Zero Based Budgeting 101

Budgeting for college students doesn’t have to be complicated. If you know your income and expenses, you’re halfway there! All that’s left is choosing a budgeting plan that works. 

We like the zero based budgeting plan. It’s fairly easy to grasp and gives every dollar you bring in a ‘job.’ At the end of the month, you’ll have $0 left. That’s NOT because you’re broke, but because you put every dollar to work! 

After a few months, you’ll get into the habit of matching your income and expenses, giving you total control over your budget and setting you up for success with money.

What is Zero Based Budgeting?

With a zero based budget, you allocate every dollar you bring into your fixed expenses, variable expenses, debt payoff, and savings.

The goal is to have your income and expenses zero each other out at the end of the month. It helps you see where you overspend, or where you have extra money and may not realize it. Rather than letting the money sit doing nothing or slip away, you will know where every dollar went and it’s “assignment.”

How Does Zero Based Budgeting Work?

The best way to see how a zero based budget works is to look at an example. Let’s say you bring in $1,000 a month working part-time, and you have $400 in fixed expenses (split rent and utilities, and your meal plan). 

This leaves you with $600 a month for variable expenses. You’ll look at your variable expenses for the month coming up. Do you have any special books to buy for school? Are there special events occurring that month? Are you buying any gifts? How much money do you need for other food?

You work the upcoming expenses for the month in the remaining $600. Any money not accounted for you can use to save for emergencies, future travel, or investments.

What are the Advantages of Zero Based Budgeting?

Zero based budgeting has some big advantages, especially when budgeting for college students. I

  • Easy to implement with any income – Even if you only bring in a little money each month, the zero based budget is easy to manipulate so you don’t go over budget and save any money you can, even if it’s only a few dollars at a time.
  • Transparent – It’s easy to get lost in a budget when you don’t have a direction. The zero based budget plan makes it easy by separating your expenses between fixed, variable, and savings. You’ll know exactly how much money you have to work with when budgeting for your variable expenses.
  • Flexible – You don’t have to have the same budget every month. Life changes and so should your budget. It takes a little effort to adjust your budget every month, but if it means staying financially stable, it’s worth it.

How to Create a Zero Based Budget in 6 Steps

As you’re learning about budgeting for college students, consider learning how to create the zero based budget. It’s not as complicated as it sounds and once you use it for a few months, it becomes second nature.

Use these steps to create your budget.

1. Total your monthly income

Think of your income from all sources. 

  • Do you work?
  • Do you have a side hustle?
  • Do your parents contribute any money?

2. Total your fixed expenses

Fixed expenses are the expenses you have each month and can’t negotiate or change. A few examples include:

  • Rent
  • Utilities
  • Insurance
  • Food (necessary groceries not eating out)

Your fixed expenses should always easily fit into your income. For example, you have to pay your rent or you won’t have a place to live, and you have to buy groceries or you won’t survive.

3. Categorize your variable expenses

Next, create a list of your variable expenses. These aren’t ‘necessary’ expenses, but let’s face it, we all spend money every month, it’s a part of life. Here are some variable expenses you may want to include:

  • Fun money (entertainment, eating out, etc.)
  • Transportation
  • Clothing
  • School supplies
  • School books

Your variable expenses will change monthly. If you’ve been in college for a while, you can pull your bank statements from the last 6 – 12 months to see what you normally spend.

Every month may look different. Some months you’ll have more school expenses than others, and some months you may need more clothing or go out more, like after finals when everyone needs a break.

4. Make room for savings

Using your estimated budget, see how much room you have for savings. 

Ideally, you should allocate 20% of your income for savings or even investments, but that probably won’t happen overnight.

If were’ talking about a $1,000 budget, that means you’d save $200 a month, which leaves only $800 for fixed and variable expenses. The key is to start somewhere. Even if you only save $5 at a time to start – save. Every dollar you save or invest today will be worth more tomorrow.

If you’re looking for ways to save, consider an online high-yield savings account, CD (if you can afford to tie the money up for a while), or even using an app like Acorns that invests spare change by rounding up your purchases made with your debit card. You can invest with as little as $5 with Acorns, but you’d be surprised at how fast it adds up.

5. Put the pieces together

Once you know your income, fixed expenses, variable expenses, and how much you’ll save, create your budget.

The key is to track how you do. We prefer to use simple apps, like YNAB or EveryDollar, that are made for zero based budgeting. 

If you’re more of a pen and paper person or you love spreadsheets, feel free to set something up for yourself too. As long as you find a method that works for you and that you’ll use – you’ll be on track.

6. Track how you do

You can set up the best budget in the world, but if you don’t track how you’re doing, it won’t work.

Tracking your budget doesn’t mean beat yourself up if you overspend or go over budget. Use it as a tool – a way to keep you aware of where you spend and/or can cut back. 

For example, if you find your variable expenses always go over budget, go through them one by one. Determine where you overspend. Ask yourself:

  • Are you going out too much?
  • Do you spend too much on cable or streaming services?
  • Is your cellphone data plan too expensive?
  • Are your school fees higher than you anticipated?

Be honest with yourself and then adjust accordingly. Budgeting is a work in progress, so don’t expect perfection from day one.

Alternatives to the Zero Based Budgeting

If zero based budgeting sounds too complicated for you, that’s okay! It’s not for everyone, here are a few alternatives:

  • 50/30/20 budget – This budget allocates 50% of your income for fixed expenses, 30% for variable expenses, and 20% for savings/debt payoff. You don’t have to budget down to $0, but you make sure your expenses fit inside the broad categories. It’s a bit more flexible system with a little less work, but also less accountability.
  • Envelope system – If you operate on mostly cash, the envelope system may work. With it, you budget a certain amount of money for each category of expenses. You pull money from the appropriate envelope for each expense and once you spend the money in that envelope, you’re done for the month. This works well for people who use cash often and don’t track where they spend their money.

Bottom Line

Budgeting for college students is one of the most important things you can learn in college, aside from your major. If you start now, when you leave college, you’ll have a solid understanding of personal finance and how to make the most of your money.

Even if you only save a little money through college, every dollar matters. Plus, if you save even a little bit, it will grow by the time you leave college and you’ll have the system in place to keep it going as your income increases.

It’s easy to do the lifestyle creep, especially as you graduate college and make more money, but zero based budgeting keeps you on track. You can keep a close eye on your expenses, and make sure you budget every dollar so you aren’t leaving money just begging to be spent unnecessarily.