Have you ever looked at your bank account balance and wondered where all your money went? If so, then you need a budget. No, a budget isn’t about restricting your life – it’s about creating a plan that will allow you to prioritize your spending. It’s a tool that allows you to have better control over your money. Instead of wondering where your money went, you can now tell your money where you want it to go. And you do that by using a budget.

There are many different ways to create a budget. If you’re having trouble making a budget work for you, then I encourage you to try different methods until you find one that meets your needs. Here’s how to create a budget using the zero-based method.


What is a Zero-Based Budget?

In a zero-based budget, you allocate all of your money to either expenses, savings/investing, debt repayments or giving. The title of this budgeting method comes from the fact that once all of your income has been allocated, the ending result is zero.

Wait, does this mean that your bank account balance will be at $0 every month? No, not at all. What it means is that your budget comes to zero – with nothing left over. The reason is this allows you to assign a purpose to every dollar.

One important thing that I need to point out is that you are creating a new budget each month. That’s the beauty of zero-based budgeting. Your needs can change each month and your budget should also change to reflect your life! But you don’t need to be overwhelmed about creating a new budget each month. Simply start with the budget from last month and update it for seasonal expenses or events, like weddings, birthdays, vacations, etc.


How to Create a Zero-Based Budget

STEP ONE – Track your finances.

Before you can create this type of budget, it’s important to understand your finances first. Go back through all your bank and credit card statements for the past few months, in order to understand your current income and expenses. It’s important to include everything that flows through your money accounts.

For income, this means your regular pay. It also includes income from a small business, side hustle, child support, supplements and any other money you receive. This income could be regular and predictable or it could vary from month to month. Either way, it needs to be included.

Another crucial part of tracking your finances, is to make a list of all your assets (savings accounts and investments) and liabilities (credit card debt, leases, loans and mortgages). Having this list will help you set your financial goals in step three. These goals will then be incorporated into your budget and allow you to reach your goals.


STEP TWO – Figure out your expenses.

Before you can assign a dollar value to the expenses in your budget, you need to have a good idea of what things actually cost. In this step, you’ll need to examine your expenses – this means all of your monthly bills, including essential, non-essential and seasonal expenses. In step one, you tracked your current spending habits. In step two, you can use that information to figure out the cost of your expenses.

Start with your essential expenses, like rent or mortgage, utilities, transportation, food, medication and child care. Then, add in your non-essential expenses, like clothing, dining out, entertainment and gifts. Also, don’t forget to make a list of seasonal expenses, like taxes, gifts, school supplies, insurance premiums, etc. On your list, include the month when the expense will occur. Then, when you update your budget each month, you can refer to this list, so that you won’t be surprised by expenses you forgot about.

In this step, it’s a good idea to make a list of all your subscriptions. Make note of what the subscription is for and how much it costs. Don’t forget about any subscriptions you have that are paid on a quarterly or yearly basis. Your subscriptions will include things like digital subscriptions, gym memberships, magazines/newspapers, etc.


STEP THREE – Set financial goals.

A budget isn’t about spending every dollar you make, it’s also about helping you reach your financial goals. When you create a goal – and have a plan – you are more likely to achieve that goal.

Here are a few examples of financial goals:

    • Setting aside money to have fun experiences (i.e.: vacations, concerts, etc.),
    • Building up your emergency fund,
    • Paying off debt,
    • Saving for a down payment on a house,
    • Paying off your mortgage earlier,
    • Saving for your wedding, and
    • Saving for retirement.

Start by creating a list of your goals. Think about where you want to be in the future and what it will take to get there. Be specific in your list. Include not only your goal, but also include the end dollar amount, monthly amount and due date.

Let’s go through an example of an emergency fund. You have determined that you want to build up your emergency fund to have three months worth of expenses, in case you lose your job. If your monthly expenses are $3,000, then you will need to save $9,000 for your emergency fund. If you save $500/month, then it will take you 18 months to reach your goal. Now, go ahead and put that amount in your budget. Better yet, have that amount automatically transfer from your bank account each month to your emergency fund account!

Finally, remember to review your goals on a yearly basis. They’ll need to be adjusted for any life changes – like raises (or reduced income), if you get married, have kids, retire, etc. Life changes over time. When it does, your goals – and budget – need to change as well.


STEP FOUR – Create your budget.

You can start your budget based on your current income and spending habits. This will allow you a starting point and from there, you can adjust as you need in order to meet your financial goals. For example, if your goal is to pay off debt, but your expenses are more than your income, then you’ll need to find a way to reduce your spending.

Next, create categories for spending, savings goals, debt repayment and giving. Spending categories will include things like rent/mortgage, food, transportation, utilities and living expenses. Overall, your budget should align with your priorities and what’s important to you. That’s why there’s a line for savings, debt repayment and giving. These need to be a priority, especially saving for your financial future. If you don’t make saving a priority, chances are it won’t happen at all.

One spending category that you need to include is a “miscellaneous” category. It helps to give you a little wiggle room because life happens. Stuff happens. Worse case, you don’t need the money this month. Great! Now you can use it as an extra payment towards your debt or add it to your savings, so that you can reach your financial goals sooner.

Remember, the beauty of budgeting with the zero-based method is that you can change your budget each month. By making this change, you will be able to account for seasonal or variable expenses, such as gifts, annual fees, quarterly billings of expenses, etc. So, for the month of August, you can budget some money for school supplies. But in December, instead of school supplies, you’ll have a budgeted amount for Christmas gifts.

You will know when your budget is finished because income less spending (including saving and debt repayments) will equal zero. If you have a positive number, then you need to find a place to allocate that money (hint: your financial goals are a great place to put any “extra” money). If you have a negative number, you’ll need to cut back somewhere.


STEP FIVE – Track and analyze your spending.

Finally, tracking and analyzing your spending each month is a crucial part of the zero-based budget. Pick a way to track your spending, for example, using either paper, excel or an app. Then, set aside a bit of time each week to compare your actual spending to your budget.

Is your actual spending under or over your budgeted amount? If it’s over, you need to figure out why. Is your budget actually realistic? Or do you need to reduce your spending? Remember, the purpose of budgeting using the zero-based method is to give each dollar a job. No more mindless spending – make every dollar count!

At the beginning, you may want to track your spending on a daily basis. This will allow you to make adjustments as needed. For example, if you see that your actual spending is approaching the budgeted limit, you can move money from another budgeted category. There’s no need to wait until the month is over to find out where your finances stand.


Pros and Cons of Zero-Based Budgeting

Every method of budgeting has its own advantages and disadvantages, and zero-based budgeting is no exception. Here are the most common pros and cons for budgeting using the zero-based method.


* Better financial control of your money. Every dollar is accounted for – whether it is money coming in or money going out. It will help you be more aware of your money, so that you can use this awareness to have better control over your money. Use your budget as a tool for you to dictate where your money goes.

* It’s flexible. Since you’re tracking your spending during the month, you’ll have a clear picture of where your money is going. This allows you to make changes to your budget and move money around your budgeted categories as needed. If unexpected expenses come up or you find that your budgeted number wasn’t completely realistic, simply adjust the numbers.


*This method can be time consuming, as you have to closely track your money. Therefore, it’s important to set aside some time each week in order to track and analyze your money. Pretend that you have a weekly appointment – one that you can’t miss. I want you to physically mark it down on your calendar or set it up on your cell phone.

*If you have irregular or unpredictable income, then it may be hard to allocate your money in advance. Start by basing your budget on a month with your lowest income. For the months where you earn more, you can then decide where that “extra” money will go – towards spending more, paying more on outstanding debts or saving more.


Don’t worry about creating the “perfect” budget. All budgets are a work in progress. Examine what works and what doesn’t. It’s okay to make changes, so that your budget will work for you and support your priorities in life.



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Until my next blog post, here’s wishing you lots of joy and happiness!
With love,


Hi! I'm Joanne. I’m a Canadian Chartered Professional Accountant (CPA, CMA). Money management is a life skill that I passionately believe all people need to learn. As an accountant, I love helping people understand numbers and money. At BuildingJoyAndHappiness, I share my tips to money management and make understanding finances simple.

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