What is zero-based budgeting?

Whether you're 16 or 60, one of the best ways to make sure you can pay your bills and reach your financial goals is to have a budget. To some people, budgets are a fixed way to manage money, with little room for the fun stuff or one-off expenses. There are other, more flexible options that match most people's lives — and give the flexibility they need to match changing financial needs!

In reality, a budget can be an incredibly empowering plan that allows you to choose how you spend your money and save for different goals!

You might wonder, "How else could I budget?" Enter the world of zero-based budgets and see that there's another way. Read on to learn what a zero-based budget is and see why you'll never look at a budget the same way again!

What is a zero-based budget?

Imagine this: You get your paycheck, and instead of just spending willy-nilly, you assign every cent to specific expenses, savings, and even fun stuff. It's like playing a super responsible game of Tetris with your money, where every piece fits perfectly into your monthly financial puzzle. And the best part? No dollar gets left behind feeling lonely and unused!

You might say, "What about my kid's birthday party this month?" The beauty of the zero-based budget is that each month, you start with a fat goose egg in each of your spending categories. You'll fill in the fixed expenses pretty easily, but after that, you have wiggle room to fit this budget into your life. If you have a big one-time expense, write it in. You may shave down the restaurant and entertainment budget or other discretionary expenses for the month. After your big event, you can kick them back up to your desired spending level.

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Why do people choose this type of budget?

So, why do folks jump on the zero-based budgeting bandwagon? It's all about control and clarity. When you give every dollar a purpose, you're like the CEO of Your Money Inc. and ensure everything runs smoothly. This budgeting style is a hit for those who want to live within their means and see exactly where their money goes. It's perfect for goal-setters, dream-chasers, and anyone who wants a clear picture of their financial health.

In fixed budgets, all categories and amounts are pre-determined and remain consistent. When one-off expenses arise, that can mean dipping into savings or taking on credit card debt. However, with a more flexible system — like zero-based budgeting, you can give yourself the flexibility to account for changing needs month-to-month.

In the zero-based system, you can resize some of the buckets as needed. Plus, it's a great way to teach young adults and kids about managing money because you show them how to adjust their spending to meet their goals rather than simply overspend.

Real-life scenarios of zero-based budgeting

Here are a few examples of zero-based budgeting in action:

• Freelancer’s flexible finances (Sarah): As a freelancer, Sarah's monthly income swings between $3,000 and $5,000. To adapt, she adjusts her budget each month based on her earnings. In leaner months, she tightens spending on professional development and leisure and focuses on essentials like rent and utilities. When her income peaks, she allocates more to savings and invests in new design software. This keeps her budget balanced to zero every time.

• Family planning for Christmas (The Koh Family): The Koh family starts tweaking their zero-based budget in September to prepare for the festive season. They reduce their entertainment and dining out expenses for a few months and allocate an extra portion of their income towards Christmas gifts and decorations. This adjustment allows them to enjoy the holidays without financial stress and ensure their spending aligns with their revised budget.

• Student prepping for the school year (Dwayne): Dwayne, a sophomore in college, knows that the start of the school year means additional expenses for books and supplies. In August, he adjusts his zero-based budget. He reduces his leisure and dining out categories and redirects those funds to cover his school-related costs. He also takes on extra shifts at his part-time job to boost his income, ensuring his budget balances out.

• Retired couple with variable medical expenses (Mr. and Mrs. Gomez): The Gomezes, living on a fixed retirement income, face fluctuating medical costs. They review their budget monthly and adjust spending on leisure activities and gardening supplies to accommodate higher healthcare expenses in months when they have medical appointments or prescriptions to fill.

• High schooler saving for college (Jordan): Jordan, now focused on saving for college, adjusts his budget each month depending on his varying work hours at the bookstore. In months when he earns more, he increases his college savings allocation, while in quieter months, he scales back spending on entertainment to maintain a consistent savings contribution.

• Entrepreneur adapting to business cycles (Oleksandr): Oleksandr's startup experiences different business cycles throughout the year. During peak periods, he allocates more funds to marketing and development. In slower months, he reduces operational costs and increases his savings. This ensures his budget is always aligned with his fluctuating business income.

What other types of budgets do people use?

By now, zero-based budgeting may sound like the cat's pajamas. But guess what? It's not the only show in town! Here are some other popular budgeting strategies that people love to use. Whether you’re a meticulous planner or a free spirit with your finances, there’s a budget style out there for everyone!

The 50/30/20 rule: easy-peasy budgeting

The 50/30/20 rule is like the comfort food of budgeting — simple and satisfying. You split your income into three chunks:

• 50% for needs (like rent and groceries)

• 30% for wants (hello, movie night!)

• 20% for savings or paying off debt

It’s perfect for those who want a straightforward plan without too much fuss. 

The envelope system: tangible and fun

What money is more satisfying to work with than real cash? With the envelope system, you divide your cash into different envelopes, each labeled for a specific expense like "Groceries" or "Fun Money." Once an envelope is empty, that’s it until the next refill. It’s a hands-on way to keep your spending in check and great for visual learners or kids who earn an allowance or work in a cash-based parental economy.

The zero-sum budget: for the number nerds

This is similar to zero-based but with a twist! At the beginning of the month, you allocate all your income to expenses, savings, and debt repayment. But here’s the kicker: you use last month’s income for this month’s expenses rather than what you expect your income to be for this month. The pro here is that you're budgeting with money you've already earned, so it's great for people whose income fluctuates month-to-month.

The pay-yourself-first budget: treat yourself

This one flips the script. Before you pay bills or buy groceries, you set aside a chunk for savings. Whether it’s for retirement, a dream vacation, or an emergency fund, you make saving your top priority. It’s a fantastic strategy for building wealth and ensuring your future self is well taken care of.

The apps-first budget: tech-savvy spending

In our digital age, budgeting apps are all the rage. Link your accounts to an app, set your spending limits, and let technology do the tracking. It’s budgeting for the 21st century — perfect for those who are always on their phones and love real-time updates.

How to learn more about budgeting

Are you ready to become a budgeting superstar? 🌟 It can be fun, engaging, and super rewarding to learn about finances! Whether you're a young adult taking your first steps into the world of finances or a parent who wants to help kiddos manage their money, there's a whole universe of resources out there. Knowing what a zero-based budget is already sets you up for success.

The first step to manage your finances is to cultivate a positive money mindset through financial education. Blogs, podcasts, and budgeting books are everywhere, packed with tips, tricks, and life-changing advice. From nifty ways to save on groceries to big-picture strategies for long-term financial health, there's something for every learning style. 

Despite what your kids may think, apps are great for more than scrolling through photos or keeping up with your friends. Budgeting apps turn your smartphone into a financial guru right in your pocket. Track your spending, set up savings goals, and get insights into your financial habits — all with a few taps on your screen.

And for the ultimate learning experience, say hello to Greenlight®! It's more than just an app — it's a whole financial learning platform for families. With Greenlight, you can teach your kids to budget, save, and spend smartly. It's like a crash course in adulting right at home, where kids can practice real-world money management in a safe and controlled environment. Plus, parents get the tools they need to guide their children's financial journey. It's a win-win for learning and doing!