Gain financial control through zero-based budgeting by assigning every dollar a specific purpose.

What budgeting method results in a zero balance? Only one. However, the zero-based budgeting approach can significantly improve your financial situation by promoting careful spending and saving. By assigning every dollar a specific objective, you can achieve your objectives and feel more confident about your financial health.

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What is zero-based budgeting?

Zero-based budgeting is a spending strategy that requires you to allocate every dollar of your monthly income to a specific expense, savings goal, or debt payment. This approach can help you prioritize your spending and ensure that you're making progress towards your financial goals. At the end of each month, you should aim to have zero dollars left over in your account.

An example of how zero-based budgeting could be applied with a monthly net income of $4,000 is:

• $2,500 can be used for ongoing expenses like rent/house payments and gym memberships.
• $800 for savings and investments
• $500 for debt repayment
• $200 for discretionary spending

Every dollar now goes toward a specific goal, leaving you with $0 at the end of each month.

How to start a zero-based budget

To create a zero-based budget, you must closely examine your finances and allocate your entire income to various expenses each month. This approach promotes mindful spending and saving. To begin, follow these steps to gather the necessary information to create your own zero-based budget.

Figure out your monthly income

Your monthly income determines the effectiveness of the zero-based budget method. If you have a steady salary, you can calculate your monthly take-home pay by examining your pay stubs or bank account deposits.

If your income varies monthly, examine your earnings over the past year to determine the month with the lowest income. If it's too extreme, you can also calculate the average of a few months where you earned less than usual.

To prevent overspending, use the figure you decide as your income to create a zero-based budget. During the months when your income exceeds this number, you can allocate the extra money towards savings or discretionary spending.

Look at your expenses

After determining your monthly income, proceed to your expenses and savings objectives. Categorize all planned expenditures by housing, groceries, medical bills, credit card debt, student loans, and discretionary spending. Subtract these expenses from your income to achieve a balance of zero. If you have a negative balance, it may suggest that you are overspending and need to reduce your expenses.

If you need help managing your budget, you can try a budgeting app like You Need a Budget (YNAB), which utilizes the zero-based budgeting method. For $109 per year or $14.99 per month (after a 34-day free trial), YNAB allows you to sync your bank accounts, credit cards, and investment accounts, enabling you to allocate every dollar you earn into customizable categories.

Simplifi offers a personalized spending plan for $5.99 a month, with a free trial available.

Review your results

Evaluate the success of your budgeting plan. Did any unforeseen circumstances cause you to overspend? Were the expenses related to an emergency or an impulsive purchase? Adjust your budget accordingly for the upcoming months.

If you didn't meet your savings goals this month, don't worry. Instead, use this as a chance to examine your spending habits from the past. Look for any seasonal expenses or trends that may have affected your savings. With this information, you can plan ahead by setting aside extra funds during the months leading up to those periods. Additionally, if you were able to save more in certain categories in the past, consider using that excess to cover any unexpected costs or increase your savings.

An effective way to increase savings is through a high-yield savings account, which offers additional income for keeping money in the account.

The LendingClub LevelUp Savings account provides a high yield, zero monthly fees, and no minimum balance requirement. Additionally, it allows you to use your funds for various purposes, such as paying bills, sending money to friends and family, and making internal and external transfers, which is less common for a savings account.

Capital One 360 Performance Savings™ provides a strong return, no minimum balance requirements, and no monthly fees. Additionally, Capital One offers CreditWise®, a complimentary credit monitoring service that allows you to monitor your credit score and receive notifications when it changes.

Pros and cons of zero-based budgeting

Is zero-based budgeting for you?

Your approach to budgeting depends on your preferences. The zero-based budget approach involves closely monitoring and allocating every dollar spent, which can be helpful in achieving your financial goals.

If you find it uncomfortable to assign your income to different tasks until you hit zero, you could try a different approach to zero-based budgeting. Marcus Holzberg, a CFP at Holzberg Wealth Management, suggests starting at zero and building a budget by adding in your most essential expenses first, such as housing costs, and then gradually working your way down to discretionary, "fun" spending.

"Holzberg believes that there is no absolute right or wrong way to perform these tasks; rather, they are merely guidelines, and one should strive to do their best."

Meet our experts

We interviewed Marcus Holzberg, a certified financial planner at Holzberg Wealth Management, for this story at CNBC Select.

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