when you sign up for direct deposit with Acorns and get two deposits.

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Kara Perez Freelance Contributor

Kara Perez is a freelance personal finance writer.


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