Need to Control Your Spending? Try Zero-Sum Budgeting

Do you have a solid idea about where your money goes each month?

You probably can list the big-ticket items – rent or mortgage, car payment, maybe even utilities or other fixed expenses. But hundreds of other dollars have a way of vanishing and you may wonder why your bank account looks a little thin by month’s end and why your savings don’t grow as much as you’d like.

Some financial advisors recommend zero-sum budgeting as a way to track your money, resulting in finding big and little ways to cut expenses to a more reasonable level. This budgeting system is popular with millions of people.

Zero-Sum Basics

You assign a job to every dollar you make in order to prevent waste and maximize the use of your income. The premise of zero-sum budgeting is that you use your last month’s income to pay this month’s expenses. So, you probably can’t just jump into zero-sum budgeting today. You first need to have a savings cushion of at least one month’s expenses before you get started.

Once you have that cushion and launch your zero-sum budgeting plan, your income minus your outgo equal zero each month. If you end up with extra cash in the ledger sheet, you must assign the surplus dollars a job. The idea behind mindfully assigning every dollar a job is that money without a specific purpose usually gets spent carelessly. With zero-sum budgeting, there’s no waste.

How to Create a Zero-Sum Budget

A zero-sum budget takes work and practice, so get ready for some serious thought and decision making about money. And prepare to dig through your credit card statements, checking and savings accounts, cash on hand, etc., to calculate where and how much you’ve been spending in recent months. Follow these steps:

  • Track your monthly income. Use paper, an Excel spreadsheet or a free budgeting app. Your income includes paychecks, small-business income, any side hustles, cash gifts, government checks, child support, spousal support and other sources of income. List everything.
  • List your monthly expense. Include rent, utilities, food, clothing, Internet, TV, phone, loan payments, tuition, entertainment, clothing, savings, investments, etc. All of your expenses aren’t fixed, of course. Perhaps in some months, you need to make a payment for car insurance, for example. That’s why you need to budget your expenses monthly.
  • Subtract your income from your expenses. When your zero-sum budget works perfectly, this number equals $0. With your initial efforts, you probably won’t hit this goal. This just means you need to find ways to bring in more cash or eliminate some expenses, or maybe both

Of course, put any extra dollars to a good use – deposit them in an emergency fund, or put them in an account dedicated to a specific purpose, like a down payment on a new house or car, or perhaps a fun purpose like a vacation, or add more cash to your retirement investments. Budgeting takes practice, so don’t give up if it seems difficult at first.

The Pros

By giving every dollar a job, you cut down on mindless spending – no more impulse purchases. If it’s not in the budget, you don’t buy it or spend on it. When you’re budgeting correctly, you keep on top of your bills, you don’t pile up credit card debt and you save some cash every month. You don’t have to borrow from one line item to cover another.

You’re in total control of your budget, so you adjust as needed. Perhaps you find you need a bigger emergency fund because you didn’t expect your furnace to go belly up. You budget some additional cash each month for that emergency fund to cover such needs.

If you’ve never lived on a budget before, this is a great way to learn how to manage money and to truly understand your spending habits. Because you’re aware of how much money flows in and out, you stop spending what you don’t have. If you have credit card debt, this kind of budgeting will help you erase it.

The Cons

Such painstaking budgeting is time consuming. You can’t just make an overall budget for the year and forget about it. You need adjust monthly to account for any income fluctuation and any occasional bills, like for insurance premiums, car maintenance or medical needs.

If your income changes from month to month because you’re paid on a commission, or if you’re self-employed and your income tends to vary widely, zero-based budgeting is particularly challenging and may be extremely stressful.

Zero-sum budgeting may not work for you if you’re the kind of consumer who tends to rebound and engage in excessive spending when you feel you’ve been constricted.

If you share a household with a spouse or partner, you both need to commit to zero-sum budgeting or you may be in for some heated arguments.

The Bottom Line

So, are you ready to give it a shot? You might try it for a few months and see if it’s manageable and helps you make the most from your income. If your financial situation is complex, consider talking with a financial planner before you decide if this type of budgeting is right for you.

If you really need a budget because your spending is out of hand, and zero-sum doesn’t work for you, try another budgeting method. Whatever means you use to gain control of your spending, the easier your life will be.

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