A budget helps you get a clear idea of where your money is going. It helps you identify where you’re overspending so you can cut back your expenses and put money back in your pocket.
You are then in a better position to be able to determine where to put your income. The savings you make from implementing a budget will help progress toward your financial goals at a faster pace.
When you start a budget it can be hard to know the best way to approach in managing where your finances go. I recently published a post on the 50/20/30 budgeting rule. This budgeting rule defines an approach to dividing up your income. It’s an extremely effective and simple way of dividing up your income.
In that post, a blogging friend of mine mentioned the zero sum budget in the comments section. I’d heard about the zero sum budget but had never investigated how it worked. I decided it was time change that and do some reading.
To my surprise, I was already budgeting in this manner. To me, it’s a common sense approach to getting a grip on your finances and putting every penny to work. Let me explain:
The Zero Sum Budget
The zero sum budget is sometimes called the zero-based budget. It boils down to ensuring that every cent or penny of income you receive is assigned a task. You’re giving each coin a job. Every cent is used in your budget, leaving a zero balance.
If a particular area of your finances needs additional funds you adjust another to compensate. The budgeting system prevents waste and maximises your income.
The technique is powerful. Dave Ramsey conducted some research and found that people who work to a zero sum budget vs those who don’t pay off 19% more debt and save 18% more!
Those are figures you can’t ignore.
I run a fortnightly budget because I get paid each fortnight. I track my spending on a weekly basis so that I can keep a close check on my progress. This helps me take corrective action quickly and keep on target with my financial goals. Under the zero sum budget, I make sure that I have nothing left over at the end of my fortnightly cycle.
The zero sum budget also requires that you use last month’s income to pay this month’s expenses. The ultimate goal is to ensure you end up with a zero balance left over prior to your next pay cycle.
If you end up with $200 left over at the end of your budget period you aren’t finished. You have to apportion that money somewhere!
If you’re carrying debt you use any money you have leftover to pay off debt. If you need to build an emergency fund, it goes there. If you don’t have debt you place your money into a savings or investment account. If you don’t you’re missing out on putting your money to work for you in order to grow your wealth.
When your budget is thought through effectively you shouldn’t have any money left over that is going to waste.
If you find you don’t have enough money, well then it’s time to start cost cutting.
Under a zero sum budget, you allocate your earnings to different categories. This differs very little to the recommendations I’ve made for general budgeting.
I have a post that shows you how to create a budget and I even give you a copy of my budget planner spreadsheet when you sign up to my mailing list. My budget planner spreadsheet will give you head start.
If you sign up to my mailing list you’ll receive a copy of my budget spreadsheet. This budget planner spreadsheet contains weekly columns to track your income and expenditure. At the base of these columns shows the difference between income and expenditure.
Under the zero sum budget, you need to make each of these columns equal zero.
Because I run my budget fortnightly, but track weekly, you’ll see I also have a row at the base for the fortnightly difference. This is where I try to make my budget equal zero.
Whichever time period you run your budget too if the difference between your income and outgoings shows a negative balance you need to adjust your outgoings to compensate.
The power of zero sum budget
The power of the zero sum budget is not only in the fact that you are putting every penny to work for you. The real power is that once you’ve implemented the zero sum budget every decision you make about your budget thereafter requires a stringent review to keep to it.
Because you have already assigned your money to a task, if you need to modify expenditure in some way you must review other categories to compensate.
For example, if you have to increase your medical expenses or travel expenses in a particular period, you may have to reduce down the money you spend on entertainment to allow the increase elsewhere.
This forces you to keep within your income boundaries. You’ll work to keep from overspending and most importantly you’ll be ensuring each penny or cent is doing a job that pushes you toward achieving your financial goals.
If you sit down on a regular basis to update your budget, as I do, this decision-making process will become focussed and intentioned. Your financial goals will drive your decision making.
Using a zero sum budget for regular earners
If you’re a regular earning, like me, the zero sum budget will be easier to implement and maintain. Those of us with a regular salary generally see the same level of income coming in each period.
The predictability of income and expenses makes planning easier and enables us to get pay next month’s expenses from this month’s income.
Using a zero sum budget for non-regular earners
If you’re a non-regular earning you may find the zero sum budget requires a little more legwork from you. But there are some ideas on how you can make this work.
I’ve been in the position where I’ve had a variable income. I was working as a freelancer web developer back in the day and when there wasn’t a solid pipeline of work adjustments had to be made. Back then I wasn’t running a family budget, but I remember the fluctuation of income well.
The best tip I can give is to ascribe yourself an income. Take each earnings from each month and place them into a separate account. From this account assign yourself a wage.
If you’re a freelancer, for example, you should have a reasonable idea of what income you need to generate. You should be generating a pipeline of work and you should be running a cash flow budget in your business to help you manage seasonal trends in work or expenses. If you’re not, you need to start managing that better!
If you’re doing on demand work, like waiting or bar work where you can get big fluctuations in work then you should look to budget against the minimum income you’ll generally receive each week and ensure your employee keeps you within that threshold.
In either case, if you can be sure you can generate 16 hours of work per week then this is the weekly budget you can operate against. If you then earn 20 hours one week you put that money ahead for the following week, or weeks, in the event you don’t get 16 hours one week. This will bake consistency of income into your budget.
If you think putting money aside from funds you have “left over” isn’t stringently adhering to the zero sum budget I’ll correct you. It is. You are setting your budget up to be more manageable. Putting money into a separate account for income in this way is just like putting money aside for savings. You are still making your money work.
In fact, it’s wise to put this money into a savings account then the extra 4 hours of income is put to work earning interest.
Yes, it may be better put to use on high-interest debt like a credit card, if you are carrying debt. However, you’re creating a bed of savings to ensure you’ve got enough to live on. In these circumstances, your priorities may be different.
As your savings build up, say for example you’ve built up a couple of weeks of income, and you feel that there’s a reliable albeit variable stream coming in. You can start to use your extra income to service debt. Your income savings will be your buffer.
Give the zero sum budget a try
Just like me, if you are already budgeting you may realise that you’re already using the zero sum budget yourself. I was adhering to it by ensuring every penny went somewhere sensible, I just never realised what I was doing had a name. I can attest that it’s a really powerful approach to budgeting and one that can be implemented with other methods like the 50/20/30 budgeting rule.
Let me know in the comments if you’ve tried the zero sum budget and how it’s helped you? Would you have any tips or guidance for others, particularly those on a variable income?