Zero-Based Budgeting To Erase Debt and Build Savings

By Mike Peterson
In March 2, 2017

Ever heard of zero-based budgeting? Admittedly, when talking budgets the word “zero” doesn’t exactly instill confidence in the practice’s virtues. After all, no one likes to hear the number zero when talking about their money. But rest assured the concept of zero-based budgeting is not as scary as it seems and is, in fact, a good way to dig yourself out of debt or grow your nest egg.

Let me explain.

To understand how zero-based budgeting can help you get your finances in order, it’s important to know exactly what this type of money management entails. Simply put, a zero-based budget is one in which when you subtract what’s going out (your expenses) from what’s coming in (your income) the answer is zero. In other words, every dollar you earn has to be spent, saved, or invested, and it must be spent in a specific way according to the plan you create.

Now you can see exactly how the “zero” in zero-based budgeting comes in. Not so scary anymore, right?

Now that you understand what zero-based budgets are, you may be wondering if or why this might be a good option for your personal finances.

Creating a Zero-Based Budget

Zero-based budgeting is smart for two reasons. First, this method forces you to be disciplined with your money, spending it, saving it, or investing it only in ways you have already specifically defined. Second, because you are budgeting every penny you earn, it is that much more difficult to splurge on unneeded items because there is no extra money lying around unaccounted for at the end of the month. Every dollar has its place. So, how do you build your own zero-based budget?

First, you need to list and add up all your monthly income and make note of the total. Be sure to include all income, including child support if you receive it and any additional money you earn aside from your main paycheck.

Let’s say your monthly income, after taxes, is $4,000.

Next, list each and every expense and calculate that amount, as well. Include bills, housing costs, groceries – everything you spend in a month. Remember to include seasonal or even yearly expenses, such as school fees, car registration, or insurance renewal, so be sure to include those amounts in your budget as they come up.

Here’s an example of what your monthly expenses might look like:

  • Rent/Mortgage: $1,300
  • Utilities (including cable, electricity, Internet): $350
  • Food: $800
  • Insurance: $135
  • Car Payment: $275
  • Debt Payment: $200
  • Gas: $200
  • Cell Phone: $100
  • Miscellaneous shopping/expenses: $300
  • Savings: $200

Total expenses: $3,860

Now, subtract your total monthly expenses ($3,860) from your monthly income ($4,000).

If you did your math correctly, you’ll notice there’s $140 left. This may happen from time to time, but it’s still something you have to rectify to build a true zero-based budget – and that brings us to the fun part: Deciding where to put the money.

You can add it to savings, or you can make an extra payment to your debt, or you can use the extra money for a special dinner. No matter what you choose just make sure the money is designated and used for a specific purpose.

Spending More than You’re Bringing in? Keep Reading

You may find that, once you review your monthly income and spending, your expenses loom larger than your income. In that situation, you’ll need to find a way to cut back and get to zero.

Not sure where to start? Here are a few common ways to get your spending under control:

  1. Time for the weekly shopping trip? When it comes to groceries, scour coupons and buy generic. It also helps to make a list before you go out – this cuts down on unplanned impulse purchases.
  2. Need to blow off a little steam and kick back? Instead of a night out at a bar or a restaurant, invite friends over for game night instead.
  3. Time for dinner? Forego the pricey takeout and commit to making most of your meals yourself.
  4. Need furniture, a dress for a special event, or a replacement for your broken espresso machine? Instead of buying new, check out sites like Craigslist or look to consignment and thrift stores instead. You can find gently used items for a fraction of the price.
  5. Looking to purge your home and get rid of clutter? Sell off anything you don’t need. Have a garage sale or put it all on eBay – and use the proceeds to pay down some credit card debt or bulk up your emergency fund.
  6. Tired of paying a budget-busting car payment? Seriously consider selling your ride, paying off the note and buying a used car instead.
  7. Shocked by unexpectedly expensive utility bills? Bring them down by paying close attention to how much energy you’re expending in your home. Switch off lights on your way out of rooms. Unplug any appliances such as coffee pots and toasters when they aren’t in use. Turn off the TV and pick up a book.

When you’re finished trimming, see what you have left over. If you find you have some extra cash – lucky you! – make sure to bring your budget back to zero by assigning those dollars to a specific expense, like credit card debt, savings, or retirement account. Remember, in a zero-based budget, all money must be accounted for.

So, there you have it! Simple, right? And not in the least bit scary! And remember, as with any budget, even if you initially feel constrained by spending limits, I promise you’ll soon realize the freedom that comes from knowing all your bills are accounted for, your debt payments are prioritized, and your savings accounts are being attended to.

However, if you need more information about zero-based budgets or any other help related to debt, credit, or credit cards, we are happy to listen and offer any assistance we can. Contact the Debt Guru team today for a free debt consultation .

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.

Click "More" for important American Credit Foundation client transition information