Zero-based budgeting: what it is and how to start

What zero-based budgeting is

Zero-based budgeting is a method where you assign every euro of your income to a specific purpose, so that your income minus everything you plan to spend, save or repay comes to zero. The idea comes from business, where departments build each year's budget from zero instead of copying last year's numbers. For households, it means the same thing: each month you decide afresh where your money goes.

The key phrase is "every euro has a job". A job can be rent, groceries or a cinema ticket. But it can also be "emergency fund", "December gifts" or "extra payment on my credit card". The only thing not allowed is money without a purpose, because unassigned money tends to disappear.

How it differs from other methods

With the 50/30/20 rule, you only decide three big buckets and spend freely inside them. With pay-yourself-first, you move savings out on payday and don't track the rest. Zero-based budgeting goes further: you plan each category in detail.

That extra detail has a cost (time) and a benefit (you know exactly where your money goes). If you're new to budgeting in general, our beginner's guide on how to make a budget compares all the common methods.

How to start a zero-based budget

1. Write down your income for the month. Use your net pay: what actually arrives after tax. Add any regular allowances or benefits. If your income varies, use your lowest normal month.
2. List your fixed costs. Rent, energy, insurance, phone, internet, subscriptions and minimum debt payments. These are the first jobs.
3. Add your everyday variable costs. Groceries, transport, personal care. Use the average of your last two or three months of bank statements as a starting estimate.
4. Add an irregular costs pot. Nibud, the Dutch national institute for family finance information, recommends adding up yearly costs such as clothes, holidays and gifts, dividing by 12 and setting that amount aside every month.
5. Give savings and extra debt payments a job. Emergency fund, goals, investing or paying off debt faster.
6. Assign the rest to flexible spending. Eating out, hobbies, fun. This is real, planned money, not leftovers.
7. Check it adds up to zero. If you have money left, give it a job. If you're over, reduce a category until the total is exactly zero.

A worked example: every euro of €2,600

Here is a complete zero-based budget for one person renting a flat, with a take-home pay of €2,600 a month.

The numbers in this example are illustrative, not recommendations. Your rent, insurance and grocery costs will differ.

A few things to notice:

• Savings are a line, not a leftover. €250 to the emergency fund and €100 to investing are planned first, like any bill.
• The irregular pot makes December possible. €160 a month builds €1,920 over a year for gifts, clothes and a holiday, so they don't land on a credit card.
• Fun is in the plan. €205 for eating out and fun money is not a failure. A budget with no enjoyment rarely survives.

Running it month to month

A zero-based budget is rebuilt every month, but that's quicker than it sounds. After the first month, you mostly copy the plan and change what's different: a birthday, a yearly bill, a holiday.

During the month, you track spending against each category. If one category runs over, you move money from another category so the plan still adds up to zero. Overspent on groceries by €30? Take €30 from eating out. This is the heart of the method: overspending isn't hidden, it's a choice about what to give up.

At the end of the month, look at what was left in each category. Leftover money gets a job too: roll it into next month's category, or move it to savings.

How long it takes

Your first zero-based budget will probably take an hour or two, because you need to go through your bank statements and decide on each category. After that, a monthly planning session of twenty to thirty minutes is usually enough: copy last month's plan, adjust for anything unusual coming up, and make sure the total is still zero. A short weekly look at your spending, five minutes or so, helps you catch an overspending category early instead of at the end of the month.

Who zero-based budgeting suits

It suits you if:

• You want to know exactly where every euro goes.
• You have a specific goal, such as clearing debt or saving for a house, and want to squeeze every euro toward it.
• Your income is irregular and you need tight control in lean months.
• You enjoy a bit of structure and don't mind a monthly planning session.

It's less suited if:

• You dislike tracking and would quit within weeks.
• You're very short of time.
• Your spending is already under control and you just want savings to happen. Then pay yourself first or 50/30/20 may be enough.

Common mistakes

• Treating zero as an empty account. Keep a small buffer in your current account so a payment timing difference doesn't cause an overdraft. The buffer itself can be a line in the budget.
• Forgetting irregular costs. The yearly bills are what break most budgets. Always include an irregular pot.
• Too many categories. Twenty categories is hard to keep up. Ten to fifteen is plenty.
• Not adjusting. If you overspend on the same category three months in a row, the plan is wrong, not you. Change the amount.
• No savings line. A zero-based budget that assigns every euro to spending still adds up to zero, but it doesn't move you forward.

Where your savings line should go

The first job for your savings line is usually an emergency fund. Find out how big yours should be with our emergency fund calculator. For ideas to free up more euros to assign, see 25 easy ways to save money every month.