How to Use a Zero-Based Budget to Pay Off Debt

zero based budget

It probably doesn’t come as a surprise to you that well over half of American adults are in debt. From credit cards to student loans, the average person has about $38,000 of debt – and that doesn’t even include mortgages!

While the idea of drastically cutting your spending and putting more money toward debt pay-off may not sound fun to you, the benefits of being debt-free are truly endless. The benefits range from financial to emotional to relational.

Living in debt may have become the new normal, but it certainly doesn’t have to be your reality. There are budgeting methods that have helped people to pay off incredible amounts of debt. One of the budgeting methods that can be most beneficial for paying off debt is the zero-based budget.

What Is a Zero-Based Budget?

A zero-based budget (also known as a zero-sum budget) is a budgeting system where your income minus your expenses equals zero. This means you’ve found a place for every single dollar in your budget.

Now, this doesn’t mean you need to spend every single dollar. This budgeting system does not give you permission to go on a shopping spree with any money left after accounting for all of your necessary expenses.

On the contrary, a zero-based budget is ideal for those who need to save a lot of money or pay off debt. The reason is that this budget really allows you to prioritize paying yourself. You’re putting your savings and debt payments right into your budget rather than just using whatever is left at the end of the month.

Why a Zero-Based Budget Might Work For You

Zero-based budgets are ideal for people who need to pay off debt or save a lot of money. Because you’re designating where every single dollar will go, you reduce waste. You’re less likely to have a situation where you splurge on something you don’t need simply because you have the extra money in your account.

Zero Based Budgeting

4 Simple Steps to Zero-Based Budgeting

Step 1: Determine Your Income

Determine your incomeThe first step to setting up your zero-based budget (or any budget, really) is to figure out your monthly income.

If you are a salaried employee and your paychecks are the same every month, then this part is obviously pretty easy. However, if you work inconsistent hours on an hourly wage, or own your own business with inconsistent income, then you might have a little more work to do.

If you have an inconsistent income and are struggling to figure out what number to budget with, base it off of last month’s income and adjust every month as needed.

Step 2: List Your Expenses

List your expensesYour next task is to list out all of your expenses, including how much money you will allocate for each spending category.

Start with your fixed expenses such as mortgage or rent, insurance, internet, etc. Then move onto variable expenses such as groceries, eating out, and miscellaneous expenses. Finally, don’t forget about savings and debt pay-off!

Since this budgeting method is really geared towards paying off debt and increasing your savings, I like to add an extra step here, after listing all of my expenses. I take a look at what I am currently allocating toward savings and debt pay-off, and compare that number to how much you want to be allocated to those categories.

Once you have a goal number in mind, figure out which of your variable expenses can be reduced. If your family spends a lot of money eating at restaurants, could you cut that number and instead devote some of that money to your credit card debt? This is a good time to identify your problem areas and address them!

Step 3: Account For Every Dollar

Account for every dollarWhen you’re putting together your zero-based budget, it’s important to account for every single dollar. And if you’ve budgeted as much as you need for all of your spending categories and still have money left over, that’s great news!

That extra money can go either toward savings or toward debt pay-off, depending on what your current financial goals are. If like most Americans, you’ve got a lot of debt to tackle, you can employ the snowball method made famous by Dave Ramsey in order to start paying off your debts one at a time.

And what if there’s not enough room to devote anything to savings or debt pay-off? In that case, it’s time to get brutal with the rest of your budget. What can you cut back on, like food, and what can you cut out completely, like cable or buying your morning coffee?

Step 4: Track Your Spending

Track your spendingOnce you have created your budget, you’re not done! Moving forward, it’s important to track your spending throughout the month to ensure you are staying on track with your spending goals.

By doing this at least once per week, you’ll be able to stay accountable to your budget and you’ll know if you start to go over budget in one of your spending categories. That way, you have plenty of time to rein in your spending if necessary.

Moving forward, if you find that the budget you have put together isn’t exactly realistic, you can go back at any time and change up the numbers to better suit your life.

Making Zero-Based Budgeting Work For You

Make Your Emergency Fund Non Negotiable

If you are doing zero-based budgeting correctly, you don’t have any money left over at the end of the month. Because of that, it is absolutely essential that your emergency fund be a part of your budget and that you’re adding money every single month.

Ultimately, financial experts recommend having at least six months worth of expenses saved. If that seems like a stretch for you right now, start by aiming for just $1,000 and work your way up over time.

Create Financial Goals

For some people, the idea of saving just for the sake of saving is one they struggle to get on board with. For that reason, setting financial goals for yourself is a great way to make sure you aren’t spending all of your money every month on things you don’t really need, or even want.

As we discussed previously, creating an emergency fund for yourself is a great place to start. Once you’ve put some money away in savings, you can redirect your efforts to put as much money as possible toward debt.

Your financial goals should also include additional expenses you’re saving for, such as vacations or a down payment on a house. You can even set up a separate savings account for each purpose you’re saving for (one for a house, one for your emergency fund, etc.). That way when it comes time to make a large purchase, you aren’t emptying all of your savings to do it.

Watch Your Problem Areas

We all have problem areas in our budget, and more than likely you know what yours are.
For example, you may have heard of what’s known as the “latte factor”, a phrase coined by financial author David Bach. The general premise of the latte factor is that those little purchases you make repeatedly really add up. Your daily $5 latte may not seem like that much, but when you consider that adds up to $150, I’m sure you can think of other areas in your budget where that money would be better spent.

For some couples, eating out is the problem area in their budget. For others it’s entertainment.
Knowing what your problem areas are is key because then you’ll know you need to keep a closer eye on those areas.

If you’re really struggling to stay accountable in those areas, you might consider using something like the envelope system, made famous by Dave Ramsey. You put together cash envelopes for your different categories. When the cash is gone, it’s gone.

Zero-Based Budgeting With an Irregular Income

Zero-based budgeting becomes a little more difficult when you’re dealing with an irregular income. It’s still possible, but you’ll have to adjust your budget every single month.

The best way to successfully have a zero-based budget with an irregular income is to get one month ahead on your expenses (if that’s possible for you). Then you’ll always be living on last month’s income, and you’ll know how much you have to spend for the month.

In some ways, budgeting with an irregular income can make it even easier to put big payments toward debt. If you plan your lifestyle around the lower end of your average income, then the months where you have additional money to work with, you can make extra-large debt payments.


If you have a debt to pay off, the zero-based budget might be just what you need to get on track and start turning your finances around.

As with any new budgeting method, it will take some time to set up and consistently stick to your zero-based budget. But once you’ve figured it out, you can really start to prioritize savings and debt pay-off.

Erin is a freelance writer who has been writing passionately about personal finance, productivity, and side hustles for more than five years. After graduating college with student loan debt and entering a low-paying career, Erin threw herself into learning everything she could about personal finance and making money through side hustles. On her own blog, she helps women to reach their goals by teaching them how to manage their time and their money.

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