The power of a zero-sum budget

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 month's 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: $1,426
  • 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: $3,451.56

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: $1,426
  • 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 exactly the 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 preset 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 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 OK. 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 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.

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FI Journey
FI Journey
7 years ago

I love zero-sum budgeting, and I love using YNAB to track it all, either on a mac or PC, iPhone or Android. It’s zero-sum budgeting for modern times!

Ahumbles
Ahumbles
7 years ago

I second the YNAB recommendation – it really makes zero-sum budgeting easy. Several of the principles mentioned above (putting your finances a month ahead, emergency funds, finding a job for every dollar) are integral to the YNAB philosophy and the software actively encourages users to use those methods. YNABers tend to be passionate evangelists for zero-sum budgeting because it often makes a huge difference in their finances!

Sam
Sam
7 years ago

We use a variation of this and a spending plan and an allowance. I create a yearly spending plan which is then used to create monthly spending plans. We pay all our regular recurring bills (thinks with a bill, i.e. mortgage, insurance, phone, etc.) then we allocate savings (some is long term, some is medium and some is short). We do all that first. Then we each get an allowance which we use for day to day expenses, groceries, fuel, dry cleaning, eating out, etc. We limit the amount we spend but we don’t limit a particular category. This works… Read more »

Sam
Sam
7 years ago
Reply to  Sam

We also have a long term budgeting goal of avoiding lifestyle inflation. Having a yearly spending plan and a yearly saving goal helps us stay on track with trying to keep expenses flat from year to year. It is certainly not easy since costs go up year over year, but it is a goal.

getagrip
getagrip
7 years ago

I tried, and would recommend other people also try, something like this just to stop wondering where the money is going and recognize how you can being nickeled and dimed into debt without realizing it. But it was a failure long term because the maintenance was a behemoth created by the simple fact that your example is small fry and doesn’t encompass all the spending a larger family can encounter. Car insurance, health co-pays, prescriptions, kids activities, hair cuts, water bills, HOA fees, car maintenance, new car saving fund, college savings, etc. just to add a few additional categories as… Read more »

Sarah L
Sarah L
7 years ago
Reply to  getagrip

I agree…most people aren’t at the point where they can put that much into savings, even if they would love to. Some people, can’t put anything into savings, and even if they have $5 or $10 left over in a month, something cmoes along next month that needs that, and more. Seeing some articles, and with the tone of writing that it’s just sort of… a casual every day event for someone to put aside half or more of their salary into savings, along with that $8 oregano is a bit of a kick in the stomach feeling. I don’t… Read more »

Laura
Laura
7 years ago
Reply to  Sarah L

Hi Sarah, I totally understand where you & getagrip are coming from. For me, I simply ignored the exact numbers and focused on the meat of the article. I’m still working on zero-sum budgeting, as we’re still in the red nearly every month (the difference being made up with credit cards, which is what I’m trying to avoid – and no, it isn’t for shopping expeditions, believe me). But the idea is helpful because if nothing else, the budgeting reveals where I’m falling short and allows me to brainstorm for other (legal) ways to balance the books – in my… Read more »

Holly@ClubThrifty
7 years ago
Reply to  getagrip

The example budget is just a generic version of my monthly budget. I didn’t want to bog you down with every last detail of my monthly budget…like the fact that this month I’m paying $79 to get my furnace serviced and $1500 in moving expenses. That stuff is boring =/ But, with that being said, it’s important to note that my zero-sum budget has changed dramatically over the years. When we started using a zero-sum budget, we were actually spending more than we made and saving approximately zero percent of our income some months. And, we had tons of different… Read more »

Matt @ Your Living Body
Matt @ Your Living Body
7 years ago

Zero-sum is the way I’ve been operating for a whole. Somehow, some way, it all ends up somewhere.

Mrs. Pop @ Planting Our Pennies
Mrs. Pop @ Planting Our Pennies
7 years ago

We do a variation of this where we have planned spending that accounts for one of our salaries, overage comes out of the other salary and our rental income, and we assign the “leftover” to specific savings goals at the end of every month.

Terry
Terry
7 years ago

I recently re-did my budget and threw all my misc expenses (gas, groceries, entertainment, etc) into one category. That category grows or shrinks depending on the month’s income. At the end of the month, anything that’s left there is deposited into savings. It’s a zero-sum budget but not till the end of the month.

It makes it easy to work with varying income and also helps me not freak out if I go over in one category but under in another.

Kathy
Kathy
7 years ago

We do something similar except we have a reserve account where money for non consistent bill amounts go. For example, in the winter, spring and fall, our electric bill is usually less than during the summer months. So if we budget $200 for electric bill but it is only $150, the extra $50 goes into the reserve account to help pay for the summer air conditioning season when the bill runs $250. That way, the money is there for a larger than budgeted amount. Hubby tracks amounts on Excel spreadsheet and we make adjustments at the end of the year.

Holly@ClubThrifty
7 years ago
Reply to  Kathy

Kathy,

That is an excellent idea!

We overestimated our utilities all summer because it didn’t get quite as hot as last year. But, instead of transferring the surplus to a fund like you, it got eaten up by additional grocery spending. =/

Lucille
Lucille
7 years ago

LOL! That’s probably what would happen to me too. A reserve acct is an excellent idea.

Patti
Patti
7 years ago

Another thing that I have done with this type of budget is have one column for my month and another column where I multiple everything by 12 and get the yearly number.

Looking at expenses on the yearly level helped me make choices about what to cut or negotiate for lower fees. Some how $60/month for something (cell phone, internet, name your bill) didn’t seem bad, but $720 a year did.

Granted this is not exercise that helps you budget, but is useful at making decisions.

John S @ Frugal Rules
John S @ Frugal Rules
7 years ago

We’re similar to Mrs. Pop in our approach in that we have our planned spending and the extra gets put towards our targeted savings. Of course, this varies with having a variable income but we put all extra towards each savings “bucket” each month.

Brian
Brian
7 years ago

I use a variation, we are in debt snowball mode and throw every extra at debt repay at the moment.

Kristin Wong
Kristin Wong
7 years ago
Reply to  Brian

I did the same when I was in debt–used my leftovers to aggressively pay it off.
Now, I do the same, but with savings. I don’t really think about what percentage of my income goes into savings. Not for everyone, but works for me. I set my fixed and variable expenses, set a reasonable amount for entertainment/dining out (not too much, but I’ve learned to give myself some room for fun), and the leftovers go to savings. For me, this has worked really well. It’s especially helpful because my income is so variable month-to-month.

JLynch
JLynch
7 years ago

We’ve been using YNAB for the past two months. We jumped in feet first. Now I feel stupid for not starting a zero-sum-budget years ago! We’ve wasted so much in frivolous spending!
I urge everybody who is just making excuses to not start a budget to suck it up and get one going!

Honey Smith
Honey Smith
7 years ago

I didn’t know the name for this at the time, but this is exactly how I budgeted when I started my first “real” job in 2008. I used Excel and it has since migrated to Googledocs, but every month has a tab with all the expenses broken out and which paycheck they are coming out of. I highlight them as they are paid and adjust the amount for those that are adjustable (say, electric or gas) so that I can see exactly how much is “leftover” at the end of the month. I’ve paid off about $20k in credit card… Read more »

Christine T
Christine T
7 years ago

Anyone have tips on how to budget when your paycheck is every 2 weeks but all bills are monthly? Right now I just use 4 weeks pay as the budget and assume the other 2 paychecks go to savings.

Elizabeth
Elizabeth
7 years ago
Reply to  Christine T

That’s what I used to do when I got paid every two weeks. My monthly budget was based on two pay cheques so the two extra cheques a year were bonus savings!

I kept a buffer in my checking account because pay cheques and bills (and rent!) didn’t always align. If I had a mortgage, I would put the mortgage on every two weeks rather than twice a month to take advantage of those extra payments each year.

Jeff
Jeff
7 years ago
Reply to  Elizabeth

Yeah I find it quite annoying that budget programs can’t seem to comprehend bi-weekly paychecks (most people I know get paid this way so it’s not like it’s a rare thing either.) The easiest option for me was to set my income as if it’s always twice a month and treat May/November’s 3rd check as a bonus, those 2 checks go towards savings for emergencies and fun stuff. The bills and recurring expenses come out of the other 24.

Jen
Jen
7 years ago
Reply to  Jeff

I also get paid every 2 weeks on a Friday. Once I get my final debt of $1300 paid off in Dec (not counting the house) I plan on leaving an even amount of $1000 as my ending balance for the month on my excel spreadsheet. That way it is enough to cover my mortgage and other little things before my next check comes in and ensures I’m doing a zero-sum budget.

Connie G
Connie G
7 years ago
Reply to  Christine T

That’s how I handle my expenses as well. I know which bills need to come out of the first check and which ones need to come out of the second check. The only thing that comes out of the 3rd check (which happens twice a year) would be gas and grocery money.

A-L
A-L
7 years ago

Another YNAB user here. The record keeping on this is not that daunting. If you put everything on a credit card or debit card, just download your transactions from the bank. It will fill in automatically (the first time or two you’ll have to say that Olive Garden is eating out, or whatever category you named it). And you can name the categories however you’d like (wants, needs, savings, or whatever works).

I HIGHLY recommend YNAB.

Slinky
Slinky
7 years ago
Reply to  A-L

I’ve used an older version of YNAB, but my biggest problem with it was that it isn’t very “future oriented”, which I think is part of the creator’s “method”. Is that still true with the newer versions? It also annoys me if I buy a product and then have to pay a ton for an upgrade. So I don’t upgrade. And by “future oriented” I mean that I run my budget out about 10 years. That was completely impractical in YNAB. It sounds slightly insane to some people, but it’s how I plan for my goals. Here’s where I fund… Read more »

Ely
Ely
7 years ago

6 steps? Track expenses? No thanks. I can see the value, but for anyone already scared of budgeting this isn’t going to help. I’ll stick with the Balanced Money Formula and automated savings, thanks. 🙂

Vanessa
Vanessa
7 years ago

I have a zero-sum budget set up in excel. It’s good in some ways, but I always feel like I’m living paycheck to paycheck. Because I’ve given every dollar a “job” I never feel like I can splurge on anything. I have a budget for savings and I can’t spend from there because, well, it’s for savings. Sometimes it can feel very restricting.

Slinky
Slinky
7 years ago
Reply to  Vanessa

Add a splurge or allowance or sanity line item to your budget. That money is for spending on anything you like. My vice is generally yarn and books.

SuzyQ
SuzyQ
6 years ago
Reply to  Vanessa

To Vanessa,

I’m with you, zero-budget was making me crazy because I didn’t give myself an allowance. So, I built-in an accounts I titled “Cash” and the money in that account I can spend however I choose. When I started, that fund had $40/month in it–I’m now up to $200/month and that amount satisfies my “impulse” buys (i.e. souvenirs, lunch out with the gang from work, books, shoes)

I actually make a “wish list” for my cash account like I make a grocery list…Happy Budgeting!

Gilia
Gilia
7 years ago

Thanks for the article! I have to admit that this is how I budget and I didnt even know it or that there was a name for it. Im glad to also get some ideas to make it work better for me.

Nick @ ayoungpro.com
Nick @ ayoungpro.com
7 years ago

This is pretty much what we try to do. We aren’t too great at it right now though.

Cherie
Cherie
7 years ago

I have been doing this sort of budget for more than 10 years – it’s been adjusted many times over – to meet reality – to account for increases in income and changing expenses.

It is the ONLY kind of budget I’ve every been able to cope with – and I make sure that all my variable expenses are accounted for and updated regularly

I did it on paper for several years before I migrated to a very simple spreadsheet on google docs

Kim
Kim
7 years ago

We do this and it works great to keep us on track. Our categories are simple: Groceries, Gas, Golf, Utilities, Cash (we visit the ATM once a week for pocket money), Miscellaneous, and finally, Savings. We have no debt.

This works for us because every penny is accounted for. I track it all through Quicken so if we go over the amount allotted for utilities, say, I take that $ away from the Miscellaneous category.

I love the simplicity of it.

Marie
Marie
7 years ago

It sounds almost impossible, but getting a month ahead to account for irregular earnings would be nice. So many budget systems ignore anyone other than 9 to 5 corporate drones with biweekly paychecks!

We have several “types” of irregular earnings…freelance-based “per job” earnings, school-year-based seasonal earnings, and holiday-based seasonal earnings. Keeping everything organized is a real undertaking.

frugal mainer
frugal mainer
7 years ago
Reply to  Marie

Yes, I’d love to see a post on the nuts and bolts of getting a month ahead. Perhaps it’s really obvious, but I’ve had an incredibly long day and am not getting the picture. 🙂

nobody, really
nobody, really
7 years ago
Reply to  frugal mainer

Use your ER savings as your first month ahead. I don’t think that’s unreasonable. It will just be replenished with the next month (you’re now a month ahead). Hey, I understand what you’re saying, but if one of the goals is to have 3-6-8 months of ER savings (depending on the guru), I don’t see any harm in getting yourself ahead in your own game.

salamander
salamander
7 years ago
Reply to  frugal mainer

Yes, please! More on this paying a month ahead concept and why it helps when your income is variable.

Elizabeth
Elizabeth
7 years ago
Reply to  Marie

“Corporate drones”? I agree with your point about budgeting for irregular income, but I don’t see why people on PF blogs needs to insult each others’ occupations. Some people are miserable working for corporations. Some people aren’t. Whatever works.

Lance @ Money Life and More
Lance @ Money Life and More
7 years ago

I use something similar to the zero sum budget. Whenever we get paid I move any extra money above a set amount to pay off my wife’s student loan debt. We run a tight ship so her loans are getting paid off quicker than we anticipated!

sabet
sabet
7 years ago

I’ve been doing zero-sum budgeting each month for about a year now. I use an excel spreadsheet and update it frequently. I never had debt, but I always wondered why it was a stretch to pay off my credit cards. Facing the monthly fluctuations in spending has really opened my eyes – I previously thought I was compensating for a higher spending month (gifts, doctor’s appointment, etc.) by lowering my discretionary spending (eating out, clothes, etc.), but I wasn’t. Now I can adjust for those random expenditures and not worry about it. I’ve finally built up a buffer in my… Read more »

bobj
bobj
7 years ago

Don’t forget to budget for fun! after all.. you work hard and should enjoy life too!

Amy
Amy
7 years ago

The “budget” that we use is what I would more accurately call a “cash flow” system. I use excel and keep track of all of the items that I pay out of my accounts, and all the money that goes in. This way I can see where my lows and highs are for the next month and can put in the maximum amount to bring my next month’s “low” point to under $100. Is this zero sum? I’m not sure. I highlight each expense that I have that I have estimated the amount (always trying to overestimate costs and underestimate… Read more »

Caitlin
Caitlin
7 years ago

Reading the first sample budget, just makes me think ‘wow, houses are cheap in the US but I can’t believe you have to pay that much for healthcare’. I pay twice that to rent a modest two-bedroom house in Sydney but my healthcare is free.

Elizabeth
Elizabeth
7 years ago
Reply to  Caitlin

IMHO, the problem with budget worksheet is how little attention we pay to taxes. We budget with our net income, and taxes are left out of the equation.

I don’t know what the tax situation is like in Australia, but in Canada we pay higher taxes than the U.S. It bothers me when Americans say we have “free” health care. We don’t. It just looks that way because it’s not part of our personal budgets.

Shepherd Moon
Shepherd Moon
7 years ago

Dumb question – does it make a difference whether one uses gross or net pay for step 1? If I use gross pay do I just consider taxes, medical, etc. to be bills that subtract from the initial gross amount?

Thanks for any help.

Holly@ClubThrifty
7 years ago
Reply to  Shepherd Moon

There is no wrong way to do it!

You can either use your gross income then deduct medical benefits and taxes as one of your “categories” or you can use your net income and ignore those things.

I personally use my net income because I think it simplifies things…but it’s totally up to you!

Evan
Evan
6 years ago

I’ve been using zero-sum for my family’s finances for about three years now. It has worked extremely well for us! When I started, I didn’t realize there was a name for the type of budgeting I chose. My income is in the fluctuating category described above, as I am a freelancer. What we do is take the projected income for the month, based on my bookings, and list it at the top of an Excel spreadsheet, followed by the month’s static expenses, followed by the month’s variable expenses. When there is extra, we will sometimes allocated to a future months… Read more »

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