How to Set Up Zero-Sum Budgeting
Do you struggle to have enough money to pay for the things that you need? Maybe you find that there’s not a whole lot of money left after you’ve managed to pay your bills. Or maybe you’re struggling to pay your bills at all.
What you’ll hear from everyone, and what you absolutely need to be listening to, is the idea that setting a budget is the best way to create the life that you want.
Now, budgeting can be a bit difficult if you don’t know how to get started. Or if you’ve struggled in the past you may be having trouble getting started.
That’s why we’re going to talk about something called a zero-sum budget. It’s going to help you get where you need to be, and see where you’re spending your money.
What Is Zero-Sum Budgeting?
When we talk about zero-sum budgeting we’re talking about spending every single dollar of money that you bring in during the month. But see, you don’t have to actually ‘spend’ that money per se. What you’re doing is assigning each and every dollar that you make a job to do and that’s going to allow you to really maximize the amount of money that you bring in. By the end of the month, you will have zero dollars left over, but you’re not going to be struggling as you have been.
With this method, you’re going to create a brand new budget each and every month. Then, you create the income categories that you have coming in and the expenses that you have going out. From there, you can see where you’re spending money and where you’re doing what you want and saving the money you need.
Now, you need to look at how much money you make in a month and you need that much money to start out. The idea is that you’re going to use the month before to pay for the current month’s bills. So, you would take the money you earned in January and use it to pay for everything that you need in February and so on.
When it comes to bringing in bonus money you need to find a way to spend that as well. So, if you win a lottery or you get an unexpected gift from someone you would put that money into some type of category. You get to decide the category that it goes into (though putting it toward your debt or savings is the best way to go). The next month you wouldn’t account for that money because it’s not a normal part of your income.
The great thing about this type of budget is that you’re giving every single dollar a place to go and you don’t have to stress about what you’re doing with it. You don’t have to think even about the money that you’re spending because you have that money allocated for that task.
Similar to an envelope system, this type of budget is going to give you the money that you need for each category and then let you have some fun. But you don’t have to worry about how you spend any of the dollars that are coming in.
How to set a Zero-Sum Budget
In order to start this type of budget, you’re going to need at least a full month’s worth of income before you even get started. And you’re going to need to put in some work to make this type of budget work for you. If you’re not putting in the effort you could find yourself struggling with your zero-sum budget the same way you’ve struggled with any other type of budget.
What Do You Spend Money On?
First, think about the amount of money that you spend each month. What are the bills or expenses that you have that you need to account for? Remember to write out a little bit of an allowance in these bills so that if you have a higher utility bill this month you’re going to be covered still. Set a reasonable amount for things like groceries and gas. And make sure that you’re also allocating a bit of money toward the bills that you only have to pay once in a while (like quarterly car insurance).
You may have a bit of difficulty getting all of these expenses figured out. A lot of people struggle to figure out where they’re spending money unless they’ve been doing it all via credit card. If that’s the case you can pull up old statements and see where you’re spending the most money.
Create Overall Categories
Once you know where you’re spending your money you need to have specific categories that you can put into your budget. You might have things like entertainment and groceries or you might want to break down your categories to have money for eating out and for going grocery shopping or going to the movies versus to another special event. You’re the one that gets to choose your categories.
Remember that you also need to include your bills in these categories, so include your utilities, medical expenses, rent or mortgage, and other common expenses so you can make sure to add those into your budget as well.
You want to make sure that you put all of the spendings that you’ve done in the past month into one of the categories that you’ve created. This is going to give you an idea of just how much money you tend to spend in each category. You may want to do this for a couple of months to get a better average of what you’re spending and how you should be allocating your money.
Once you know what you’re spending in each area you can figure out how much money you should be spending. You may realize that you need to cut some areas dramatically, but making too drastic of a change all at once is definitely not going to help you in the long run. Instead, try to cut a little at a time from some of these categories so you’re more likely to stick to it.
You may not do as well as you had hoped when you first start out and that’s okay. You’ll likely need at least a few months before you’re going to get everything just right and be able to set the budgets that you need and stick to them. You may also find that there are some areas where you’re willing to sacrifice a little more so that you can splurge in others.
The zero-sum Benefits
There are a number of different benefits that you’re going to see with this type of budget and they are:
Effectiveness – You’ll definitely be better prepared to set goals and stick to them when you can actually see what you’re trying to accomplish.
Motivation – When you can see everything that you’re doing and you can see the benefits that are happening with your saving and debt repayment you’re definitely going to feel better about sacrificing in other areas. You’re also going to be able to see when you’re finally going to hit the big goals that you’ve set for yourself.
Control – Finally, you’re going to have complete control over everything that you’re spending and setting. You get to create the overall categories, after all, remember.
Baruch Silvermann is a personal finance expert, investor for more than 15 years, digital marketer and founder of The Smart Investor. But above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.