When I was pregnant with my second baby, my husband lost his job due to budget cuts. Money was extremely tight. I would lie awake at night worrying about the financial challenges that lay ahead: preparing our home for our new little one, taking unpaid time off to care for him in the early weeks and making sure we had money for essentials like diapers and a car seat. I knew that in order to get through this lean time, I would need to make every single dollar that my husband and I earned count. That’s when I stumbled on zero-based budgeting.
Using a zero-based budget means that you allocate every single dollar you make toward a specific expense or saving goal. It stops you from spending more than you earn, it requires you to carefully consider every purchase and it encourages long-term savings. It helped us prioritize our spending when my family earned a limited income — and definitely decreased the number of sleepless nights I experienced. Zero-based budgeting might just be the budgeting method that will work well for you, too.
Here's how zero-based budgeting can help parents like you and me — and how to do it successfully, according to financial experts.
What is zero-based budgeting?
"A zero-based budget essentially counts every dollar that comes in as income, then subtracts your expenses until it equals zero at the end of the month," explains Regina McCann Hess, a certified financial planner (CFP), certified divorce financial analyst and author of Super Woman Wealth: How to Become Your Own Financial Hero.
With zero-based budgeting, you decide what each dollar you earn will go towards. The idea is that every cent you make is dedicated to a specific expense or savings goal. It also makes you take a close look at your finances each month.
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"Instead of adjusting last period's numbers, you start with a clean slate and intentionally allocate every dollar," Akin says. Keeping a zero-based budget encourages a greater awareness of costs, and it allows you to align your spending with evolving priorities, she adds.
How is zero-based budgeting different from other methods?
A zero-based budget gets more granular compared to other budgeting strategies, like the envelope method (when you assign your income to different spending "envelopes" and can only spend the amount of money in the envelope each month) and 50/30/20 budgeting (when you allocate 50% of your budget to your needs, 20% to savings and 30% to your wants).[1]
"Most other budgeting techniques, like the envelope method or 50/30/20 rule, focus primarily on allocating funds across broad categories," says Ashley Akin, CPA, a senior tax associate and contributor at Dividend Earner. "While useful, they don't force you to critically evaluate each line item expense with a fresh perspective regularly."
What are the pros and cons of zero-based budgeting?
Zero-based budgets aren’t for everyone. Let’s take a closer look at the pros and cons of zero-based budgeting, especially when it comes to raising a young family.
Advantages of zero-based budgeting
- Prioritization of key goals: Making every dollar count is especially important when you’re raising little ones. Many new parents face huge expenses they've never had to budget for before. For instance, day care expenses can account for up 19% of a family's income per child, according to recent estimates from the U.S. Department of Labor.[2] Zero-based budgeting can help you prioritize essentials like child care and diapers by allocating those dollars first.
- Regular check-ins: By reassessing your expenses each month, you're more likely to consider making necessary changes. You’ll clearly see if finding a more affordable childcare option or trimming your grocery bill will make your money go farther.
- Adaptability: Instead of having set spending buckets each month, this method allows families to easily alter their budget as things evolve, Hess says. "This can be helpful with families with young children, especially as they age out of day care," she says. "As families come out of this stage, they can quickly move this funding to another column, [like] saving for college."
- Goal-setting: When assigning each dollar a place, you might feel more motivated to make sure money is going towards specific savings goals (e.g., a 529 account, an emergency fund, a down payment on a house or a new minivan).
Disadvantages of zero-based budgeting
- Time and effort: The truth is that as helpful as a zero-based budget can be, there's a steeper learning curve compared to other methods. Plus, it can take a bit more involvement. "One of the biggest complaints that people have about the zero-based budget is that it is time-consuming," Hess says. That’s because you have to track every dollar that you earn and spend. It can feel hard at the beginning, but in time, categorizing your spending definitely gets easier, Hess assures.
- Allocating for savings and unexpected expenses: What if your car suddenly needs a new transmission or you want to plan a vacation? Experts agree that you need to put some income toward various savings buckets, not just planned expenses.
How to do zero-based budgeting
Okay, so let’s get down to the nitty gritty. How do you get started with zero-based budgeting?
Here are the basic steps:
- Figure out your income. Your income includes not only your normal salary but also any money you might earn as a side hustle or passive income, Hess says.
- Record your monthly expenses. Review your last few months of bank and credit card statements to get a good idea of your spending and saving habits. You’ll use this info to set up your budget for the upcoming month. "To make it a little fun and less daunting, pretend that you are a detective and track down every dollar that comes in and out of your accounts," Hess says. Make sure you also include savings contributions, charitable donations and debt payments in this column.
- Adjust the expense columns until your total income matches your total expenses. Another way of putting this is that you want to make it so that if you subtract your expenses from your income, it will equal zero.
Whether you do this the old-fashioned way in a notebook or in a spreadsheet on your computer is up to you. You can also use zero-based budget apps (such as YNAB and Every Dollar) to get started. Many of these apps can pull data directly from your bank and credit card statements so you don’t have to enter it manually.
Zero-based budget example
It’s one thing to learn about a method like zero-based budgeting, but it’s another thing to see it in action. I recently dusted off one of my budgets from when I first started using this method to illustrate how it works.
As previously mentioned, my husband had recently been laid off. He temporarily worked as a substitute teacher and collected unemployment on the days he wasn’t called. I was quite pregnant with our second baby and worked part-time as a lactation consultant.
Since we didn't earn a set salary, I would base our income on what we had made the previous month. Expenses like rent, car insurance, the phone bill and the electric bill were non-negotiable. We'd then tweak the miscellaneous spending and food shopping categories based on our earnings. Here's what that looked like:
| Total | $0 |
| Total monthly income | +$3,000 |
| Rent | -$1,400 |
| Cell phone plan | -$150 |
| Car insurance | -$250 |
| Electric bill | -$100 |
| Food | -$600 |
| Miscellaneous expenses (gas, Netflix, diapers, clothes, etc.) | -$500 |
Our family has used zero-based budgeting for more than ten years now. As we exited that period of financial strain, we added additional "savings" columns to our budget, which was super exciting. We now have a solid emergency fund, as well as funds for miscellaneous life expenses (like house and car repairs as well as vacations) and health care needs.
Zero-based budgets certainly aren’t the answer for everyone. But everyone should have a budget, and a zero-based budget is one of the best ways to make sure that you stay within your means every month — and that none of your earnings go to waste.
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