Yahoo Finance ‘Every penny has a purpose’: the rise of zero-based budgeting
Each month 20,000 people tune in to watch 27-year-old Beth Fuller work out how to spend her salary.
For a year and a half she has, on payday, opened a spreadsheet and written out in granular detail what she will owe in bills, exactly what she wants to do in the weeks ahead, how much it will cost and how much she intends to save.
She recently started sharing all the figures on TikTok, to a surprisingly rapt audience. Doing this has helped her clear £8,000 of credit card debt and finally feel on top of her finances.
“Every penny has a purpose,” says Fuller, a digital product manager from Newcastle, quoting the mantra of the near evangelical followers of “zero-based budgeting”.
This method of meticulously tracking spending and saving began as a business accountancy technique, credited to Peter Pyhrr, an accountant in the 1970s. Instead of basing your budget on previous years, you analyse each expense to see whether it still justifies allocating some of your funds to it.
Zero-based budgeting has since been adopted by personal finance experts such as Dave Ramsey in the US and is gaining popularity on social media among people struggling with debt and the cost of living crisis.
To capitalise on the trend, an increasing number of firms and individuals are selling zero-based budgeting-related merchandise. When we looked, there were more than 4,000 different zero-based-budget planners, spreadsheet templates and software programmes for expense tracking available to buy on the online marketplace Etsy.
So how exactly does it work?
“Zero-based budgeting simply means your income minus your expenses should equal zero,” says George Kamel, the author of the book Breaking Free From Broke, who co-hosts The Ramsey Show radio programme and podcast.
“If you make £5,000 a month, everything you give, save, spend and invest in that month should equal £5,000.
“Every pound has a job, a goal. You don’t want your pounds unemployed.”
You start by listing out your income, and then all your expected expenses, broken down into categories, from your rent or mortgage to energy, the supermarket shop, takeaway coffees, clothes … whatever feels important to you.
You create savings accounts for the future – a rainy day fund, for example – and a pot you can dip into so that if you overspend in one area, you won’t bust your budget completely.
You subtract all these expenses from your income, and try to get to zero.
You then track your transactions throughout the month.
“You can use old-school pen and paper or a budgeting app,” says Kamel, who recommends EveryDollar, based in the US. YNAB (You Need a Budget) and HyperJar are also popular apps that are available to UK users.
“If you do your budget and you’re in the negative, that’s a problem, but don’t freak out,” Kamel says. “You’re spending more than you make, which means you need to get out your metaphorical hedge clippers and trim that budget.
“Spend less on eating out, cut a subscription or two. Make adjustments as you need to throughout the month. If the electric bill is higher than you expected, tweak another line item to make up for it. For most people, it takes about three months of budgeting to get it dialled in. Don’t give up.”
What do fans say about it?
Fuller credits following zero-based budgeting content creators online with making her realise she could find an extra £700 a month, as well as pay off her credit cards.
“Funnily enough, it was when I started to earn more money at work that I got into debt. I had a perception of how my lifestyle should be with that income, and I think I had it conditioned into me that the answer was to grow my income.
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“Now, before I buy anything or any money leaves my accounts, I will plan the month. My bills don’t really change that much but I will look ahead and think: OK, there’s a friend having a birthday, family visiting, there will likely be a takeaway then, I want to take my daughter to the farm at the weekend and this is how much tickets are. I know exactly what I actually need for spending. I also put money into emergency savings.
“It sounds so sad but I love it. I have no automatic payments set up – I manually pay childcare, and manually pay my credit card every month.
“I feel like I know my money better than I ever have.”
How financial firms are jumping onboard
Banks have noticed the increasing popularity of this budgeting method and are introducing features to make it easier to not only track expenses and set budgets but to pay expenses from allocated budgets, too.
Rachel Kerrone, a family finance expert at Starling Bank, says the bank’s most popular feature is “Spaces”, where customers can ringfence money for certain things.
A customer can then use Starling’s virtual cards, which can be added to Apple Pay or Google Pay, to shop directly from one of their “Saving Spaces”.
Kerrone says: “They are linked to budgets you have created, so you’ll only ever spend as much as you planned. For instance, you could set up a Space for costs associated with your home, and arrange an automatic top-up for the amount you need each month. You could then pay direct debits and standing orders, such as your rent, mortgage, energy bills and council tax, straight from that dedicated Space using our bills manager feature.”
Starling also has a free online budget planner.
The rival bank Chase, meanwhile, will let you have up to 20 accounts open with it at once, of which up to 10 can be “saver accounts”, each created for a different goal, where you earn 4.1% interest. It may sound like an awful lot of admin but all are managed on one app, and you use one debit card and simply choose which account you want the money to come out of.
Monzo customers can pay bills via direct debit or standing order directly from pots but if you upgrade to Monzo Plus (which costs £5 a month) or Monzo Premium (£15 a month), you can pay for online subscriptions from, and link virtual cards to, specific pots.
What about downsides?
Some would say that the obvious drawback to zero-based budgeting is its apparent time-consuming complexity.
Fuller believes the online communities springing up to support one another with budgeting do help people to stay motivated.
But some would argue that it can be a real challenge to predict what expenses are coming down the road – and even more so if you are a freelancer or gig economy worker with irregular earnings.
“There’s always something that you didn’t plan for,” says Dr Marcel Lukas, a senior lecturer in banking and finance at the University of St Andrews.
He adds: “I have a PhD in finance. I study consumer financial decision-making. I would struggle with the zero-budgeting technique.
“Every month I write out the expenses that I didn’t plan for, and every month there is something big: a gift, something relating to a holiday, something needing replacing in the house, a problem with the car. No one can ever work out how much fuel they’re going to use.
“You might put away so much money for savings, lock it away, and then can’t get it out again quickly, and then you end up using a credit card and think: ‘Oh, it’s just a one-off thing.’”
While it may seem obvious that budgeting saves you money, there has been relatively little academic research done into whether this is always the case.
Lukas and Dr Chuck Howard, an assistant professor of marketing at the Mays Business School, carried out research last year that concluded that even the simple act of tracking one category of your spending, such as eating out, does reduce your spending.
He advocates for starting small, focusing on tracking one or two categories of spending. However, he believes you should be ambitious with those goals.
“We experimented and got those used to spending £100 a month on dining or drinking out to either set up a budget for £50 or £80. The group that set their budget lower ended up spending much less than those who were more realistic.”
