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The Power of a Zero-Sum Budget

Home Mortgage Bank Loan Officer


There's been a lot of talk about budgeting here at Get Rich Slowly. For instance, Kristin recently wrote about her adventures using the envelope system. I wrote about the reasons your budget might be failing. And, a variety of guest posters and staff writers have touched on the topic with articles like these:

How I kept to my budget and still have everything I want

Budgeting: The Most Important Thing You Can Do With Your Money

How to Build a Better Budget

When One Partner Won't Budget

However, among the articles on budgeting systems and strategies, there has been very little written on using a zero-sum budget, which happens to be the budget that I use and love. So, I wanted to write about why I'm a zero-sum budget enthusiast, why I think they work so well, and how you can harness the power of the zero-sum budget for your own financial well-being.

Why should you use a zero-sum budget?

In my opinion, a zero-sum budget is superior because it forces you to "spend" every dollar that you make. And, no, I don't mean you should spend it on dinner at Outback or a weekly mani/pedi. Instead, you allocate all of your earnings into the different categories that your finances require. You don't need an Excel spreadsheet or a complex software program to use a zero-sum budget. In fact, all you really need is a pen, paper, and the desire to begin budgeting for your benefit. So, how do you begin using a zero-sum budget? Follow these simple steps:

Step 1: Determine how much you make

Whether you're paid hourly or salary, you need to figure out how much money you make on any given month. So, you need to ask yourself a few questions. For instance, "How many paydays fall within this month?" And, "How much will each paycheck be?" For salaried workers, this should be fairly easy. For those with a fluctuating income, it can be much more difficult. However, one of the easiest ways to make a zero-sum budget work for your family is to get all of your finances "one month ahead." Easier said than done, I know. But, using that method, a fluctuating income won't matter as much. Since you're using this month's income for next months' bills, it will be much, much easier to plan.

Step 2: List your bills

Once you determine how much money you'll make this month, you need to figure out how much money you need to spend next month. Using pen and paper, write out all of your monthly bills, estimating bills that fluctuate like utilities. You'll also need to set a reasonable allowance for spending categories that you're trying to keep under control (like groceries and gas). And, don't forget about bills that are paid quarterly or seasonal expenses. The best way to make a zero-sum budget work is to include everything.

I'll use a generic version of one of my old budgets as a real-life example:

  • Mortgage: $1426
  • Electric: $200 (estimate)
  • Gas: $25 (estimate)
  • Groceries: $500
  • Daycare: $500
  • Internet: $35
  • Fuel/Miscellaneous: $200
  • Cell Phone: $55
  • Health Insurance: $377
  • Life insurance: $77.31 (paid quarterly)
  • Trash: $56.25 (paid quarterly)

Total: $3451.56

Of course, everyone's categories will be different. Obviously, you'll need to include all of your bills including any debt payments that you make on a monthly basis. Make sure to list all of your bills (even the ones that you're trying to forget!) Confronting them is the first step to making them disappear for good!

Step 3: Compare and contrast

This is where it gets fun, I think, and why using a zero-sum budget can be life-changing for so many people. Once you see your monthly income and your monthly bills on paper, a clear picture of how much money is left over emerges. You might find that thousands of dollars are being spent on "wants" each month. And, you could use that knowledge to begin saving that money instead. Regardless, once you determine how much money is left over after you pay all of your required expenses, you can decide what to do with the rest.

If my husband and I earned a net income of $7,000 for the sample month, we would update our zero-sum budget to reflect the overage:

  • Mortgage: $1426
  • Electric: $200 (estimate)
  • Gas: $25 (estimate)
  • Groceries: $500
  • Daycare: $500
  • Internet: $35
  • Fuel/Miscellaneous: $200
  • Cell Phone: $55
  • Health Insurance: $377
  • Life insurance: $77.31 (paid quarterly)
  • Trash: $56.25 (paid quarterly)
  • Short-term savings: $1,500
  • Long-term savings: $1,500
  • Vacation Fund: $548.44

Total: $7,000.00

But, what if nothing is left? If you're spending every penny you earn, it's probably time to reconsider that strategy. Start by making a list of things you could live without. Some possibilities include cable television, eating out, or excessive entertainment spending. And remember, everyone's priorities will be different. Although I do just fine without cable television, I have no desire to feed my family on a bare bones grocery budget. You may feel the exact opposite. And, as J.D. so eloquently put it, you have to do what works for you, whatever that is.

Step 4: Spend all of your money on paper

Once you determine your own excess cash flow, you can decide where that money will serve you best. For instance, if you're still in debt, you can decide to pay X number of additional dollars toward those debts. Many people, including me, tackled their debts using the snowball method. Using this method, you focus on one debt at a time, paying over as much as you can until that debt is demolished. Then you can move on to the next.

Or, if you don't have any debts to contend with, you can allocate all of your extra cash toward your savings or investments. Obviously, it doesn't have to be all or nothing. You can choose to tackle your debts and continue saving at the same time. It's up to you. However, the key is to go ahead and transfer the money you have allocated to savings right away. That way it doesn't get squandered on those dinners at Outback, weekly mani/pedis, or anything else.

Step 5: Track your spending

If you have a pre-set spending limit for your zero-sum budget categories, you'll need to check in periodically throughout the month to "see where you're at." I've found this to be particularly helpful when it comes to grocery and miscellaneous spending. I have a tendency, in fact, to completely blow through my grocery budget if I don't watch myself. ($8 organic oregano, anyone?) So, to combat my grocery spending weakness, I usually check in on my spending about once a week. And for the most part, when it's gone, it's gone. This often means that we're eating freezer food and leftovers by the end of the month, which seriously annoys my kids. But, it works!

Step 6: Make adjustments

Your zero-sum budget may be an epic failure for the first few months. And, that's okay. You'll probably need to make some adjustments to get it just right. Maybe you need to add a little buffer to your grocery category. Or, add in some wiggle room to the entertainment portion of your budget. Whatever it is, making adjustments shouldn't be seen as a failure. In fact, it's just part of the budgeting process.

One more thing

Unless you want to have a specific budget category just for emergencies, an emergency fund is a crucial part of using a zero-sum budget. Having an adequate emergency fund means that a surprise car repair or medical bill won't knock your entire financial plan off track. And, whenever you have to tap into your emergency fund, it's important to replace the funds you use. You can do this by budgeting to add to your emergency fund in the following month (or months) until it's back to its former glory.

Have you ever used a zero-sum budget? If so, did it work? Also, please feel free to share your favorite budgeting strategies below.

The original article can be found at
The power of a zero-sum budget

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