Why You Need a Zero-Based Budget to Get Out of Debt

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Wanting to save up for your dreams or get out of a debt? A zero-based budget is the very best strategy you can follow!

What is a zero-based budget?

In a nutshell, a zero-based budget gives every dollar you earn a job or a home. You plan for every purchase you make in a given month!

How is this different from other systems?

A lot of folks will let their paycheck deposit, spend based on whatever they have in their account at the time, and try to save here and there.

A zero-based budget is like putting your money in battle mode. You give every single dollar a job and know exactly where it is going! You also set specific spending amounts for different categories each month, like groceries, dining out, clothing, etc.

Zero-based budgets really became popular with Dave Ramsey, who advocates a very specific type of zero-based budgeting often referred to as “the envelope method.”

how to start a zero-based budget

What is the envelope method of budgeting?

In the envelope method, you actually withdraw all the cash you will need for different categories of spending each month and sort them into envelopes. When you shop, you pay for your expenses with the cash from the envelope for that category.

For example, you may have a $200 grocery budget. In your grocery envelope, you add $200 in cash at the beginning of the month or after your pay day.

When you shop at the store, you pay by using the cash in that envelope. When the cash in that envelope is gone, you have no more money in that category to spend unless you borrow from another envelope that has money leftover.

Read: Planning for Christmas on a Budget

Why would someone want to use the envelope method?

This method is extremely popular because it forces you to limit your spending. If you only have $200 in your envelope, you can only spend $200.

With the envelope method, you are not using credit cards at all. You are not going into debt. You are only paying for items with money you have right now. That’s extremely powerful!

Research also shows that people spend less when they have cash versus a card. That’s extremely true for me. For some reason, I have no problem swiping my credit card for $50 or $100 because “I need it” or “it’s a good investment.” Those purchases add up so quickly!

When I have cash in hand, I buy generics, try to find a way to do without, and avoid buying things I don’t need. I’m extremely stingy with cash!

Zero-Based Budgeting and Debt Repayment

Generally, most people I meet doing the zero-based budget method do so because of debt. They want to completely remove debt from their lives! Especially in the Dave Ramsey community, people want to live debt-free so they can live the sort of life they dream of. Consumer debt can drastically limit our options and happiness.

If your debt requires you to work in a job you hate or stress every month to cover your expenses, are you thriving or surviving?

Zero-based budgeting is also perfect for the Debt Snowball!

What is a debt snowball?

There are two main ideas behind paying off your debts as fast as possible. In the Debt Snowball, you start by paying off your debt with the smallest balance.

After your smallest balance is paid off, apply that old payment amount to your next smallest balance! Now, you’re paying your minimum payment to the second debt, PLUS the minimum payment you were sending to the first debt.

In this mode, it is highly recommended to send additional money to your snowball, but not necessary. If you have a tight budget, you may only be able to pay an extra $10 to $20 over your minimum payment each month. Apply that extra snowball amount to your debt each month until the debt is completely paid off.

Since you’re rolling those extra funds to the next debt, it will be paid off really quickly and you’ll be able to do the same thing to all your other debts.

Debt Snowball Alternative: Debt Avalanche

Personally, I prefer the Debt Avalance to the Debt Snowball! In this situation, you focus on the loan with the highest interest rate, not the smallest balance.

I find this situation to be the best if you’re dealing with multiple accounts, especially ones with high-interest rates like credit cards.

Which is better for beginners: the Debt Snowball or the Debt Avalanche?

The Debt Snowball is great for that initial thrill of paying off debts! It’s very good if you need the motivation to keep going. Seeing debt after debt getting paid off will help you see progress from your efforts!

You can always worry about the specific tweaks you want to make in the long-run later. For now, just pick a strategy and get started! If you are a beginner at budgeting, I recommend starting with the Debt Snowball.

Ready to get into the details? This is my favorite Debt Snowball/Debt Avalanche calculator! Use this tool to see which plan is right for you.

How do I start a zero-based budget?

There are SO many budgeting tools out there and many of them are excellent! The trick is finding a system that works for you.

I’ve tried a variety of apps, but I am generally reluctant to pay for any that charge me a fee per month or year. UPDATE: That is no longer true! I switched to You Need a Budget in 2021 and the cost is absolutely worth the quality of the program.

A budget is simply a way of tracking your income and expenses to ensure your money is doing what you want it to do. It doesn’t need to be complicated or fancy!

How to create a basic budget

Step 1

First, calculate your income. If your job pays once a week, biweekly, weekly, or sporadically, get a number for your total income and write it down.

Step 2

Then, list out all of your required monthly expenses. Focus on the big stuff first: housing, vehicle, utilities, debts, etc. These are your Fixed Expenses.

Subtract these from your total income.

Step 3

Next, write down how much you usually spend per month on the rest of your discretionary expenses. These typically vary and are things you really have some control over.

Subtract these discretionary or variable expenses from the amount left over when you subtract your fixed expenses from your income.

how to create a basic budget

Assessing your initial budget

Do you have any money left over? Great! That needs to be saved or used on debt repayment each month.

If you do not have money left over, we need to revisit the variable expenses to see what we can reduce.

If you still cannot balance the numbers, you may need to try one of these strategies:

  • Find a way to earn more money
  • Negotiate your utility rates to reduce expenses
  • Bring in a renter or someone to help offset expenses
  • Make a BIG change – trade-in your car for something more affordable, move somewhere less expensive, etc.

Budgeting apps that support zero-based budgeting

My favorite budgeting apps I’ve tried are EveryDollar, which includes a Debt Snowball/Avalanche tool and is from the Dave Ramsey team, and You Need a Budget. Both are robust tools that will certainly help you manage your budget!

My current budgeting tool

I used to do all of my budgeting with a now-extinct bank called Simple and a Google spreadsheet. Once Simple shut down, I decided to check out You Need a Budget for a second time. I tried with a free 30-day trial again this year and watched lots of YouTube videos to help me understand how it works.

The first time I tried to use it, the learning curve was too high. I kept getting confused and messing up. Even this time, I still messed up on my first month…of course.

Once I realized my mistakes, I created a new budget, tweaked what I was doing, and everything clicked into gear.

After my 30 day trial, I actually liked the program so much that I paid the full annual subscription rate of $83.99! I’m a stingy budgeter and do not like paying for memberships or apps, so that tells you how helpful You Need a Budget is.

I’ll be writing more about YNAB soon to help you understand what did and did not work for me. If you’d like to explore it yourself, you can start a no-strings-attached 30-day trial right here!

Tracking your zero-based budget digitally

Although I have tried a variety of different tools to implement my zero-based budget, none of them have worked nearly as smoothly as Simple. UPDATE: In 2021, Simple Bank closed and was transferred to a different bank. I shut down my account and no longer recommend Simple at all.

When I tried using all cash, I still had to make some card purchases for online expenses, etc. Then, I got stuck trying to figure out how to balance card and cash purchases and that didn’t work for me.

I tried just charging everything on my credit card and paying it off at the end of the month. Although this certainly did work, I had a hard time tracking my monthly spending until the end of the month. This meant that I wasn’t really monitoring my category spending and did not use my money as well as I could have.

Why I Recommend You Need a Budget (YNAB)

The reason why I was willing to pay for a full-year YNAB subscription was because of how it solves a few problems.

Problem 1: I noticed that I would budget for the whole month’s income in advance, but the money would hit my account in waves

This made paying bills tricky because even if I knew I’d have plenty of money by the end of the month, I had to watch carefully what was in the account when I sat down to schedule most of my savings and debt repayment at the beginning of the month.

In YNAB, you only budget money you have in the account and there are handy tools to help you see exactly how much you’ll need for bills and how much you’ll need for variable expenses, etc. When the money comes in, you give it a job right away and do that each time you get paid.

Problem 2: I was overspending in variable categories

When you don’t pay off your credit card until the end of the month and you’re juggling how much you spent in each category in your head…you WILL overspend.

Normally, I’d print out my credit card statement and calculate how much I spent in each category at the end of the month. First of all, that is so slow and clunky and second of all, I often skipped it because it was so slow and clunky.

If your budgeting system is so bad that you avoid budgeting, you need a new budgeting system.

The worst part was that if you overspent, you didn’t find out until AFTER. There was no way to course-correct in the moment. That kept being a problem for me and I was considering having different debit cards for each category, etc. No need, though, because YNAB solves that problem!

Because YNAB is like a giant checkbook register that can see all of your accounts (and you can even automatically import all transactions), you categorize each purchase as it’s made. This means that I can see in real-time how much I am spending in whatever category.

I actually do not use the automatic import feature as it got too confusing for me. Instead, I manually update each account or card as I shop. I can see right away what I’m spending and YNAB requires me to cover any overspending. This has been eye-opening and helped me get a more accurate picture of my spending!

Ready to try YNAB yourself? Sign up for a free 30-day trial here!

Why YNAB was a game-changer

You might be thinking that lots of budgeting apps track spending in categories and help you manage waves of income. You’re totally right. The YNAB interface handles these features in a really smooth way but my favorite feature is…

The Age of Money

YNAB will calculate how long your money stays in your account before you spend. Normally, I get paid on the last business day of the month and I sit down that day to pay off my credit card and set up my budget.

This means that my money sits in my account…for 0 days. It comes in and goes out right away.

How could I set up my budget so that the money coming in at the end of one month would cover the NEXT month?

I had enough money to cover my expenses…but my money was coming in and going out right away. Once my bills were paid, I had covered all of my expenses but backward. I paid for all of my June expenses with my check at the end of June. My money was looking back, not preparing me for the future.

Right away, I switched to budgeting for the future. I paid off my credit cards so I could start from zero. On my payday, I budgeted all of the money I had for all of my upcoming expenses. I could still pay for my purchases with my credit card and track them with YNAB, but now, the money I need to pay off the credit card is actually still in my checking account.

Keep money for your expenses in your bank account & pay off credit cards at the end of the month

When I make a purchase, I simply update my YNAB account for my credit card, the spending gets categorized, and YNAB tracks how much of the money in my checking account is reserved for my credit card payment at the end of the month.

I love this switch! It feels so much better having money in my account instead of always seeing empty accounts from paying off all of my bills. This feels like how a budget should be: all of the money I need for my expenses is already where it needs to be.

YNAB actually shows you an Age of Money score on your account. Mine went from 0 to 5 days after initiating this switch and I’ll be tracking it each month! Get started with your YNAB account here.

What about biweekly or other payment situations?

If you get paid biweekly or in any other scenario, YNAB can still work for you! You’ll simply need to assign your money to the expenses you need to cover at the beginning of the month (rent, groceries, gas, etc) and then when your next check comes in, finish assigning to your remaining categories.

What’s the right zero-based budgeting system for you?

There is no one right solution for everyone! However, if you’ve tried a cash-based system before and it did not work for you, I recommend trying You Need a Budget. It’s been a game-changer for how I budget and it is way less stressful than managing it all on my own.

What’s your favorite budgeting system? Do you use a zero-based budget? Tell us below in the comments!

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  1. Great tips on budgeting! I love using cash for everything as much as possible, as it helps me keep track of how much I spend. I even made little “envelope-ish folder dividers”, so my wallet so I can place the cash in each dedicated spot.

    Thanks for sharing your post with us at our Embracing Home and Family link up party!


    1. Awesome! I’ve never been good about balancing online and cash purchases, so I love using Simple for a digital envelope style. Whatever works, right??

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