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Do you ever wonder where your money really goes?
A couple of weeks ago, we covered a beginner-friendly budgeting tool: The 50/30/20 Rule.
But if you’ve been looking for a more in-depth way of tracking your spending, then you’ll be interested in the budgeting method we’re talking about today: Zero-based budgeting.
Zero-based budgeting allows you to tailor your budget based on your goals, rather than following percentages that don’t account for your unique life circumstances.
We’re going to cover how you can use a zero-based budget to reach your financial goals:
So, why should you make a zero-based budget? Because it can help you…
Let’s anchor your goals in something more tangible: What’s something you want to accomplish financially?
Maybe you want to save for a down payment on a home—perhaps you want to pay off your mortgage or student loans.
Pick an amount of money you want to reach by saving. Then, using the zero-based budget, you’ll be able to see exactly how many months it will take to reach that goal.
Having it laid out in front of you can be a great motivator!
The zero-based budget boils down to this:
You take all of your income, subtract all of your expenses, and wind up with $0.
Normally, we think of having $0 left as a bad thing—but in this case, it’s exactly what you’re striving for!
It doesn’t mean that you have $0 left in your bank account. It means that every dollar you earn and spend is accounted for, from your rent to your savings account contributions.
While it’s more time-consuming than other budgets, it’s a way to be more precise and mindful with how you spend your money.
Here’s how to create your zero-based budget:
Consider the income sources aside from your primary paycheque. Do you have a side-hustle? Do you receive government benefits or child support? Anything that adds money to your bank account should be factored in here!
If you share income and expenses with another person or your family, factor in their share of the budget, too.
If you’re self-employed or your income fluctuates, try to average out what you earn over a few months.
Once you’ve added up your total income for the month, it’s time to move on to the next step.
You can divide your expenses into 2 categories: fixed (which are mandatory, unchangeable costs that are necessary for your quality of life) and variable (which are costs that you can opt out of or adjust if needed).
Rent or mortgage. Insurance. Utilities. Internet. Cell phone. Debt. These are all the costs you can’t change, and they must be factored into your budget.
Don’t forget about your annual costs! If you make payments in annual lump sums, spread the expense out over 12 months and add it to your fixed costs column.
In this category, you’ll also list things that you don’t typically think of as an expense—that’s how you’ll assign a job to every dollar you earn!
For example:
To make sure you’re not missing anything, review your credit card or bank statements for the past few months and see what you regularly spend money on.
All that’s left to do is the math! Take your total income, subtract all of your expenses, and see where you end up. Hopefully, you’ll land near $0.
Example:
To help illustrate how this works, here’s an example of what one person’s monthly zero-based budget might look like:
Monthly income:
Paycheques: $2,500
Profits from Etsy store: $500
Total income: $3,000
Monthly expenses:
Fixed:
Rent: $1,000
Student loan payments: $100
Phone bill: $50
Insurance: $80
Utilities: $100
Variable:
Cat food: $50
Eating out: $80
Groceries: $350
Entertainment: $100
Online subscriptions: $30
Gas: $200
Gym membership: $60
TFSA contributions: $150
RRSP contributions: $150
Emergency fund: $200
Buffer: $200
Materials for Etsy store: $100
Total expenses: $3,000
Income ($3,000) – expenses ($3,000) = $0.
Zero-based budget = Success!
If you have money left over, that’s a good thing! It means you have some extra cash to put in your savings or investment accounts. Add those extra dollars to your savings account and crunch the numbers again until you end up with $0.
If you get a negative number, that means you’ve over-spending—your expenses are exceeding your income! Look for categories where you can trim down your budget, like your entertainment spend in your variable expenses.
The zero-based budget isn’t one that you can set and forget. To get the most out of it, you need to take time each month to adjust it. After all, it’s unlikely that your expenses are the same month to month!
Aim to create your budget at the beginning of each month, so you’ll have a game plan ready to go.
It might take some time and effort, but the payoff is worth it: Financial freedom. The satisfaction of crushing your debt or reaching a saving goal. And we’re here to help you get there. Book a meeting with a Cambrian Advisor today!
We would be happy to discuss your unique situation with you.
Our goal is to make complex topics like this one, simple.
It takes less than 5 minutes to make an appointment or to apply online. It is up to you how you want to meet your advisor - you will have the option to meet your advisor:
