So you've reached the age where you want to stop paying someone else's mortgage and buy your first home. Or maybe you've been planning an epic multi-country trip to explore exotic destinations.

Or maybe you want to retire early, say at 55 or even 45, rather than in your sixties. Maybe you want all of the above! To achieve these very possible goals, you need to set up a budget, and a zero-based budget is one of the simplest to set up.

What Is a Zero-Based Budget?

A zero-based budget is a method of budgeting that requires you to allocate all your monthly income into designated spending categories until you have zero dollars left. By creating a zero-based budget, you "assign" all your money in ways that align with the things that matter the most to you.

Don't get me wrong; there are many other helpful Excel templates that can help you manage your money. But many people believe that a zero-based budget is the simplest personal budget you can create to hold yourself accountable.

How to Make a Zero-Based Budget

Here is an example of a completed zero-based budget. Don't worry; you'll be able to follow each step so that you can create one for yourself.

Screenshot of complete zero-based budget

1. List Monthly Income

Your after-tax monthly income is the amount of money you have to work with. We'll be using $4,000 for illustrative purposes. You may make more or less than this, and that's perfectly OK. You can update your income in the spreadsheet as your circumstances change. For example, as inflation rises, you might want to learn how to ask for a pay raise.

Screenshot of Excel spreadsheet showing income

In the example above, you can see that an amount of $4,000 has been typed into cell C3.

2. List Mandatory Expenses

Your mandatory monthly expenses include all non-discretionary spending. This includes any expense that you have no choice but to pay to survive, such as rent, internet, utilities, and insurance (if insurance is required where you live).

These costs normally stay the same month over month. If you have any mandatory expenses that occur annually, you can divide them by twelve to spread the cost across the year and include these expenses in your monthly budget.

ZBB mandatory expenses screenshot

Just like your income, these expenses may change over time. For example, you may use one of these websites to find a cheaper apartment to rent. However, at this point, you just need to start tracking how much you're currently spending in each category of your life.

To finish this step, add a line for the total amount spent each month on mandatory expenses using the SUM function.

Screenshot of Excel showing mandatory expenses with screenshot

3. List Variable Expenses

Variable expenses include all non-discretionary spending. This means any expense that you have some control over. Of course, things like food are mandatory, but you can control how much you spend on food. These costs normally vary month over month, or they may occur once every couple of months. Insert your list of variable expenses in one or two rows below your mandatory expenses.

Screenshot of variable expenses

You'll need to choose category names for your variable expenses and establish some spending targets. In the example above, there are eight categories that have been included for illustrative purposes, but you might have twenty or more categories. Try to keep the number of categories between 10 and 15 so that you have fewer categories to assign your expenses to later.

Also, you can adjust the targets each month, so don't stress if you've never tracked how much you spend. You'll start to understand better where your money goes after the first month of tracking, and you can update the targets in subsequent months.

To finish this step, add a line for the total amount spent each month on variable expenses using the SUM function.

Screenshot of variable expenses with formula showing

4. Subtract Expenses From Income to Equal Zero

Now we need to add a few lines so that we can subtract your total budgeted expenses (mandatory and variable expenses combined) from your budgeted income. This is where the budget template gets its name—the Budget Balance needs to equal zero.

Screenshot showing income minus expenses

If you find your budget balance is positive, it means you have extra dollars to assign to one of your spending categories. This is where you get to choose how your money works for you. Do you choose to spend this extra income on dining out or saving for a down payment on a new home? Remember, the goal is to give every dollar a job so that you're spending money in a way that aligns most with what you want most out of life.

Screenshot showing income minus expenses with formula

If you find your budget balance is negative, it means you will be spending more than you earn. If this is the case, you'll go into debt if you don't change the amount you spend or if you don't increase your income.

5. Track Expenses

It's easy to underestimate how much we spend on seemingly insignificant things like coffee, restaurants, and subscription services like Amazon or Netflix. For this reason, one of the most important steps in maintaining any kind of budget is tracking your expenses.

If you are a credit card user, one of the easiest ways to track expenses is to download your monthly statement into Excel or QuickBooks and then categorize each payment into one of the categories in your zero-based budget spreadsheet. Alternatively, there are several apps available to help you track your expenses.

By tracking how much you spend in each budget category, you may find that you're not spending as much as you thought on certain categories, or that you're spending more than you thought on certain categories. In both cases, you can adjust your allocations each month.

Once your Spending Balance equals zero, you've successfully set up your first zero-based budget.

6. Make a New Budget Each Month

As mentioned, you will need to create a new copy of your zero-based budget every month so that you can track spending against your goals and adjust as necessary. The process of continual adjustment means that as your income and life circumstances change, you can continue to reassign available dollars in a way that best aligns with your life goals.

You don't have to recreate your spreadsheet every month. Simply copy and rename the tab for the previous month, adjust the variable expense amounts if necessary, and begin tracking again.

Stop Wondering Where Your Money Is Going

Developing a budget is a simple yet powerful first step to financial well-being. By developing a budget, you gain clarity on the things that matter most in your life, such as spending time with friends, traveling, or retiring early.

As the world continues to experience economic uncertainty, you can use a zero-based budget to stop wondering where your money is going and start working towards your goals.