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Personal Finance

How to Use a Zero-Sum Budget

Updated Feb 18, 2019   |   5 mins read

Some Americans are terrible at budgeting and managing their personal finances. Two-thirds of Americans reported they would have trouble coming up with $1,000 in cash for an emergency. Only 46 percent of Americans have any kind of emergency savings fund. Around one-third of people with credit cards pay only the minimum due each month.

Making a budget could be beneficial to many of these financially-troubled Americans, but people tend to avoid taking a close look at their finances because it might stress them out too much. Budgeting, however, is about taking control of your money and making sure it is helping you meet your goals. The trick to making and sticking to a budget is finding a method that works best. There are many methods and apps available to help you create and use a monthly budget. The zero-sum budget is just one of those methods we’ll look at today.

The Zero-Sum Budget

A zero-sum budget takes your entire monthly income and directs it to specific places, so at the end of the month your total for the sources and uses of money are exactly equal. In other words, you have a zero sum from what you earned and what you spent. The zero-sum budget is great because it doesn’t allow you to spend money you don’t have. You can’t have a negative budget by spending more than you earned. The zero-sum budget gives you some flexibility in how you spend your money each month and helps to give every dollar a purpose.

How to Use a Zero-Sum Budget

  1. ​Track your spending for at least one month. You can’t begin to create a realistic budget until you know how you really spend your money. For at least one month, simply track all of your expenses. Keep your receipts, track spending using an app or spreadsheet, write your expenses in a journal, or use bank statements. It doesn’t matter how you track your spending, the only thing that matters is that you are completely honest about every dollar you spend. Don’t leave out a stop at the convenience store, fast food, or coffee break just because you only spent a few dollars.
  2. ​Create categories for your common expenses. After tracking your expenses for at least one month, take a look at them and try to break them down into categories. For example, you might group daycare, art lessons, and sports team fees into one category for childcare and activities. Other common expense categories include transportation expenses (gas, car loan payment, oil changes, parking, public transportation), medical expenses, housing expense (rent or mortgage, insurance, taxes), phone and utilities, entertainment, groceries, dining out, clothing, student loans, and credit cards.
  3. Assign each expense to a category. Each expense from your spending log should somehow fit into one of the categories you created. Now you are ready to add up the expenses in each category. If you tracked your expenses for more than one month, you can get an idea of what your average spending is over time and adjust your budget accordingly.
  4. ​Identify any problems. Now that you have the numbers in front of you, there might be a few shocking realizations. Maybe you didn’t know how much you actually spent each month on eating out, coffee, iTunes downloads, or Starbucks visits. If you’ve identified an area where you can cut down on spending, do it.
  5. ​Assign a dollar amount to each category. After making any adjustments to your spending categories, assign a final budget amount to each category. If the expenses are not set dollar amounts and have some variation due to your spending habits, set the budget for the category a little lower than your actual total. The idea is to find little ways to cut back in as many spending categories as possible.
  6. One Month Ahead. The trickiest part of zero-sum budgeting is that you actually need to get one month ahead to make this work. When you use zero-sum budgeting, you are actually paying for this month’s expenses with the previous month’s income. So, you need to have a month of expenses saved before you can start using your zero-sum budget. If you don’t already have enough saved, work on continuing to cut and control your spending while adding money into savings each month.

Zero-Sum Budgeting in Real Life

Once you’ve saved enough to start using your zero-sum budget, you’ll find it refreshing to know you are no longer living paycheck to paycheck. You’ll also know that every dollar has a purpose and goes to meet a specific need or goal in your life. That means you should also add categories like saving for college, paying down debt, saving for retirement, or a car purchase. Zero-sum budgeting is a lot easier if you have a stable monthly income. If you don’t, you will need to adjust your spending categories each month to match your income from the previous month.

Final Thoughts

Creating a zero-sum budget involves some effort to create and build enough savings to use the budget. But once you’ve put in the work, you’ll have great peace of mind knowing you already have the cash to pay every bill and possibly some money left over for longer term goals.