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Bottom Line Up Front 

  • Zero-based budgeting helps you manage debt, control spending and build savings.
  • You can create a zero-based budget in 4 steps: list your monthly income, track and categorize your monthly expenses, build your budget and adjust as you go.

Recently, one of our members said, “I checked my account and was surprised by the low balance. I thought I was hacked! But, when I looked at where the money went, I realized it wasn’t a hacker—it was me!”

If you’ve ever found yourself wondering where all your money went at the end of the month, you’re not alone. There’s a budgeting technique called zero-based budgeting that may be worth trying out. In addition to helping you manage debt and control spending, it also may help you to build your savings. Wondering what’s different about this budgeting method? Well, for starters, your goal is to get to $0 every month.

What’s Zero-Based Budgeting, and How Does It Work?

Take-Home Pay Minus Expenses, Savings and Debt Reduction = $0

Zero-based budgeting (ZBB) is a method first used by businesses to budget for what they actually need, instead of using a previous budget and adding a little extra. They start at zero, examine all their expenses and justify each one.

Many people have adapted this method for personal finances—with a twist. Of course, the aim for all budgeting methods is to spend less than you earn. However, with ZBB, how you work in your savings and what you do with anything that’s left is where it’s different.

The idea is to take a fresh look at your finances and assign all available money for a specific purpose. And, unlike traditional budgeting methods, putting money in savings is a requirement, just like accounting for housing costs or transportation. It’s not just a “nice to have” if you happen to end up with extra money at the end of the month.

What you’re aiming for is to have your expenses, savings goals and debt reduction combine to equal your take-home pay exactly. If something changes or you find that you assigned too much or too little for a specific category, you can always modify it.

How Can I See My Finances With a “Fresh Look”?

Look at how you spend your money each month. Justify your expenses by deciding which are essential (housing, groceries) and which are optional (streaming services, gym memberships). Do you have other financial goals you’d like to achieve (e.g., saving for retirement, putting money aside for investing, a down payment or a vacation)? Finally, consider if there’s anything you could reduce or eliminate, so you have room for all your financial goals. For example:

  • Are there less expensive alternatives, or are you paying for something you don’t use often (streaming services, internet, and cell phone providers)?
  • Can you reduce expenses such as your grocery bill, eating out, or commuting costs?
  • Can you transfer your credit card balance(s) to one with a lower rate?
  • Could you refinance your car for a lower payment?

How Can I Get Started?

You set up your zero-based budget in 4 simple steps.

  1. List your sources of monthly income. Your monthly income is how much you know you can depend on each month, such as your net paycheck or alimony/child support.

    Note: Don’t include money you’re not sure you’ll receive or receive only irregularly, like a bonus. You’ll add those in later in the process.
  2. Track and categorize your monthly expenses. This step will really help you identify needs versus wants and will aid you in making sure the way you spend matches your priorities. Track your expenses for a few months so you have a good idea of where you’re spending your money. Checking bank and credit card statements is easy with our mobile app* or online banking.

    Next, you’ll create spending buckets (e.g., living expenses, debt, savings, entertainment) and rank them by importance. List out your expenses and decide which will go in which spending buckets. It may help to start with expenses that stay the same each month, like housing costs and loan payments. Then, fill in the rest based on past spending.

    Finally, include other goals you want to add. It’s a good idea to create multiple categories for your savings goals (e.g., separate emergency, vacation, retirement, down payment funds). Be sure to account for things you may not pay every month like license or registration renewals or gifts.
  3. Build your budget. This is when you’ll decide how much you’ll allow for each category. You won’t be opening accounts for each. You’ll just be deciding how much should be available for them. As we explained above, your goal is to have every dollar assigned, so your expenses, debt reduction and savings equal your take-home pay.

    Now, suppose you’ve accounted for all your expenses and still have money unassigned. Did you get a bonus? Maybe you’ve just paid off a bill, so you no longer have that payment, or maybe you earned more than you expect to spend. Whatever the reason, put the extra money toward one of your savings goals or paying down debt. For example, you might decide to start saving for 3 months of expenses in an emergency fund. Or, you could use it to pay off a bill with a small balance. Just don’t leave it unassigned—so you’re not tempted to just spend it on a lower priority expense. You’ll be especially glad you did when you have 1 less bill, can reach a savings goal sooner or are able to cover an unexpected expense (e.g., flat tire, dead phone, surprise medical bill) without having to borrow.

    Note: If your pay changes from month to month, use the lowest month’s pay and adjust, as needed. In low-earning months, work on the items you ranked as most important first. In months when you have more money, work on adding more to savings, paying down debt or even putting a little more toward something fun.
  4. Adjust as you go. In the beginning, setting up your zero-based budget will involve some guesswork. Don’t get discouraged if you’ve forgotten something or unexpected expenses throw your budget out of balance. Keep your focus on covering the essentials and growing your savings—so you have a safety net. It may take a little time to get it where you want it. Using a budgeting app or spreadsheet may make it easier to fine-tune your spending buckets and dollar amounts.

Can You Show an Example?

The thing to keep in mind is that every dollar has a purpose. Although your situation will be different, here’s a very simple example of how this method could work for a child-free individual whose take-home pay is $3,000.

Example of Zero-based Budgeting: Target Monthly Expenses = $3,000
Expense Amount
Housing, food, utilities (including internet and phone), transportation -$1,800
Loan (student, car) and credit card payments -$400
Insurances (life, health, auto, renter’s) -$200
Clothing, entertainment and charitable giving -$150
Retirement savings -$200
Emergency fund -$50
Travel fund -$50
Miscellaneous (e.g., gym membership, pet expenses, irregular expenses like haircuts, holiday fund, birthdays, auto tag renewal) -$150
Total Expenses -$3,000
Total Monthly Income Minus Expenses $-0-


Navy Federal Can Help

We’d love to help you take control of your budget—so we’ve assembled a number of financial tips and tools on a variety of topics. Navy Federal members can also get personalized assistance to learn more about budgeting or improving personal finances. You can submit an application and speak to a personal finance management counselor by visiting our Personal Finance Management page. 

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.