Zero Based Budgeting for Personal Finance: What Is It and Who Does It Work For?

Daniel Brown

Financial ExpertUpdated on June 19, 2023

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Do you live life from payday to payday, wondering at the end of each month:

Where did all my money go?

You can better track your spending if you have a budget.

Having a budget can help you create a strategy to reach your money goals, while having adequate funds set aside for bills and bucket list items such as buying your dream home or going on a holiday in the Maldives. 

One of the most common methods for doing this is Zero-Based Budgeting.

Have you ever heard of this budgeting system before?

If not, you’re on the right page because I will cover the definition of a zero-based budget, how to develop a zero-balance budget, the advantages and disadvantages of this approach, what to include in your budget, and more. 

Continue reading to find out if this method is suitable for you.

Jump straight to…

zero based budgetting

Who introduced the zero-based budget?

Who Introduced Zero-Based Budget
Who Introduced Zero-Based Budget

Zero-based budgeting was developed in the 1970s by accountant Peter Pyhrr who worked for calculator manufacturer Texas Instruments. Pyhrr developed the budgeting method to aid in integrating top-level strategic objectives into the budgeting process by linking them to the organisation’s distinct functional divisions.

Pyhrr categorised expenses and compared them to past performance and current budget items. This allowed management to distribute resources based on current needs rather than past spending. 

Later on, Jimmy Carter, the governor of Georgia at the time, selected Mr Pyhrr to oversee the state’s budgetary process. This eventually led to the adoption of the zero-based budget in the private and public sectors. 

Pyhrr is also the author of Zero-Based Budgeting: A Practical Management Tool for Evaluating Expenses.

The Zero Based Budgeting Method: What Is It & How Does It Work?

Zero-Based Budgeting Definition
Zero-Based Budgeting Definition

The Zero-Based Budgeting Method is based on the idea that each dollar in your budget has a purpose and needs to be assigned a category. You’ll know where 100% of your income went at the end of the month. Think of it as something like a purpose-driven budgeting method of financial planning.

A zero-based budget obliges you to allocate any extra money from your income sources to savings, debt repayment, or any other financial goal, as opposed to a standard budget which allows excess money to float around, making it easier to spend on unnecessary items or left just sitting in your savings account. 

The goal is to have zero money in your budget each month.

Yes, you read it right:

Zero money in your budget each month.


Don’t panic just yet. 

That doesn’t mean you’re using it all. The reverse should be true. 

It means that you are more intentional in where you spend your money each month by identifying your priority expenses for that period. 

For example, you’ve decided that your top three priorities for a certain month are: debt repayment, saving, and investing

Therefore, if your monthly income is $7,000 and your fixed expenses (rent, insurance, etc.) total $6,000, you will have $1,000 left over to allocate to your variable expenses. You need to set aside that extra $1,000 to cover for your other budget items. 

The Zero-Based Budgeting Method may be for you if you’re looking for:


Efficiency, and


How to Create a Zero-Based Budget

A zero-based budget gives you flexibility while still staying on track of your monthly budget goals

To help set you up for success, keep in mind these simple steps of a zero-based budget: 

Step 1

Step 1

Identify Your Income Streams

To determine how much money you must budget, add up your salary, benefits, and other monthly income streams. 

For salaried workers, your monthly income is your take-home pay after tax, health insurance, and pre-tax superannuation deductions. Remember to add other income streams that may come from side jobs, investments, or government grants. 

For freelancers and seasonal workers, base your salary on your average income the previous months. 

And then choose your spending limit based on your monthly income. 

Step 2

Step 2

Classify Your Fixed and Variable Expenses

Deduct your fixed monthly expenses, such as rent, mortgage, and car payment from your income. Going through your credit card and bank statements is a good practice to be sure you’ve got everything covered. 

For variable expenses such as groceries, eating out, and holidays, review your previous spending to have an idea how much you spend on this category. This will greatly help in having a realistic estimate because variable expense items fluctuate from month-to-month.

How To Make Categories For A Zero-Based Budget
How To Make Categories For A Zero-Based Budget

You can make the categories as specific or as general as you like with the categories you track. All you have to do is to double check that you’ve got all the items covered and be flexible with unexpected expenses. 

Do you need to upgrade to a bigger car for your growing family? 

Make a category for “car fund”. 

Want a Maldives getaway with your partner? 

Make a category for “travel fund”. 

Step 3

Step 3

Prepare for Unforeseen Expenses

No matter how prepared we are, unexpected things always happen when you least expect them to happen. 

Your laptop suddenly dies on you and you need an immediate replacement.

Your child gets injured during a school camp and needs to see a specialist.

Your best friend gets married and you have to spend on gifts and travel to the island venue of the wedding.

These are unforeseen costs and can be covered by an emergency fund, which may also include medical expenses and other costs due to life’s surprises. 

Hence, it would be wise to create a category for unforeseen, irregular or unexpected expenses. 

Irregular expenses are fixed costs yet they may not occur every month, such as council rates, annual subscriptions, and vehicle registration. 

Step 4

Step 4

Plan for long-term goals

Zero-Based Budgeting Can Help Prioritise Long-Term Goals Like Investing
Zero-Based Budgeting Can Help Prioritise Long-Term Goals Like Investing

Zero-based budgeting can help make what may seem as a far away money dream a reality because you are able to prioritise long-term goals. Investments can be integrated in your budget category from the start as opposed to waiting until the end of the month for “leftover crumbs” from your budget. 

It also allows you to include an amount for retirement planning, private education savings for your children, debt repayment, and emergency fund development in your budget alongside other costs. 

Even if you might not be able to give each of those priorities the attention they deserve at the same time or on the same scale, you can nevertheless take the first step towards your money goals.

What is an example of a zero-based budget?

Like what has been discussed earlier, with zero-based budgeting, you allocate 100% of your income to budget items you’ve identified at the start of each month. By the end of the month, you want your income less your expenses to be equal to zero. 

Here’s an example of a zero-based budget supposing you earn $8,000/month:

Budget CategoriesMonthly Income: $8,000/month
Car and Transport1,025
Household Expenses (utilities, communication, home maintenance, etc.)1,500
Living Expenses (food and groceries, medical and pharmacy, clothing, education, pet food & maintenance, childcare & school fees, etc.)1,500
Insurance 50
Loans & Credit Cards (rent, mortgage repayments, personal loans, credit card repayments)2,625
Leisure & Entertainment (holidays, restaurants, take-away, sports & hobbies, gifts)300
Savings and Investments1,000
 Amount left: $0
Zero-Based Budget Example

Every month, you can use the same expense categories and amounts, or you can vary them. The remaining money can be added to the budget for the next month or transferred to another area, such as your emergency fund. 

You can simplify the process by using the MMS Expense Planner Calculator. Try it out!

Advantages of Zero-Based Budgeting

1. You see where your money goes

With a zero-based budget, you can always see how much money is coming in and going out because every dollar from your income has been assigned a purpose according to your priorities. By doing this, you can avoid overspending which can sometimes lead people to a debt trap.

2. Flexibility

Fluctuating costs is a given in any economy. With a zero-based budget, you can simply make adjustments as necessary without the hair-pulling stress of having to adjust the whole system, thanks to its flexibility.

3. Sustainability

If you have irregular or unstable income, zero-based budgeting is a smart choice because your monthly budget is designed based on your income. It gives you clarity of your priorities so you can focus on expenses that can be covered by your actual income.

Disadvantages of Zero-Based Budgeting

1. Takes considerable effort

You’ll need to consistently and closely track your expenditures if you want to hold yourself accountable. Variable costs can be sneaky and so you must routinely and carefully monitor it.

2. Time-consuming 

Aside from being tedious, keeping tabs on every single monthly expense needs a lot of time commitment in order to keep your zero-based budget accurate.

3. Can be challenging for those with irregular income

If your income is irregular or unexpected, such as if you work as a freelancer or have an hourly job with changing hours, the zero-based budgeting technique may also provide difficulties. The trick is to have a reserve fund equivalent to one month’s worth of income.

Key To Successfully Managing A Budget
Key To Successfully Managing A Budget

The key to successfully managing a budget is this:

Only use money that has already been paid to you, not money that you anticipate making.

By increasing your awareness of your financial circumstances, 

you will be able to make sound and wise money decisions.

Additionally, you might find it helpful to consult a Finance Expert if your financial situation is complicated.

You can avoid costly financial mistakes and keep things simple with the help of a Finance Expert.

Many people may be unaware of this…but just like you, 41% of Aussies have said they intend to get personal financial advice, according to an Australian Securities and Investments Commission (ASIC) report. 

Find the right Finance Expert for you with the help of My Money Sorted. 

When you book a call with My Money Sorted, you’ll:

         ✓ get a better understanding of your money matters

         ✓ have an idea of your money goals to help you save more

         ✓ be matched with the right finance expert who can help simplify your budgeting process that can lead to financial wellness

My Money Sorted is your stress-free pathway to getting ahead with your money. Here’s what your journey will look like:

Step 1: Start off with a quick money matters session with My Money Sorted

Step 2: Get matched with a Finance Expert that’s right for your money situation

Step 3: Take the first step towards your money goals with a clear and sound roadmap prepared by a Finance Expert

It’s that easy!

Get Your Money Sorted with a Finance Expert by booking a call with your My Money Sorted today!


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