Practice Zero-Based Budgeting
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The first and most important step is to take full control of your money—factoring in both your time and opportunity costs. This starts with planning how every unit of your money will be used before you spend any of it. The most effective way to do this is by learning and applying zero-based budgeting.
Why Practice Budgeting?
When people hear “living on a budget,” they often think of cutting back or being frugal. But zero-based budgeting isn’t about restriction—it’s about planning. It simply means assigning every dollar you have to a specific purpose before you spend it. Think of it more as organizing your money than limiting it.
Budgeting isn’t a one-time task. It’s an ongoing process of managing your finances with intention. With zero-based budgeting, the goal is to give every dollar a job. For example, if you have $1,000, you might assign $200 to groceries, leaving $800 to allocate. You continue assigning funds until there’s nothing left unaccounted for.
Why bother? If you’ve never budgeted before, your finances are likely somewhat scattered. The first goal is to bring order—and that’s easier than it sounds. You can create your first budget in an afternoon.
Once you do, you’ll likely feel a noticeable shift in how you relate to money. Many describe it as feeling like they got a raise. Each time you log a transaction, you reinforce that sense of clarity. But when you stop updating your budget, disorder quickly returns.
The good news? You can restore order anytime by starting fresh. After that, it only takes a few minutes a day to stay on track. Before long, even small deviations will feel frustrating—not because of guilt, but because you’ve come to prefer the control and peace of mind that budgeting provides.
The Benefits of Budgeting
Without a budget, money decisions tend to be emotional. Some people become overly frugal out of fear, while others spend too freely without thinking it through. This happens because there's no clear sense of opportunity cost or the time value of money.
For example, without a budget, we often judge a purchase based on our total available balance rather than what that money is meant to do. This leads to impulsive choices—and often regret. With a budget, that regret fades, because every dollar has a job and every decision fits within a plan.
Budgeting also brings visibility. Without it, most people only have a vague idea of where their money goes. And without that data, planning for the future is guesswork. But when you're budgeting, you know exactly how, when, and where your money is spent. That clarity builds over time and leads to better, more confident decisions.
Admittedly, taking a hard look at your finances can feel uncomfortable at first. Many people avoid it for fear of what they'll discover. But once you start, budgeting quickly becomes a daily habit—and surprisingly, an enjoyable one. There's a real sense of peace that comes from knowing you're in control.
Common Problems Without Budgeting
When we don’t budget, we often fall into harmful financial habits, such as:
Living paycheck to paycheck, with little sense of where the money goes
Assuming debt is necessary to afford major purchases or lifestyle upgrades
Underestimating the stress caused by disorganized finances
Feeling out of control and uncertain about financial decisions
Prioritizing short-term gratification over long-term stability (high time preference)
Overlooking opportunity costs, leading to inefficient spending
Ignoring the time value of money, which limits our ability to build wealth over time
Why Keep Budgeting?
The more you practice budgeting, the better you’ll get at it. Over time, you’ll refine your skills and gain the ability to plan years into the future. There’s no point where you "graduate" from budgeting—it’s a lifelong tool for financial clarity and control.
By sticking with it, you’ll not only improve your money management but also reduce stress, make smarter decisions, and feel more confident about your financial future.
Categorize Your Money To Define Its Opportunity Cost
In order to gain full control over our money, we first have to decide its opportunity cost. Without budgeting, our money's opportunity cost remains undecided. Let's illustrate this through an example story.
Imagine we have $5,000 in our bank account, which is all the money we have at the moment. Should we go to a nice restaurant that has an average dinner price of about $100 if we really want to?
Without zero-based budgeting in place, our decision-making process is as follows: we look at our bank account, see $5,000, and may think, "Well, $5,000 is much more than $100, so we can afford this," and then go out to eat.
In our example, sitting down to a $100 dinner means we gave up $100 worth of alternatives on something we hadn't decided on before. In other words, because we spent $100 on dinner, we are unable to spend the same amount on something else. Even though this may seem like a simple idea, it can be difficult to fully understand what it means without first assigning money in our budget.
Returning to our previous example of having $5,000 in our bank account, suppose we made a zero-based budget one afternoon a couple of weeks before we came across the restaurant. In this case, we put a fifth of our $5,000, or $1,000, into the Giving category of our budget. We'll talk more about this in later chapters.
A further fifth of our budget, or $1,000, was assigned to cover our housing expenses (rent, utilities, upkeep, etc.). We set aside $1,000 for groceries, $1,000 for transportation, and $1,000 for "Everything Else" (which could include things like clothing, hobbies, travel, dining out, etc.). We could further subdivide these categories, but let's keep it simple for now.
When deciding whether to spend $100 on dinner right now, we are not looking at the total amount of money in our bank account ($5,000), but rather at our "Everything Else" category, which has $1,000 available.
Here is how our budget looks:
Total Budget: $5,000
Giving: $1,000
Shelter: $1,000
Groceries: $1,000
Transport: $1,000
Everything Else: $1,000
We now know that if we spend $100 on this dinner, we will have $900 left in the "Everything Else" category. We decide that we value the dinner experience more than retaining $1,000 in the "Everything Else" category and enjoy it. Additionally, we give the waiter a $20 tip, which we subtract from the Giving category, bringing it down from $1,000 to $980.
The remaining amount in our overall budget is $4,880. Here is how it looks now:
Total Budget: $4,880
Giving: $980
Shelter: $1,000
Groceries: $1,000
Transport: $1,000
Everything Else: $900
We decide to adhere to one of the three timeless money management principles and always keep 20% of our total budget in the Giving category (again, more on this later). This means we should have $976 instead of $980 in the Giving category. So, we decide to move $4 from "Giving" to another budget category, like "Everything Else." This means that our budget now looks like this:
Total Budget: $4,880
Giving: $976
Shelter: $1,000
Groceries: $1,000
Transport: $1,000
Everything Else: $904
Imagine that one day after dinner, on the way to work, we stop at a gas station, fill up the tank, and pay $65 to do so. We deduct it from the Transport category, bringing its amount down from $1,000 to $935. Our total budget is now $4,815.
Total Budget: $4,815
Giving: $976
Shelter: $1,000
Groceries: $1,000
Transport: $935
Everything Else: $904
We again apply the timeless principle of keeping our Giving category at 20% of the total budget, so we transfer $13 from Giving back to Transport, resulting in the following budget breakdown:
Total Budget: $4,815
Giving: $963
Shelter: $1,000
Groceries: $1,000
Transport: $948
Everything Else: $904
Now imagine that a few days later, we spend $50 on a birthday present for a friend. We deduct $50 from the Giving category, bringing it down from $963 to $913, leaving us with a total budget of $4,765.
Total Budget: $4,765
Giving: $913
Shelter: $1,000
Groceries: $1,000
Transport: $948
Everything Else: $904
Once more, we apply the timeless money management principle of keeping 20% of our total budget ($4,765) in the Giving category ($953), so we move $40 from another category, this time Groceries, to Giving. We arrive at the following budget breakdown:
Total Budget: $4,765
Giving: $953
Shelter: $1,000
Groceries: $960
Transport: $948
Everything Else: $904
Then, the day arrives when we usually pay for our rent and utilities, like the mobile phone bill. Our rent is $400, and our mobile phone bill is $25. Let's also imagine we do our weekly grocery shopping and spend $120 at the grocery store. Our budget now looks like this:
Total Budget: $4,220
Giving: $953
Shelter: $600
Groceries: $840
Transport: $948
Everything Else: $879
Again, we calculate that our Giving category should be at 20% of the total budget, which is $844 instead of $953. We move $109 from Giving to Shelter and also decide to move $100 from Transport to Shelter, so everything is a bit more balanced. Our budget now looks like this:
Total Budget: $4,220
Giving: $844
Shelter: $809
Groceries: $840
Transport: $848
Everything Else: $879
Now, let's imagine a couple of days later, we get our $1,500 paycheck:
Total Budget: $5,220
Giving: $844
Shelter: $809
Groceries: $840
Transport: $848
Everything Else: $879
We know we should have 20% of the budget in Giving ($1,044), and we decide to top up the rest of the categories as well. We end up with this:
Total Budget: $5,220
Giving: $1,044
Shelter: $1,106
Groceries: $1,020
Transport: $1,020
Everything Else: $1,030
Budgeting Allows You To See Your Money's Time Dimension
The total amount of money we have can be viewed through the lens of time. We have money in the present that we earned in the past, and we own money in the future that we have not yet earned. We can choose to transact in the present with money that we have already earned in the past or with money that we have not yet earned in the future.
We know with absolute certainty how much money we have made in the past. However, the money that we have yet to earn in the future is completely uncertain. This is due to the fact that we can never be certain of how much time we have left to live and earn money because of the nature of time. As a result, we can never predict how much money we will have in the future.
When we look at our current money situation, it's like looking at a still photo, a snapshot. We know how much money we have right now. However, our money exists in a continuous flow of time, and we have to get used to looking at it through that lens as well. We can only gain this perspective by practicing budgeting over some period of time. If we keep doing it for a few months, for example, we'll start to see our money situation more like a video than a snapshot.
As we do this, we naturally begin using past budgeting information to adjust our budget to better fit our future plans and goals. The longer we practice budgeting, the further ahead we can look and plan. We'll start tracking our "age of money" to see how it changes based on how much we put into each category and when we spend it. We'll learn how to increase this number, which will give us more financial peace and clarity.
We'll also learn how to use savings goals. For example, if we want to save $20,000 for a car and we already have $2,000 in our Transport category, we can set a goal to save $20,000. Then, our $2,000 in the Transportation category means we're 10% closer to our savings goal. We can also contextualize our goals in the dimension of time. In this example, if we want to reach our $20,000 target in the next two years, we will realize that we have to assign $750 to the Transportation category each month for the next 24 months to get there.
Budgeting Concepts
Age Of Money
Age of Money is the average number of days your money stays in your account before you spend it. It shows how long your money lasts between earning and spending.
A higher Age of Money means more financial breathing room. The longer your money sits, the more time you have to think and make smart decisions.
If you're just starting out with budgeting, don't worry too much about it. By following the steps in this guide, your Age of Money will grow over time.
Want to stop moving money around at the last minute? Tracking your Age of Money can help you create space between income and expenses—and give you more control.
Assets
In this guide, assets are defined as all economic goods we own. This includes:
Monetary goods: cash, bank account balances, Bitcoin, and similar forms of money.
Capital goods: investments like stocks, bonds, and business interests.
Consumption goods: items such as real estate, vehicles, and artwork used for personal enjoyment or utility.
The key distinction we make is between monetary and non-monetary assets—mainly to identify what we use for budgeting.
Cash Section
This includes all liquid and easily spendable assets—what we treat as money. It’s what we use to plan our budget by assigning funds to specific categories. This section also tracks income and spending.
Tracking Section
This keeps a record of the value of non-monetary assets—those not used in budgeting and less liquid than cash. These include things like cars, real estate, stock and bond portfolios, private equity, and other similar assets.
Keep in mind: an asset can be part consumption and part capital, depending on how it’s used.
Budget Categories
Budget categories are the areas to which you assign your money. For example, when you purchase groceries, you enter the transaction under the Groceries category.
The main purpose of these categories in your budget is to clearly represent the opportunity cost of your money.
Category Groups
It is useful to group similar categories together in a Category Group. For example, you can create two major Category Groups: Essentials and Discretionary.
In the Essentials Category Group, you can organize necessary, non-negotiable, and needed categories. Similarly, you can group non-essential, flexible spending categories under Discretionary.
Here is an example:
Essentials Category Group:
Shelter & Utilities
Groceries
Transportation
Clothing
Discretionary Category Group:
Hobbies
Vacation
Restaurants
Debts (Liabilities)
Debts (liabilities) include everything we owe. Examples are cash loans, credit card balances, auto loans, student loans, mortgages, leases, home equity lines of credit, and any other secured or unsecured debts. These are monitored based on their current balances.
Income Vs Expense Report
The Income vs. Expense report displays all your budget inflows and outflows over time and can be filtered by budget category and budget account. This report shows all your income sources and expenses organized by category. You can view the total income and total expenses for the entire budget period, as well as the average monthly income and average monthly expenses.
Inflows & Outflows
Inflow refers to money coming in, while outflow refers to money going out. We can compare our inflow and outflow levels over time. If more money comes in than goes out, you will have a positive net income. Conversely, if outflows are higher than inflows, you will have a negative net income. Your average net income is calculated over time.
Task: Check your income and expenses once a week. Review your net income and limit your search to a single category.
Net Income
Net income is the difference between your income and expenses. It can be viewed as part of the Income vs. Expense Report. Net income is calculated as the total net income for the entire budget duration or as the average monthly net income for the selected period.
Net Worth
Your net worth is the sum of your assets minus your debts (liabilities). For example, if you own a $100,000 house, a $15,000 car, $10,000 in your bank account, and $5,000 in investments, your assets total $130,000. If you also have a $4,000 credit card balance, an $80,000 mortgage, and a $10,000 car loan, you should subtract your $94,000 in liabilities from your $130,000 in assets to get your net worth, which is $36,000 in this case. Net worth can be tracked over time.
Payees
A payee is any party (person or legal entity) with whom we make incoming or outgoing transactions.
Why should we keep track of our payees? It allows us to know exactly where our inflows and outflows occur, enabling us to make better decisions about who we transact with over time.
Running Balance
The running balance is the amount of money in your account that is readily available when needed. You can hold money in multiple accounts, and every time you make a transaction from an account, the running balance changes.
Cleared balance is the total of all transactions that are not currently pending.
Uncleared balance includes transactions that you manually entered but are still pending clearance.
Working balance is the sum of cleared and uncleared transactions, representing the money you have available to spend.
Scheduled transactions: The running balance is useful for understanding how much money you'll need in the account for future transactions.
Scheduled Transactions
Scheduled transactions are those that are set to occur in the future. For example, if we know our rent is due on the 15th of next month and today is the 1st, we should enter a scheduled transaction for the 15th.
Some transactions are recurring, such as a monthly internet bill. You can create these recurring transactions in your budget, and once you pay them, they will appear in the budget's scheduled transactions.
Both inflows and outflows can be set up as scheduled transactions.
Spending Totals
You can filter the spending totals report by time period, account, and category to see a visual breakdown of your expenses. This is useful if you want to determine which category has the largest amount relative to your total expenses over a specific duration.
Spending Breakdown
Spending Trends
Spending Trends is a helpful visual representation of your monthly total spending by category. This tool is useful for examining how your spending patterns have changed over time.
Targets
Spending Category Target Options
Needed For Spending Targets
Weekly
Monthly
Yearly
Custom
Monthly Rollover
Savings Balance Targets
With Date
Without Date
Monthly Savings Builder Targets
Monthly Debt Payment Target
If the Category is Not Paired with a Loan Account
If the Category is Paired with a Loan Account
Credit Card Payment Category Targets
Pay Off Balance By Date
Pay Specific Amount Each Month
Transaction Memo
The memo field is where you can describe the transaction. In most cases, I record the transaction details and include a list of the goods I bought on the invoice. You can use this field to provide much greater detail about the transaction. The more descriptive you are, the more insight you will gain when revisiting the transaction in the future.
Transfer Transactions
A transfer transaction is one in which you move money from one account in your budget to another. This type of transaction does not affect how your money is assigned to budget categories or the total amount of money you have.
An example of a transfer transaction is moving money from one checking account to another at the same bank. Note that transferring money between accounts can sometimes result in a transfer fee.
How To Make A Zero Based Budget
To understand how the method works, it's best to start with a simple budget. Here's a step-by-step guide using both the pen and paper (envelope) method and the YNAB software:
Pen and Paper (Envelope) Method:
Set Up Your Envelopes:
Take two envelopes and label one "Essentials" and the other "Discretionary." These are your main categories.
Practice Moving Money:
Begin by practicing moving money between envelopes. This will help you get comfortable with budgeting.
Create a Zero-Based Budget:
Write down a scenario where you have $100 in total.
Assign amounts to three different categories. For example, "I have $100, so I'm going to assign $30 to Category 1, $40 to Category 2, and $30 to Category 3."
Record Transactions:
Imagine spending $10 from one of the categories. For example, if you spend $10 from Category 2, you now have $90 left in total.
Adjust the balance in Category 2: $40 - $10 = $30 remaining.
Repeat for Further Expenses:
Continue this process for any additional expenses or income adjustments. This manual tracking helps you stay aware of your budget.
Using YNAB:
Count Your Money:
Start by counting all the money you have right now, including cash, checking accounts, savings accounts, etc.
Enter Balances into YNAB:
Write down or enter these amounts into YNAB. For example, if you have $34 in your wallet, add an account named "Wallet" with a balance of $34.
Similarly, add your checking account. If it has $2,344.42, add an account named "Checking Account" with a balance of $2,344.42.
Add All Accounts:
Add any other accounts where you have money. YNAB will sum up all the balances from your accounts, showing the total amount available to assign.
Assign Money to Categories:
Delete the template categories in YNAB and create your own categories.
Assign your money to these categories until everything is allocated.
Track Assets and Liabilities:
For assets and liabilities not part of your cash balance, list them separately to track your net worth.
Add tracking accounts for items like the value of your home (asset) and any outstanding loans (liabilities).
By starting with these simple steps, you'll get a feel for budgeting and be able to track your income and expenses effectively.
Mission: 180 Days Of Budgeting Practice
Start by setting up your budget according to the instructions provided in the previous chapter. Then, make sure to keep track of all your inflows and outflows for a continuous period of 180 days. After this six-month period, you should be prepared to answer the following questions:
What is your age of money?
What was your net worth three months ago, including both your assets and liabilities?
How much did you spend on groceries four months ago?
What was your average net income in the past six months?
What was your net income two months ago?
Which category comprises the largest percentage of your spending, and what is that percentage?
What was your average monthly spending in the past six months?
What was your total spending in the past six months?
Remember, you can create a zero-based budget with a physical notebook and pen. The main thing you need to do is enter each transaction you make, including the date, payee, amount, category, and description.
Once you understand how this works, it doesn't matter which tool you use. You can also create your budget using any spreadsheet software. Personally, I prefer using YNAB software for zero-based budgeting.
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