How The Zero Sum Budget Can Save You Money

zero sum budget

Have you heard of the zero sum budget? It’s something that I do, without realising that it was called that! It’s one of the best ways that you can budget your money, in my opinion.

I’ve written before about budgeting – how to create a budget and the 50/20/30 budget rule. Creating a budget is very important if you want to take control of your finances because you will be able to see where your money is going instead of wondering why you never have any money.

Whenever someone asks me how they should start out with sorting out their finances, there tends to be a lot of resistance when it comes to realising the need for a budget. Most people tend to think that a budget will restrict them and not allow them to do anything they want, but that is not the case. This is why I suggest calling it something other than a ‘budget’ – such as a ‘get rich strategy’ or whatever you like!

Zero-Sum Budget Explained

According to personal finance guru Dave Ramsey, a zero sum budget works like this:

“The point of a zero-based budget is to make income minus the outgo equal zero. If you cover all your expenses during the month and have $500 left over, you aren’t done with the budget yet. You must tell that 500 bucks where to go. If you don’t, you lose the chance to make it work for you in the areas of getting out of debt, saving for an emergency, investing, paying off the house, or growing wealth. Tell every dollar where to go.”

Sounds pretty simple, right? Surprisingly, this is what a lot of people do not do. Even if people are budgeting well and covering their main expenses, when they have money left over, it’s easy to think ‘Ooo I have all of this money to go and spend however I want!’ – which is why a lot of people end up with no money left and wonder why they are never able to improve their finances.

The difference with the zero-sum budget over other budgets is that it encourages you to use last months income for this months expenses, which means getting a month ahead. If you aren’t able to get a month ahead don’t worry, it can still work for you.

Where To Begin

Budgeting is very simple, and doesn’t need to be overcomplicated or take up tons of your time. There are easy steps to take, especially if you are made the same amount every month so you are fully aware of the amount of money that will be coming in.
Think of the reason why you want to get on top of your finances – is it to pay off debt, set up your own business, be able to travel? Setting goals and having a clear reason why you want to do this, will help you achieve it.

Track Your Expenses

This is very important and is a step that should not be skipped when working out your budget, because it is an area that most people trip themselves up on. The reason that this is important is because we are often unaware of what we are spending money on because if you are not budgeting, you probably aren’t aware how much exactly you are spending on buying lunch everyday.
The main problem is underestimating. If you just wildly guess how much your lunches are each day instead of adding it up properly, you could be short by hundreds of pounds. It is imperative that you go back and add up everything that you have been spending – even if you think that you wouldn’t spend that much in the future because you are determined to do better – still add up everything that you have been spending, and then if that spurs you into cutting your expenses, this is something that can be worked on in the future.

Assign Your Expenses Categories

We are going to be allocating your expenses categories, to ensure that it is all going where we want it to go. There will be different expenses for everyone, but generally your categories could look like this: mortgage, utilities, groceries etc. By going back over your spending, you will be able to see expenses that you may have forgotten about.
I recommend going onto your internet banking (if you don’t have internet banking, you should definitely sign up) and into the section where it lists all of your direct debits and standing orders. This will show you easily your recurring expenses, how much they are, and the dates that they get paid. Here are some common categories:

Mortgage/Rent
Council tax
Gas and Electric
Water
TV, phone, internet
Mobile phone
TV Licence
Food
Car insurance, tax
Petrol

Work Out What You Can Reduce

What can you sensibly reduce? I don’t mean declaring that you will go from £1000 a month on your food shopping to £100 a month, because this is not something that I would recommend – not because it’s not a good idea, but something so drastic can be difficult to accomplish when you are first starting out on improving your finances.
Work out what can be reduced sensibly, and if you find that you were in fact able to reduce it by much more than that and still be happy, you can reduce it even more the following month.

What Income Are You Working With?

Again, internet banking or your bank statements will come in handy for this. Many people are not aware of how much they are being paid, and never check their wage slips. You could be getting paid less than you realise after paying tax and pension contributions.
Include all income, including benefits that you may receive. Don’t include income that you are not 100% sure that you are getting.

Even if you have a variable income, this system can still work for you because it is using last months income to pay this months expenses, so you will know what you are working with.

Why Should I Do The Zero-Sum Budget?

As mentioned, many people (looking at you again, husband!) have their money come in, and expenses go out. They are then sat looking at their bank balance which says they have £500 left in their account (for example). The temptation to spend it is too strong.
For myself, I find it easy to assign all of my money a place to go, because it’s what I have been doing for years and I rarely buy anything. But if you are just starting on your journey of financial success, it can be a difficult thing to do to use that spare cash for something smart.
If you are wondering where the spare money after bills should go (this is if you have got your bills as low as you possibly can as well) – these are some ideas:

  • Start an emergency fund. There are variable suggestions of how much this should be, but it’s basically there to help you in case of an emergency such as losing your job, death of a relative, car breaking down suddenly, all of your things in your house breaking down at the same time (why does it all break at the same time?!).
  • Planned spending. This is where a lot of people go wrong (hello again husband!) because they think of savings and planned spending as being the same thing. It’s not. Planned spending is saving for things that you will be spending money on, such as saving up for a new car. This money will be going on your car, and your car only. It won’t help you with anything else, only your car. Another example could be saving for a holiday. You could save all of your money for your holiday – and that is an amazing achievement – but once you’ve paid for the holiday, it’s gone. This is therefore planned spending and should be assigned a different category.
  • Retirement Fund. This is a discussion for another blog post, but saving for your retirement is more important now than ever, no matter what your age. There are continual changes to pensions, and some people have found that they no longer have a pension, or they do not have anywhere as much as they thought they would to live on. We need to think of our future self, even if it feels incredibly far away.
  • Paying off your debt. If you have debt, you need to treat it like an emergency. Far too many are paying the minimum payments and thinking that is ok. It’s not. Pay off your debt, and you can make your life so much more than you could dream of.
  • Starting your own business. How many of us dream of having our own business? I am a huge advocate of everyone becoming entrepreneurs and running our own businesses. It is possible, and a lot of companies require only a small fee to set up.
  • Financial freedom. Again, one for another blog post, but this is something that I think it really important, and needs to be addressed more in this country. There is a belief that we must all work until we are too old to work anymore, in the same place, doing the same thing. We need to realise that there is a different way of going about life, and that can include retiring in your twenties. It doesn’t have to be in your twenties, especially if you are older than that already! But there is the potential to retire from the rat race and do whatever you wish, at any age.

If you don’t give every part of your money a category, it will get spent, and probably not in a way that will benefit you. I personally have been doing this for years, and thought it was the norm until I dove a bit deeper into other budgets, and could see that others do not always do it. I have seen people say that it was not until they started doing a zero-sum budget that it clicked for them, and they were able to manage their money.

I have a printable budget sheet that you can use, or you could use Excel if you aren’t a paper and pen gal like me!

zero sum budget

Do any of you use the zero-sum budget, or want to give it a go?

 

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