How I Budget: Zero-based Budgeting with YNAB
i have struggled with budgeting for much of my adult life, despite being a “numbers” person. i grew up with a very low-income mom who was very bad with money, and barely scraped by for most of my early 20’s and had no safety net/family to rely on, which left me with a lot of anxiety surrounding my finances. i tried making budgets here and there but never kept to it; it was too intimidating to even take a hard look at my actual expenses. i just hoped for the best, overdrafted my account more times than i can remember, and maxed out my credit cards for a while until i reached my breaking point.
it was about a year after getting serious with saving and paying off my credit card debt that i heard about Zero-Based Budgeting (ZBB) from a friend who is a CPA. once i understood it, it made so much sense and i really can’t imagine budgeting any other way.
i happen to use the app called You Need a Budget (YNAB) which is a ZBB budget tool, but it’s not the only one out there. i’ll explain a little more further on.
What is Zero-Based Budgeting?
to put it simply, ZBB means you should assign every dollar to a bucket or category or whatever you want to call it, so that you’re left with $0 remaining. this includes saving of course, so you hopefully shouldn’t be left with $0 in your bank account, but you should assign every dollar somewhere.
and because every dollar should have a purpose, this means that if you overspend in a particular bucket, you will need to allocate money from a different bucket to cover those expenses. otherwise, you will be relying on credit to float your spending, which is how you end up in credit card debt.
another aspect of ZBB is that you shouldn’t assign money to a category that you haven’t earned yet. so instead of looking at how much you typically earn in a month, the idea is to just assign all of the money you currently have in your accounts to the appropriate buckets and to allocate your future paychecks only after you receive them.
it might sound confusing, but i find it helpful to remember it really boils down to these two principles:
assign every dollar a job
allocate only what you currently have
Tools For ZBB
so you can do ZBB a number of different ways. however, to do it successfully, you really need to keep track of how much money you have allocated to every single bucket and every actual expense.
one free way some people do this is to use a cash envelope system - meaning you take all of your money and put them into physical envelopes for different categories. this works best if you’re someone who likes dealing with cash but seems difficult in today’s world.
another free way is to use an excel spreadsheet but you will need to enter in every purchase to get an accurate look at what’s left in your budget. this is a great if you are disciplined enough to actually dedicate time to do this (spoiler alert, i’m not).
i personally use You Need A Budget (YNAB) and it’s the only tool that i’ve used that i keep up with. i initially signed up while i was in grad school, so i was able to get a year free as a student, and i’ve been hooked ever since so i do pay the yearly membership cost. it’s linked to all my accounts (checking, savings, credit cards), so i can easily keep up with it through out the month.
im sure there are cheaper or other free tools out there but im not going to go into them since i don’t have experience with them! i did try Mint previously and absolutely hated it (but this was many years ago!).
How do you actually do zero-based budgeting?
so how do you actually *do* zero-based budgeting? to start, you’re going to want to figure out how much money you have in all your checking and savings accounts (exclude your investment accounts for now) and that will be your “ready to assign” amount. i link all my accounts in YNAB, so it does this for me.
then start making and labeling your categories. YNAB gives you a generic example one but you can add to it or edit is as you see for. I’ll share my categories in another blog post.
then start assigning your money to categories! if you already had money in your savings that is designated to a purpose (emergency fund, travel fund, house down payment, etc.), start by allocating the money you had saved for those things. (make a row for each one). so if you have $10k in your emergency fund, allocate that now so you don’t accidentally spend it (since it should have gone to your ‘ready to assign’ number when you started linking everything).
once that is out of the way or if you haven’t had a chance to start saving yet (no shame, i did not have any savings when i started!), start allocating your ready to assign for your monthly expenses. start with any bills that you know you’ll have to pay before your next paycheck and then work your way down to more variable expenses, fun spending categories, savings, and expenses you know you’ll have in the future (either later in the month or start working on next month’s!). that’s the order i work in until i have no more money left in the ‘ready to assign’ bucket. aka, all my money has a job. and it’s okay if you don’t get to all of those! start wherever you’re at with what you have. and if you need to use credit to float you by until you can start paying it down and saving, that’s okay too. YNAB uses colors to designate where you’re at in each category (green for money that is ready to spend, yellow for credit, red for overspent).
for categories you spend throughout the month like groceries, you can also just put in enough for half the month and then add to it when you get paid next. it can also be helpful to create a “buffer” bucket, especially in the beginning when you may not know exactly how much you spend in a particular category (like eating out 😩), so you can assign a few hundred to that category and then transfer it as needed to categories like groceries, gas, etc. throughout the month.
once you get a few months in, you can use YNAB’s tools for assigning the average spent in that category or looking to see where you can make budget improvements. maybe you don’t need 6 streaming services!
payday is my favorite day because i get to fill a bunch of buckets back up. ZBB has been helpful more me because it basically treats every category as a “sinking fund”, meaning if you don’t spend all of the money in that category one month, it rolls over to the next month. so i think of all of my categories aside from bills like a mini savings account.
this has helped me so much with clothes shopping for example. i like to shop slow fashion brands and i try to not buy a lot of new clothing every year, so i assign $50/month on average to my clothing category and that way i tend to buy just a piece or two every quarter. or i go thrifting and my money goes a lot further. whatever works.
i also enter my investment accounts like my 401K through my job and my Roth IRA as a “tracking” account in YNAB. it adds the money in these accounts to my net worth but does not put the money in your ‘ready to assign’ since it already has a job!
Expenses
okay so now you have your budget, great. but the key piece is tracking expenses. your budget means nothing if you’re not actually tracking your spending throughout the month.
you can do this once a week or whatever works for you, but i actually like to go in once/day in the mornings while i’m drinking coffee and from here i check in on my budget categories, review my transactions, and assign them to the appropriate categories. YNAB does start to learn where things likely go but it’s not always right for places like target where you may buy different categories (e.g. if you buy groceries and clothes in one trip; you can split the transaction too). i have found doing this on a near daily basis has helped keep me on top of things and it really just takes no more than a couple of minutes every day, plus a few more on paydays.
also a key behavioral change for me is to check my YNAB before i make a purchase - not checking my bank account. that way i can see how much i have in that category to asses if it’s something i can afford or if i need to move some money around. this has been a helpful tool in combating impulse spending.
Credit Cards
so credit cards in YNAB work differently depending on if you carry a balance or not but there’s great tools in there to help you pay off your balance if you have one. each card gets added as a row in your budget so it’s an expense category as well as an account since you have to make payments on it.
i’m at a point now where i use my credit cards for just about every purchase but pay off my balance in full every month (i actually pay the balance every other week). so in YNAB, anytime i make a purchase on my credit card, it takes the money from the appropriate category (let’s say my water bill) and then transfers it to my credit card bucket, so that money is there for me to use it to pay the balance off. the amount will show up in green if this is the case and it should align with your balance on your card.
To Wrap Up
this is so long and there’s a ton more about YNAB i didn’t cover like the tools to help you pay off debt, ways to save, a breakdown of my budget categories, etc. so i may do a follow up with more info on that. but feel free to leave questions and i can also do a FAQ in the next blog post! happy budgeting!
And if you feel like checking out YNAB feel free to use my referral link! I think i get a free month if you end up subscribing but no PRESH obviously!