Firstly, let me congratulate you on your interest in the zero sum budget! If you are here then you are already farther ahead than most people when it comes to budgeting their money and setting themselves up for financial success. Before we jump in I just want to remind everyone that budgets do not have to be scary and if the ideas below seem a little confusing don’t worry:
It’s easier than it sounds!
This is meant to be a bare-bones basics summary of how this type of budget works, but it is important to remember that this is just an outline of the ideas along with a basic example. Read through these ideas and check out the links at the end to check out some apps and services that can help make budgeting a LOT easier and less time-consuming.
The Two Basic Ideas of Zero Sum Budgets
Zero Sum Budgets rely on two specific ideas:
- Budgeting to “zero”
- Using this month’s income to pay for next month’s budget
The Goal of the Zero Sum Budget is “Zero”
The basic idea of any budget is that you are spending less money then you have coming in. The problem with this basic definition is that it is totally focused on the “spending” aspect and doesn’t really do a good job of accomplishing anything other than paying your bills each month.
As the name might suggest, the goal in a zero sum budget is to get your budgeted dollars to “zero”. This doesn’t mean that you are running out of money each month, but rather the mentality that you are budgeting every single dollar that you have coming in as income. When you are budgeting all of your dollars you are giving each and every one of them a “job” to do for the month. This could be to pay a bill, save for a vacation, or go towards an investment. The point is that all of these things leads to a specific outcome.
Use This Month’s Income to Pay for Next Month
Another goal of the zero sum budget is that ultimately you will be using the money you earn this month to budget your spending for the next month. The idea here is that because you already have the money you are budgeting in the bank you will not have any issues paying a bill on time while you are waiting for the paycheck to come in. This is a powerful idea, but unfortunately many people live paycheck-to-paycheck and cannot even understand the idea of having a month’s worth of income sitting in the bank.
Realize though, that I did say having this money in the bank is a goal. Most people simply won’t have this luxury starting out and that’s okay! As you start the budgeting process you will naturally be adding money to different savings categories and eventually you will be so far ahead that you won’t have to worry about it all. It just takes a little time.
So How Does This Work in the Real World?
You’re probably thinking: this is all great, but how am I actually supposed to actually use this? Here’s a little example.
Say you bring home $4000 per month after taxes, 401k, healthcare, etc. This is your “take home” pay that you’ll use to pay the bills. Say also you are a family of four. Let’s say you track your spending for a few months and come up with this:
- Rent/Mortgage – $1000
- Utilities (Gas, Electricity, Water)- $250
- Cell Phone – $200
- Internet – $100
- Cable – $150
- Car Payment 1 – $300
- Car Payment 2 – $200
- Groceries – $600
- Restaurants – $200
- Clothing – $100
- Spending Money – $150
- Car Insurance – $150
- Credit Card Bills – $600
- Savings – $0
Notice I said spending. In this scenario you are spending every dollar that comes in, but you aren’t really budgeting any of that spending or putting any of your dollars at work to improve your finances. If any emergency situation comes up it’s likely that you will have to put that expense on a credit card because although you have enough money to pay your bills, you aren’t saving anything at all. There is also a sizable credit card bill each month which means that you are carrying some high-interest debt that is eating away your income. Some of these spending categories should freak you out a little bit.
Let’s take the same $4000 per month, apply a little bit of planning and sensible spending decreases and see if we might be able to budget our dollars more effectively. This is not an article on how to save money, but here are some common ways that people can lower their bills or reallocate their spending.
- Rent/Mortgage – $1000
- Utilities (Gas, Electricity, Water)- $250 -> $200 (bump the thermostat up a few degrees in the summer)
- Cell Phone – $200 -> $100 (switch to a lower cost service or negotiate a discount)
- Internet – $100 -> $75 (switch to a lower cost service or negotiate a discount)
- Cable – $150 -> $100 (switch to a lower cost service or negotiate a discount)
- Car Payment 1 – $300
- Car Payment 2 – $200
- Groceries – $600 -> $500 (create a monthly meal plan and buy in bulk – don’t impulse shop)
- Restaurants – $250 -> $100 (cook more meals at home and plan ahead so that restaurants are intentional)
- Clothing – $100 -> $75 (hit the sales or sell old clothes to purchase new ones)
- Spending Money – $150 (Leave it!)
- Car Insurance – $150 -> $125 (call and negotiate your rate or shop around)
- Credit Card Bills – $600 -> $875 (add more to your monthly bill to get it paid off quicker!)
- Savings – $200 (in five months you’ll have 1k in the bank for emergencies!)
With this scenario you are still “covering your bills”, but you are also more intentional with your money and you are then able to devote some of your hard earned dollars to things that will help you in the future: eliminating credit card debt and growing your emergency savings. In this scenario you are giving some of your dollars the “job” of paying down credit card debt and going into your savings.
Why Should You Use It?
You should consider using this type of budgeting because it allows you to be very intentional with your money and to split your dollars into as many different savings goals as you’d like in order to achieve your goals. The amount of customization with this method is insane, but if you are the type of person that likes to control every aspect of something then you will probably enjoy this type of budgeting. This could also work well for you if you feel like you need to have this kind of exacting, every dollar assigned, type of approach in order to get some results.
The bottom line is that any type of budget (assuming it’s balanced) is better than no budget at all!
Nothing is perfect.
With a zero sum budget there are a couple of major obstacles that can hold you back from success:
- Complexity – Although this type of budget could be pretty simple in theory, in practice it can get a little overwhelming keeping track of every dollar spent and spending time with your budget on a month-to-month basis to assign your dollars.
- Irregular Income – If you are making exactly $4000 every month like clockwork then the system is pretty easy to maintain. What if you are an independent contractor though or someone else that makes different amounts of income or has to wait long periods to receive a check? The system still works if you are truly using this month’s income to budget for next month, but the income differences could cause wild swings in your categorized amounts. You will need a lot of discipline in order to save during good months to provide for the leaner ones.
Tips for Using a Zero Sum Budget
I’ve been using this style for a while now and here are a few things that I would recommend you look into if you want to check it out:
- Use an app! I recommend YNAB (YouNeedABudget) as that is what I’m using at the moment. I’ve had good success with this and it basically takes the manual pen-and-paper complexity out of the equation. There are other tools available that do similar things, but I don’t have as much experience with them. I will be checking more of these out and I will add more notes here as they become available.
- Have an accountability partner – I tried and failed to stick to a family budget when I was the only one doing it. I just couldn’t keep up with it and I had nobody standing next to me holding me accountable for not updating the budget. My wife has been a huge asset here!
- Don’t get discouraged if you work really hard on setting up how much you want to spend on each category, but then blow it one month. See where the problem came from and either adjust your behavior or your budget for the next month.
- Start now!
What tools do you use (if any) for your zero sum budget? Do you use a different style? Let us know in the comments!