Updated: Mar 27
This guide will tell you everything you need to know about ZBB (zero based budgeting).
What is Zero Based Budgeting?
Let's start with the definition. What is zero based budgeting or ZBB for short? It is a type of budgeting method where every dollar is accounted for. Think of it as you assigning a job to every dollar in your budget. This allows you to better back your expenses and to help you save money each month.
How does Zero Based Budgeting work?
At the end of each month, your after tax income should equal expenses + savings + investments (if you count this separately from savings). That means you're left with $0 at the end of each month, hence the name Zero Based Budgeting. If you notice that as you're doing this exercise, you have dollars left over at the end of the month, put those leftover dollars in a savings or investments account to ensure your money is working for you (more on this at a later time).
How do you complete a Zero Based Budget?
Let's use an example: your after tax income is $3000. If you're using the ZBB method, this is an example of what your zero based budget might look like:
Gift card purchase for friend's birthday
Bank of America Account
Total net for the month:
As you can see above, there are categories that each dollar is assigned to. You can even go further and create subcategories if you need to be more specific and a description is not enough. Once you have the categories defined (in the example above, the categories are expenses, savings and investments), add them together and that total should equal your after-tax income exactly. You should have $0 at the end of the month.
If you're looking for a template, you're in luck! Join my email list for a FREE zero based budgeting monthly spreadsheet or click below to buy our annual + monthly budgeting tool!
What are the advantages and disadvantages of Zero Based Budgeting?
Great question. One of the major advantages of zero based budgeting is that it makes you hyper aware of how you're spending your money. You notice the details and can easily see where you're spending a few too many dollars (yikes, my iced coffees from Starbucks really add up!). You might be a little more cautious next month in order to maximize savings and/or investments.
I always recommend this budget method for those who are new to budgeting - yes, you get in the details, but it really forces you to take a deep look at your spending habits and make adjustments.
The disadvantages are that it is time consuming and requires attention to detail. In order for this budgeting type to be successful, make sure you have enough time set aside to go through every expense. Hold yourself accountable by setting up a recurring meeting weekly to spend time updating your budget spreadsheet. Weekly sounds like a lot, but the same amount of time is spread over a larger period. For example, would you rather spend 2 hours once a month updating your budget or would you rather spend 30 minutes per week updating your budget? 30 minutes sounds much more achievable to me!
Where can I find a Zero Based Budgeting template?
We have 2 templates! Join my email list for a FREE zero based budgeting monthly spreadsheet.
We also offer a $15 paid spreadsheet below that is more extensive and includes a year-to-date (YTD)/annual view of your budget, monthly tabs already created for you and a more organized subcategories dropdown list that updates depending on the category you select.
New to budgeting and feel like you don't know where to start? Sign up for a 1 HR financial coaching session - we will talk through your goals and build a personalized plan that will help you achieve your financial goals!