Zero-Sum Budgeting Guide: Is This Method Right for You?

Learning to budget effectively changed my financial life. Before I lived on a budget, I sometimes came up short at the end of the month — and I rarely knew where my money was going. However, once I started using zero-sum (or zero-based) budgeting, everything changed.

When you use the zero-sum budgeting strategy, you assign every dollar to a specific job so that your budgeted expenses exactly match your income. It's one of the most effective ways to ensure you’re truly getting the most out of your money.

Learn more about how this method works and how to make it work for you in this zero-sum budgeting guide.

Key Takeaways

• With zero-sum budgeting, you budget where every dollar of your income will go.
• You'll decide exactly how much money to spend on different categories like food and housing.
• You'll also want to include money for savings goals in your zero-sum budget.
• Zero-sum budgeting can be tricky when you have irregular expenses or income.
• You should take steps to stick to your budget and tweak it as your circumstances change.

What is zero-sum budgeting?

Zero-sum budgeting is a method of budgeting that allows you to control where every single dollar of your income is going. You'll calculate your income and then assign every dollar to a specific savings or spending category. When you're done making your budget, no money should remain unallocated.

This budgeting method is more precise than alternatives like the 50/30/20 budget where you keep fixed costs to 50% of income, use 20% for debt payoff and savings, and reserve 30% for discretionary spending. When using a zero-sum budget, you’ll decide exactly how much of your income you're devoting to saving and specific expenses like groceries, gas, and entertainment.

Since it requires paying careful attention to which categories your dollars are going to, creating a zero-sum budget was very effective at helping me identify areas of overspending. So, if you want to drill down into how you’re using your hard-earned funds, this budgeting method may suit you.

How zero-sum budgeting works

Zero-sum budgeting is a simple concept, but it can take time to do it correctly. You’ll need to take these steps.

1. Identify all of your different income sources to calculate your total income.
2. List the different categories of spending and saving you'll do throughout the month.
3. Divide your income into these different categories.
4. Make sure your spending and your savings add up to equal your total income — with $0 left over.

Let’s look at the steps more closely with an example of how they might work.

1. Determining your monthly income

Since your monthly spending will equal your monthly after-tax income in a zero-sum budget, you need to know how much you make.

If you earn a steady amount from one source, this is easy. Just look at your pay stubs or other earnings documents to see what you're bringing home.

However, if you have multiple sources of income, this step becomes more complicated. You must add all of your earnings from the different sources to get the total monthly income.

When your income changes from month to month (such as if you’re a freelancer or earn commissions), it becomes even trickier since you won't know your exact income when you're making your budget. In this situation, your best option is to base your budget on the lowest income amount you expect to earn.

For example, say you get $4,000 a month from your regular job and have a side gig where you earn anywhere from $100 to $1,000 monthly. You'd build your zero-sum budget using an income of $4,100 since that's the lowest you'd expect to earn during the month.

Since I'm a freelancer and my income changes from month to month, I take this approach because I want to make sure I'm not budgeting more than I'll have to spend. Otherwise, I could end up with a shortfall. Plus, budgeting with the lowest possible amount means I end up being able to save more money.

2. Listing and categorizing your monthly obligations

The key feature of a zero-sum budget is that you assign every dollar to a specific task. That means you need to know what your expenses will be so you can decide how many dollars to devote to each.

The best way to find out what you need to spend money on is to look back at what you’ve already spent money on. You can review credit card and bank statements from past months to see where your money is going, or you could track your spending for 30 days.

When you list your obligations, don't forget to consider irregular expenses since you'll need to budget for those as well. For example, you might pay your car insurance twice a year, or you'll have holiday expenses during December. Rather than scrambling to cover those costs, it's best to budget for them all year long, saving a little each month so you're ready when the bill comes.

Reviewing 12 months of credit card and bank statements and checking the calendar for key events can help ensure you're including all your expenses. Doing this when I made my budget helped me to remember that we have a big property tax bill to pay each August and that my dog's annual vet visit in December needs to be accounted for.

Of course, you'll also want to include savings as a must-pay expense. Consider your long-term and short-term financial goals — and your timeline for accomplishing them — to see how much you must save. For example, if you determined you need $400 per month to hit your retirement savings target, you'd include that as a monthly obligation to fulfill.

3. Giving each dollar of income a job

Next, decide what your spending categories are and how much to assign to each. You can then give every dollar a job by assigning it to a specific category of spending and saving.

Let’s say your budget looks like this simplified example.

• Savings: $410
• Housing: $2,200
• Food: $800
• Transportation: $150
• Entertainment: $240
• Insurance: $300

This adds up to exactly $4,100, so you'll have successfully made a zero-sum budget based on a monthly income of $4,100. Since you've assigned a duty to every dollar, you have $0 left over.

In some cases, you might find you have too many expenses and not enough dollars to cover them. For instance, if your food budget was $1,000, you'd be $200 short in the above example. Easily seeing that the math doesn't add up is one benefit of making a zero-sum budget.

If you discover you don't have enough income to cover your spending and saving goals, you'll need to make some changes — either by reducing what you spend or increasing the amount you earn. On the other hand, if you find out you have more income than expenses, you can devote more to savings or another goal like paying off credit cards or loans.

4. Tracking and adjusting your budget

Once you've made your budget, sticking to it becomes the next challenge. You can make sure you're following the guidelines you set for yourself by tracking expenses regularly. You can do this the old-fashioned way with pen and paper, use a spreadsheet, or install one of the best budgeting apps.

Some people also use envelope-based budgeting with the zero-sum budgeting strategy. This would mean that if you set aside $800 for food in your budget, you’d put $800 cash in an envelope. When the money is gone, you stop spending in that category for the month.

At the end of each month, you can check in to see how well you stuck to your limits. You can then adjust your zero-sum budget for the upcoming month based on what went right (or wrong) and include any new expenses or changing amounts that may crop up.

For me, tracking my spending has been very helpful in making sure I stay on track. I use a spreadsheet, and when I enter transactions, it forces me to think carefully about whether that purchase is the best one to use my limited funds on.

Who is zero-sum budgeting best for?

While it’s helpful for managing your money, zero-sum budgeting isn’t the right choice for everyone. If you feel really restricted by this approach, you might decide not to follow through, and your efforts could end up backfiring. You might do better with an alternative like the 50/30/20 budget instead.

However, if you really want to get the maximum value out of every dollar or you're struggling to hit your savings goals and stick within spending limits, this approach could be best for your situation. It’s also useful if you like to customize your own spending and saving targets.

What are some challenges of using this budgeting method?

There are some definite challenges to zero-sum budgeting you should know about before moving forward. Here are some of them.

• It's time-consuming. You have to sit down and manually assign jobs to all your dollars, and you’ll need to track your spending in detail. However, the process does get easier over time and forces you to make more conscious spending choices.
• It's rigid. You might find it difficult or annoying to try to stick to such a detailed budget, which could backfire if you don't follow through.
• It's complicated. If you don't know your income each month or you have a hard time estimating variable expenses, it can become complicated to make a successful zero-sum budget.
• It doesn't provide much flexibility. If something unexpected happens during the month, you'll likely have to rework your budget to adjust for it. However, having an emergency fund or a budget category for unexpected expenses can mitigate this downside.

While these drawbacks are very real, they usually present the biggest obstacle at the start before you've become used to the zero-sum budgeting process. Once you have your basic framework, you should find it easier to adjust your spending and make simple tweaks.

Zero-sum budgeting apps

YNAB

YNAB (You Need a Budget) is widely considered a top budgeting app. You can sync up your bank accounts and credit cards and set spending and savings goals.

It isn’t the most user-friendly app, though, starting out. But, YNAB does have top-notch support, including live workshops, to help you make the most of the app.

Visit YNAB | Read our YNAB review

EveryDollar

Dave Ramsey’s own budgeting app is another popular choice. In fact, it’s really best if you’re following Ramsey’s financial philosophy. For example, it doesn’t integrate credit cards nearly as easily as YNAB.

If you’re looking for a relatively simple app for beginners, EveryDollar could be a good choice. But, for most people, YNAB will be the better choice (even with a learning curve).

Visit EveryDollar | Read our EveryDollar review

Other budgeting strategies to consider

Zero-sum budgeting is just one of many ways to create a budget. Let’s look at a few others.

50/30/20 budget

As mentioned above, the 50/30/20 budgeting approach involves dividing your money so you use:

• 50% for essential expenses (like housing, transportation, health insurance, and food)
• 30% for discretionary spending (like entertainment, subscriptions, hobbies, and clothes)
• 20% for savings goals and debt payments

This method provides simplicity and flexibility but also makes it harder to clearly see where you're overspending. For example, I tried the 50/30/20 budget and was unsure whether I was making the most of the money within my discretionary spending category.

Pay-yourself-first budget

Also known as reverse budgeting, the pay-yourself-first budget is a simple approach where you first move part of your income into your savings. You can then spend what's left over on essentials and discretionary purchases.

The benefit of this option is that you make sure you're prioritizing saving, which is especially helpful when you’re working toward a specific goal (like an emergency fund). The downside is that you might not use all the other money you're not saving as effectively as you should.

Envelope budgeting

Finally, envelope budgeting means putting the physical amount of cash you want to use for each spending category into an envelope and using it until it's gone. You can also follow this approach digitally through budgeting apps like Goodbudget.

The upsides are that you can combine envelope budgeting with other methods, including zero-sum budgeting, and the visual approach can help curb overspending. However, if you aren't disciplined, you could end up with an empty envelope in a crucial spending area and possibly blow your budget. Plus, the physical cash version can become inconvenient.

FAQs

Bottom line

Zero-sum budgeting has been a great approach for me, allowing me to match my spending to my income and ensure I'm saving enough for my goals. If you want to have more control over where your money is going, give it a try. You have nothing to lose, and you can always switch to a different budgeting method later if it doesn't work for you.