How to Implement a Zero-Based Budget


A friend of mine asked me how to actually use this zero-based budget that I wrote about a couple of weeks ago.  She knew the theory but wanted to get more information on the logistics of how it worked.  The concept is known by a couple of different names.  One of the most popular terms for Canadians would be Cash Jars.

Cash Jars were coined by Gail Vaz Oxlade and popularized in her show: Till Debt Do Us Part.  The premise is quite straightforward – you divvy up all your cash when you get paid into these jars and until the next pay-day, you can only spend what is in each jar.  The cash in each jar represents your allowance in that category.  All purchases are made with cash and you are not allowed to use credit cards or even debit cards.  When you are out of cash, you have to STOP SPENDING.

The zero-based budget idea is that every dollar of your paycheck has to go into a “jar”; you keep putting dollars into jars until you have zero dollars unaccounted for.  What category are these jars and how much allowance to put into them? The most common can be lumped into “Housing”, “Transportation”, “Savings”, “Debt” and “Life”

How much to put into each jar?

According to Gail, the Housing jar should be no more than 35%.  This includes rent/mortgage, hydro, insurance, property taxes etc. Gail obviously lives outside of the Toronto and Vancouver areas or bought her home many years ago before the real estate boom in these cities.  Nowadays, it’s not uncommon to see rent figures near or over the $2,000 per month mark.  In order to come in under 35% of the budget, one must earn an after-tax amount of at least $68,000 a year (This is approximate to a pre-tax income around an eye-popping $90,000/yr).  It is important to remember that 35% is just a guideline.

According to her budget, no more than 15% should go to Transportation costs like car payments, gas, repairs, parking or public transit fares or taxis.  At least 10% should go into Savings and 15% into Debt repayment.  The Debt category is geared towards consumer debt like credit cards or student loans, not a mortgage.  If you are lucky enough not to have Debt, then that 15% could be rolled into Savings (*whispers* investing).

The rest of the paycheck, which is 25% at this point, goes into all the expenses of Life; groceries, cell phone, internet and cable bills, gym memberships, medical and dental not covered by insurance, entertainment costs including eating out and Spotify subscriptions.  But it also includes things that we don’t often think about like the annual fee of a credit card or an Amazon Prime membership.  The $20 in charitable donations for your friends’ 5K run goes here as well as supplies for hobbies like running shoes, hockey equipment or art supplies.  This Life category is where most of the belt-tightening happens.

These amounts are only recommendations, but they do provide the structure for a healthy and sustainable budget.  You can see how your budget stacks up with her interactive budget spreadsheet here.

Pros of using Cash Jars

 A couple of years ago when I discovered Cash Jars, I was eager to try it because it makes intuitive sense and I hadn’t found a ‘system’ that worked for me before.  I could see many advantages of using a system like this such as:

  • Pay yourself first:

I liked the “pay yourself first” attitude of allocating to jars that are important before you start spending.  We know all too well how many expenses “come up” and hard it is to save enough by the end of the month.  Saving for retirement or paying off debt isn’t fun, but they are priorities and the jars allow you to see their importance in a very tangible way.   Sneaking money out of these Cash Jars fills you with guilt because you know exactly who you are hurting.

  • Status at a glance:

As opposed to out of sight: out of mind, Cash Jars provide visual cues. When a specific jar is getting low and if you still have a lot of the month left, you’ll know to ease off the spending in that category. It provides positive reinforcement as well when you see the money in a jar increase.  It’s like a little pat on the back or a like your Instagram post.

  • Flexibility/Customization:

The Cash Jars also provide a lot of flexibility to customize it to your lifestyle.  I created additional “Life jars” for travel and education because those are the things I enjoy doing. I created a jar for clothes because I have a full-time office job that requires professional attire.  Dry cleaning bills and alterations are necessary evils that fall into this category.  In the “Savings” category, I added Jars for short-term goals, such as building an emergency fund, and for long-term investing goals. RRSP & TFSA contributions fall into the long-term goals.

With all of these advantages in mind, I decided to implement it. I started off with using Gail’s budget spreadsheet.  I figured out how much I’d need per Jar category and withdrew that amount from my bank account. I used separate envelops to carry around each category’s allowance for day-to-day purchases. And I committed to giving myself 4 months on this plan before evaluating its effectiveness

There is usually an adjustment period of at least a month while a new habit is formed.  So if it first seems a bit unnatural, acknowledge the discomfort because you are doing something new. Also, give yourself some time to adjust as I find my expenses are ‘lumpy’ meaning I don’t spend at a steady pace. Some weeks incur more expenses than others and you soon see a pattern.

Next weeks’ post, I’ll detail some tweaks I made after my 4 month evaluation period!

3 thoughts on “How to Implement a Zero-Based Budget”

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