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What is a zero-based budget?

A zero-based budget is a budget where your income minus your expenses equals zero- in other words, you’re making a plan for every dollar that you make. 

Your total expenses will equal your total income. 

Total Expenses = Total Income

With zero-based budgeting, you’ll be budgeting for everything that you spend money on. This helps prevent overspending (your expenses being more than your income) and going into debt.

It’s great because you can make sure you’re putting money towards your goals first, then you can budget the rest of it for your other spending (like online shopping or eating out).  So if you’re worried that this type of budgeting sounds restrictive, it actually takes away a lot of money stress!

You can spend money on things you enjoy while knowing that you’re still taking care of your goals.

Why should you use zero-based budgeting?

Zero-based budgeting is a very effective way to budget because you’re putting all of your money to work for you. 

Instead of money being mindlessly spent, you can budget for things like shopping or entertainment- while putting as much as possible towards your goals! 

You also won’t forget to put money in savings or to make an extra payment on your debt- it will already be a part of your plan. 

How can zero-based budgeting help you pay off debt or save money?

Following a zero-based budget means you already have a plan for saving your money or paying off your debt. 

Plus, you’ll know that even after taking care of your savings and debt, you’re still covering all of your other expenses. 

Your finances won’t feel as confusing anymore- you’ll know exactly how much is being spent in every area of your budget!

How to Make Your Zero-Based Budget

Ready to put your budget together? You can use a spreadsheet, a printable template, or a sheet of paper. The important thing is having your plan laid out somewhere! 

I’m a big fan of using a spreadsheet for my budget, and here’s why:

-All of the calculations are done for you (if you’ve ever sat down and added up every single one of your expenses, you’ll know how much time this can save you!)

-With a zero-based budget, you can instantly see how much money is left to work with as you make your budget

-It’s easy to change your budget as you go

-You can simply make a new copy for every new budget, without needing to rewrite the same budget categories every time

To show you exactly how to follow a zero based budget, I’m going to use our best-selling budget spreadsheet as an example. This Budget by Paycheck spreadsheet is perfect for a zero-based budget because it lets you know how much money is left to work with as you plan your budget.

Prefer to budget on a monthly basis instead? You can also follow along with our Monthly Budget template– it’s also zero-based budget friendly 🙂

If you’re not sure if you should budget by paycheck or by month, check out this post here on the Budget by Paycheck method. Keep in mind that this is a personal choice, and as long as you have a budget, you’re on the right track.

Example of a zero-based budget

Here is an example zero-based budget:

What to include in your budget:

There are five basic categories you should include in any budget:

Income – this is how much money you have to spend, and includes your regular paycheck, income from side hustles, one-time payments like bonuses or tax returns, etc.

Bills – these are your recurring payments, like your rent, minimum payment on a credit card, car payment, insurance, phone bill, internet bill, etc.

Variable Expenses – also known as your spending- these are the amounts that can change from budget to budget, like groceries, dining out, shopping, medical expenses, etc.

Savings – include regular savings contributions in your budget. If it is in your plan, you are much more likely to make it a habit!

Extra Debt Payments – If you have money leftover to pay off your debt (this is above and beyond the minimum payment that you have to make), include this in your budget so you can become debt-free faster.

How much to spend in each area of your budget:

It is difficult to say exactly how much you should spend in each budget category- this is because budgeting is personal! Even if two people make the exact same amount of money, they probably have different amounts of debt or savings goals.

That being said, there are a few rough guidelines to keep in mind when making a budget. Let’s use our example zero-based budget again:

• Housing (rent/mortgage payment) should be no more than 25% of your budget

• As a guideline, no more than 10% of your budget should be spent on insurance

• Food or groceries should not exceed 15% of your income

• Aim to save 10-15% of your income. Just remember that paying your bills on time and buying necessities like food and utilities should be prioritized before saving money! If you are in debt, you can also focus on this before saving money (remember to save an emergency fund first, however- even if it is just $1000 until you are debt-free. You can learn more about emergency funds here). Don’t sacrifice other important goals just to try and save as much money as possible.

You can read more about budget percentages (and download a free list of over 90 budget categories) here.

Now, let’s walk through the steps to making a zero-based budget!

Step 1: List your expected income

Start by listing your expected income for your paycheck, as well as any side hustles or extra income sources you have. 

Step 2: Enter your monthly bills

Record the monthly bills you need to cover with this paycheck. These are the recurring expenses you have that are (usually) the same amount each time. 

Examples of bills are:

Rent

Car payment

Car insurance

Credit card minimum payment

Student loan minimum payment

Monthly bus pass

Netflix 

Monthly gym membership

Phone 

Internet

We will start with these expenses since we know we need to cover them, no matter what. 

It is also important to list the due date for each bill so you can pay them on time.

Are you not sure which bills to cover with each paycheck? The easiest solution is to have a monthly calendar for your bills and your paydays. 

Each time you get paid, check to see what bills are due between now and your next paycheck. 

You can also color-code your paydays and bills so you know what bills go with what payday. 

For example, your first payday of the month is pink, and any bills that need to be paid with it will also be pink on your calendar. 

Your second payday of the month is green, and all of the remaining bills that month will also be green. This color-coding system makes it easy to see which bills need to be paid each payday. 

If you want to take your bill organization to the next level, try our Bill Tracker spreadsheet (available in Google Sheets and in Excel). It’s an effortless system to keep on top of your monthly, quarterly, and annual bills- so you’re never late on a bill again. 

Step 3: Budget for variable expenses

Once you know what bills you need to pay, it’s time to cover your variable expenses. Consider this the spending category of your budget.

Variable expenses are costs that will change with each budget, like groceries, eating out, and fuel for your car. The amounts you will spend in these areas will change based on your spending habits.

Other examples of variable expenses are:

Shopping

Utilities, like electricity

Home purchases, like cleaning products or decor

Gifts

Health/medical expenses

The tricky part with variable expenses is knowing how much you might spend. 

Start by looking at your bank and credit card statements for the last 30 days to see how much you spent in each category (ie. groceries, eating out, shopping). 

If you get paid twice a month, cut the amount for the last 30 days in half- this is how much you can (roughly) expect to spend per paycheck.

P.S. here’s a list of budget categories (and a guide on how much to spend) to get you started.

If this is the first time you’re looking at these amounts and you’re shocked by how much you spent- you’re not alone! 

Adding up your expenses for the first time is an eye-opening experience, but don’t get discouraged and walk away! You don’t need to have a strict budget- you’ll actually want your budget to be a realistic portrayal of your spending habits. 

When your budget is realistic, you can easily fit in things like savings and debt repayments on a regular basis. Even if you can only afford to save a small amount- you’ll be able to plan for it and save it consistently.

If you want to cut back on your grocery spending, for example, try to spend just a bit less next time- like 10-15% less than before. If you try to cut it in half and you fail, you’ll end up feeling like you suck at budgeting and you’ll want to give up. 

When I first started budgeting, I did more of my grocery shopping at bulk stores and even at the dollar store. I froze food before it expired, and I ate leftovers for lunch the next day. 

As time went on, I learned what foods I actually ate (and didn’t let go to waste), and what my favourite cheap meals to make were. 

Try 5 Dollar Meal Plan if you want a head start on making affordable, healthy recipes at home. 5 Dollar Meal Plan is a meal planning service that sends you low-cost recipes and shopping lists for 5 dollars a month. It’s a really convenient way to start saving money on your groceries!

Please also keep in mind that your budget should help you to consistently put money towards your goals, like saving money and paying off debt. 

As long as you’re consistently adding to your savings account or putting extra payments on your debt, you’ll keep moving in the right direction.

So if you spend a lot on putting fuel in your car to get to work, but you’re always including extra credit card payments in your budget, that’s 100% okay! You are still working towards your goals, and that’s the most important part of any budget. 

Step 4: Include savings contributions

Make sure to include savings in your budget! If you plan to put money in your savings account, you’ll be more likely to make it a habit.

There are three types of savings you should have:

• Emergency fund, for unexpected expenses, like losing your job. Save 3-6 months worth of living expenses here. 

• Sinking funds for planned purchases, like a vacation

• Retirement savings

Start by focusing on building up your emergency fund– once you are ready for a financial emergency, you can start to focus on saving up for other things. 

If you are in debt, you should save an emergency fund before paying it off. This stops you from using your credit card when something unexpected happens. 

Since it can take time to save 3-6 months worth of living expenses, you can start with a smaller amount (like $1000) until you’re out of debt. 

Note: if you have saved your emergency fund and are paying off debt, it’s okay to not put anything under savings in your budget. It’s also okay to put money in a sinking fund (ie. a planned purchase like a laptop you need to replace soon) while you’re paying off debt- this means you’re not going further in debt to buy what you want, which is a win! 

Step 5: Plan for any extra payments on your debt 

The minimum payments for your debt should be listed under “Bills”, since this is a regular, recurring expense for you. 

If there is extra money leftover to put extra payments on your debt, write this into your budget, too.

If you’re ready to start paying off your debt, check out these posts:

How to Use the Debt Snowball Method to Crush Your Debt

Exactly How to Start Your Debt-Free Journey

Step 6: Track your spending

Once you have made your budget, it’s time to start tracking your money!

When you get paid, write down the actual amount you get paid.

Start by paying the bills you need to cover with that paycheck.

As you spend your money, add up your spending in each expense category (ie. groceries and fuel). If you are using our Budget by Paycheck spreadsheet, you’ll have access to an Expense Tracker that adds up all of your spending for you, by expense category (this has been a LIFE SAVER for me in keeping track of my budget!).

The final step is adding money to your savings and making any extra debt payments. If you are new to following a budget, I recommend waiting for your next paycheck and seeing how much money is left before adding money to savings or debt. This ensures you won’t over-spend in these areas and run out of money for necessities like food.

Zero-based Budgeting FAQs:

I still have money leftover in my budget- I’ve already budgeted for bills, expenses, savings and debt. What do I do?

Ask yourself this: what is my biggest financial goal right now? 

If it’s to save money, add extra money to your savings. 

If it’s to get out of debt, add more money to your debt payments. 

You can also add a “miscellaneous” spending category to your expenses to cover any extra spending you might have. Just try to avoid putting a large amount of money here, since that money could be better used for savings for debt. 

Help! My expenses are actually more than my income, what should I do next?

If this is you, know that you’re not alone! This is how many of us end up getting in debt- we are spending more than we make. 

The good news is that you have made a budget, so you can quickly make a plan to fix it. 

Start by reviewing your monthly bills- highlight the ones you can cancel, and the ones you can lower by negotiating a lower rate or changing to a cheaper plan. 

The next step is to look at your variable expenses. Where are you spending the most money? Food and transportation tend to be the largest expenses, so start by focusing on these areas. 

Another option is to increase your income, by starting a side hustle or second job- you can also work more hours at your current job or negotiate a raise. 

Where should you keep your zero based budget plan?

In this example, I used a spreadsheet (available in both Google Sheets and Excel) for a zero-based budget. Spreadsheets are perfect if you’re making a budget for the first time, because you can easily make changes to the numbers until your income – expenses equals zero!

If you’re not comfortable with technology and prefer to use a pen, paper, and calculator, that is also completely fine!

This is your budget, so make one that works for you- don’t worry about what might work for someone else. 

Zero-Based Budgeting Resources

Here’s our most popular zero-based budget templates (our top sellers that have been downloaded hundreds of times!)

Budget by Paycheck Spreadsheet (used for the example budget in this post) (in Google Sheets and Excel)

Ultimate Budget by Paycheck Spreadsheet (our best-selling Budget by Paycheck spreadsheet, plus a monthly bill calendar, sinking funds tracker, and a debt snowball calculator!) (in Google Sheets and Excel)

Budget by Paycheck Printable Template

Monthly Budget Spreadsheet (in Google Sheets and Excel)

Here are some helpful budgeting resources to help you master your money: