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5 Steps to Create a Zero-Based Budget

Community 2 min read

15 Jan 2021

What is a zero-based budget? Simply put, it's when your income minus your expenses equals zero. This year, as light begins to filter at the end of a covid-dark-tunnel, and with it, the edges of a possible recession - it's never been more important to do a financial health-check, and make sure you are living with in your means.

It might sound simple, but creating and managing a zero-based budget is something which many people put off,  or never sit down to work through.


5 Steps to Creating a Zero-Based Budget

Below, we've outlined the steps involved to create budget where your outgoings match your incomings. We’ve also touched on a budget for a reduced income and/or employment lay-off.


1. Calculate your monthly spend

Start by looking at your bank statements. You can then structure your spend into different categories (household/entertainment/bills) – and many budgeting apps can now do this for you. Check out our blog here on some options.

Or you might want to do this the old fashioned way, with a trusty excel spreadsheet, dividing your spending into easy-to-follow categories, like those listed below.

2. Calculate your shortfall

Once you map out all your outgoings, and include any income you have, this will allow you to see if there is a deficit, (or what is left over). If there is a deficit, you may want to pull back on non-essential spending, or use some savings to ensure a more even balance.


3. Separate essential and non-essential spending

Separating your needs and wants will allow you to more easily balance your budget.

Essentials may include:

  • Food

  • Utility bills

  • Transport

  • Mortgage/rent payments

  • Insurance

Non essentials may include;

  • Entertainment/Leisure

  • Clothes/Leisure Retail

  • Hobbies

  • Savings

4. Set a saving's goal

Zero-based budgeting is all about getting spend to match your income: balancing your accounts as it were. Sometimes you may just want to ensure all essential spend matches your income, so you are not spending outside your means. But if you have room to, you may also want to include ‘savings’ as an expenditure or budget item – and how much your savings  are, will depend on where (or if) you can cut back elsewhere.


5. Adjusting your budget

Now you can adjust your budget to bring it in line with your financial goals.

You may want to cut back on luxury or non-essential items so you have more savings; or you might have to cut back on all non-essential spending just to ensure your income every month is on par with all essential spending.  If you find cutting back on non-essentials doesn’t allow you enough financial comfort, or is in line with your financial goals, try cutting back on essential items that are amendable – for instance, savings, transport or food like takeaway coffees. 

If your deficit is bigger than you anticipated, and reducing costs on luxury items and/or essential spending isn’t cutting the mustard, the next step is to see who you can contact to postpone certain payments or bills. If you have a loan with a financial provider like the credit union, make sure you visit them to explain your situation – they will be willing to talk to you and try to help. The same goes to other bills like rent and utilities – most companies should have a compassionate attitude during a time like this.

Even if you are not currently affected by a loss of job or income, it is important to have a plan in place in the event your circumstances change quickly. Budgeting and managing your money is a task many find taxing, but in the current climate, it can give you the relief you need and lift some weight off your shoulders.

Credit unions are always on hand for their members.You can find the contact details of your local credit union by visiting our credit union locator.