Nearly half of U.S. credit card users carried a balance for at least one month in 2024, according to the Federal Reserve. Even if you’re not planning to carry credit card debt, it’s easy to become a statistic like this. Reviewing your bank statements can help you understand your past spending patterns and inform your budgeting decisions.
Maybe your work hours get cut or you lose your job, so the paycheck you were banking on to cover your balance never comes. Or maybe you already spent your paycheck and then have an unexpected car repair bill. Unpredictable income, such as from freelancing or hourly work, can make it even harder to manage credit card balances and highlights the need for a more precise budgeting approach.
To avoid this, one strategy to consider is zero-based budgeting, which can provide better clarity on whether you have enough money to pay off your credit cards and other bills in full every month. This approach can also help you prioritize debt repayment as part of your monthly financial plan.
What is a zero-based budget?
Zero-based budgeting for personal finance (corporate finance differs) is based on assigning every dollar you currently have to specific expense categories you set up, such as housing, groceries, personal care, debt repayment, and savings. You can break down your budget into certain categories to better track and manage your spending. From there, you’re only supposed to spend what’s assigned, not based on the money you expect you’ll receive soon. Zero-based budgeting requires you to justify every expense from scratch, rather than relying on previous budgets.
“Zero-based budgeting is one of the most effective tools for avoiding credit card debt, primarily because it forces you to only use money you already have,” says Lissa Lumutenga, certified financial planner and founder of Wealth for Women of Color, a financial education platform. She is also an accredited financial counselor and a YNAB-certified coach.
“It takes the concept of ‘only spending what you have’ to another level, which is especially important when you’re trying to avoid taking on credit card debt or carrying a balance into the next month,” she adds.
The envelope method — setting aside cash in different envelopes for different categories — is one way to implement zero-based budgeting, although it can be more digital and automated, such as through apps like YNAB and EveryDollar. When setting up your categories, be sure to consider recurring expenses and variable expenses.
From guessing to knowing
The problem with budgeting based on future income is that you might guess incorrectly and spend more than you have, such as if you lose your job or miscalculate how your next paycheck will cover your bills.
“Other budgeting styles often leave room for estimating or planning how you will utilize future income. Zero-based budgeting doesn’t. It pushes you to make clear, intentional decisions about your tradeoffs in real time, using only the resources you have right now,” says Lumutenga.
For easy math, here’s what zero-based budgeting looks like. Suppose you currently have $4,000 in your bank account. You have $1,000 in credit card balances based on last month’s spending, so you assign $1,000 to cover that. You also assign:
- $1,500 for rent
- $500 for groceries
- $1,000 for miscellaneous purchases
When allocating funds, each expense must be justified and tracked to control costs. This careful review helps you optimize your budget and avoid unnecessary costs.
That means your $4,000 has been fully assigned, leaving you with a zero-dollar available balance, which is the goal. Even though your bank account might show $1,500 after paying rent and last month’s credit card balances, that $1,500 is now earmarked for other upcoming purchases.
If your friend asks you to buy concert tickets costing $500, the $1,500 in your bank account makes it seem like you can afford it, but zero-based budgeting shows that unless you move money from another category that hasn’t been spent yet, you’d be in debt. The $1,000 miscellaneous budget might cover the tickets, but if you spend that $1,000 every month on eating out and random household purchases, you’d be in the red. If your spending exceeds your income, you end up with a negative number, which signals the need to adjust your budget and review nonessential costs.
Only spending what you have can also make it easier to break the paycheck-to-paycheck cycle, notes Lumutenga. Zero-based budgeting can improve your financial health and help you adapt to changes in your financial situation by ensuring you track expenses and adjust as needed.
If you put the $500 tickets on your credit card and paid it off with your next paycheck, that could squeeze what you can afford the following month and keep you reliant on the next paycheck to stay afloat.
Instead, if you used zero-based budgeting, you might split that $1,000 miscellaneous category into $500 for restaurants, $250 for entertainment, and $250 for household purchases. You can also create specific categories such as personal care and operating expenses to better track your spending and manage your expense categories. After two months, if you stick to these more prudent limits in other categories, you’d have enough to pay for the tickets in full.
“Real-time zero-based budgeting forces you to see tradeoffs more than any other budgeting method. If I had allocated $500 to dining out, spend all of it, then get takeout again, I need to figure out where to cover that extra money from or acknowledge that it’s creating debt,” says Emily Blain, founder of Dream Big Financial Coaching, an accredited financial counselor, and a YNAB certified coach and MyBudgetCoach certified coach, which is another zero-based budgeting app. Zero-based budgeting can help reduce impulse spending by making you more aware of your discretionary expenses and encouraging you to plan for indulgences rather than spend spontaneously.
When you need to cover extra spending, new expenditures should be carefully considered and justified within your budget to avoid overspending.
As you review your budget, compare your spending to previous results and make major changes if necessary to stay aligned with your financial goals.
From bill to payment method
As you use zero-based budgeting, your credit card balances can eventually become an afterthought. By setting aside money in each category, you’re ensuring that you have enough to pay for that purchase, regardless of how you pay. Zero-based budgeting also helps you allocate funds for debt payments and monthly expenses, making sure every dollar is assigned a job. Even if you’re currently in credit card debt, you can use zero-based budgeting to set money aside for your payoff plan, and any new credit card spending should inherently be accounted for as part of the budgeting process.
➤ FREE TOOL:Credit card payoff calculator
Remember, the assigned money all flows from what’s currently in your accounts. So, if you set aside $500 in a dining out category, for example, that’s like transferring $500 from your bank account into a dining out fund. If you spend $500 at restaurants on your credit card, your card balance will increase by $500, but you already have that $500 set aside to cover it. If you spend $300 at restaurants on your credit card and $200 on your debit card, it doesn’t make a difference — the $300 credit card balance comes from that $500 you set aside, and the $200 in debit card purchases account for the rest.
When tracking and adjusting your budget, it’s important to regularly review recurring expenses and maintain budget flexibility so you can adapt to changing needs and priorities.
“As soon as you’re out of credit card debt, stop thinking about your credit card as a bill to be paid each month, and start thinking of it as a payment method. If you use a zero-based budget and are able to stick to the budgeted amount, you’ll be able to pay off the purchases at any time,” says Blain.
➤ SEE MORE:How to pay off debt and use your credit card at the same time
Ultimately, zero-based budgeting can help you get out of the cycle of wondering if you have enough to pay your credit cards and other bills. It doesn’t magically give you more money, but it can make it easier to track everything and build a savings habit, if you’re willing to put in the work. As you build your savings habit, remember to set up an emergency fund and work toward your savings goals for greater financial security.
“Zero-based budgeting is a bit more hands-on than other methods, so it takes some attention in the beginning. You can use apps if that helps, but no matter what, give yourself time to adjust. There’s a learning curve. It might feel weird at first, but in the long term, this method has helped so many people —including me — break the cycle of credit card debt and living beyond their means,” says Lumutenga.
Be prepared to make major changes to your budget as your circumstances change, and consider using a rolling process to regularly review and update your budget for continued success.
