How The Zero Sum Budget Can Save You Money
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!
Download the printable budget planner to get started today!
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 month’s 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 over-complicated 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 that 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 every day.
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:
Gas and Electric
TV, phone, internet
Car insurance, tax
You can use cash envelopes to divide the amounts – here are my really pretty ones!
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 month’s 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 as 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!
Do any of you use the zero-sum budget, or want to give it a go?
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You explained this very well. I too use the zero based budget with a tiny $15-20.00 buffer in my account. It shows that you do have control over your money, and in some cases it encourages me find side hustles to pay for things I don’t have enough money for.
Thank you – and YES I am a big fan of using side hustles to pay for things!
Trying to figure out ways to get more cash in to go towards the extra lifestyle things. However, we are firm believers of putting aside savings first, having gradually built up our automatic long term savings, now that we are both over 50, to the max in 401K and max in our Roth. It isn’t always easy some months as there seems to be more month than money, but we just try and do without, or come up with creative alternatives. then, when the tough month is over, I think, well that wasn’t so bad.
Sounds good Sam! Do you try and make extra money on the side?
We just started the zero sum budget at the start of the new year. I really can’t see us doing it any other way even when we get our debts payed off. I find it so helpful and calming knowing that every dollar has a place.
I agree Jennifer!
I love this budgeting idea! I really struggle with following a budget as a college student, but I would love to start using a zero sum budget to get ahead on my student loan payments. Thanks for sharing, xo <3
Thanks Haley, let me know how you get on?
This is really interesting budget method, it is good and easy if you are beginner into budget world however no I’m focusing on savings!!!
Thanks Giulia, it can still be used if you are saving 🙂
Great budget you got here! I’m a little ashamed to say I hadn’t heard of this until now, but what a wonderful and simple idea it follows. Making every dollar work for you so you won’t be tempted to splurge it unnecessarily!
Thank you – hope it helps!
Awesome tips. I totally agree, zero based budgeting is indeed a brilliant way to allocate your money resourcefully. Before using this method of budgeting, a large percentage of my money was wasted on frivolous items.
I agree, I was exactly the same! It’s so easily done.
Love the idea, a great alternative to the 50 / 30 / 20 rule that’s for sure! 😀
Thank you Cora! I love it!
I was that person who paid the bills and looked at my bank and thought “party time!”
i never had a bean to save at the end of the month which fed my excuses even further, I didn’t earn enough, my outgoings were too high! The truth is, I had no idea where my money was going, and that is exactly what a budget does. It tells your money where to go before your feelings do!
Completely agree and empathise with you there! So easy to spend all of the money ‘left over’ after bills!
Love seeing people referring to Dave Ramsey. I’m a fan of his. I feel that if more people followed his general rules they would be so much better off.
First time on your site. Really like it. so much good content. Congrats.
Thank you – and thanks so much, that’s really kind of you to say!
Zero Sum Budgeting is our favorite method as well. It ensures that you don’t skip on the important things like saving and depositing into retirement funds. I love your comments in “Track Your Expenses.” Estimating your expenses is like estimating your calorie intake when dieting- we’re almost always wrong, and sometimes by a landslide. We all like to think we demonstrate more self-restraint than we usually do. Tracking it forces you to have a real, honest look at your habits. Thanks for the post!
I completely agree Lindsay, and thanks!
Thanks for a great article! I guess I’ve been using the zero-sum budget without even realizing it. But pretty much every dollar is accounted for at the beginning of the year, including categories like travel, and “fun” (which my wife teases me for since I literally use Excel to plan out the “fun” in my life). It’s a great way to stay on target, without having the temptation to blow “leftover” money after required expenses are taken care of. I think it’s important to budget for the things that are “fun” in life too–just keep it to a reasonable amount for each item. It gives you a little something to look forward to each month.
Same, I didn’t realise that I was doing it either! It’s such a good way of budgeting.
I also do the Zero Sum Budgeting and love it. It keeps you on top of finances.
It really does!
I didn’t know o was doing this but it seems I am! There’s not too much left over at the moment but I am working on that 😀
I was the same – it’s good isn’t it!
Most of my money now gets placed in the financial freedom bucket either through shares, funds or hopefully soon property investments.
In the not too distant past not putting my money away meant the pubs and clubs of the UK got to have my cash. All that was left every morning when I woke up was a few coins left for me by the “change fairy” 😀
That is good to hear!