I use a zero-sum budget. Here’s how it works


Holly Johnson

Holly Johnson

Blog author Holly Johnson

Published August 28, 2017|4 min read

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Once upon a time, my husband and I spent all of the money we earned and then some. With no budget, no plan, and no specific savings strategy to help us, we lived paycheck-to-paycheck despite earning plenty of money. Fortunately, we grew up and started to take life seriously several years into our marriage. By the time we were in our late twenties, we were using a monthly budget, saving plenty of money, and on our way to a lifetime of debt freedom.

I’m sure you’re wondering what happened in our lives to force such a complete and drastic change. For us, the idea of having kids caused us to take our lives more seriously. And duh, we started to realize we weren’t getting any younger.

I also discovered a budgeting method that works rather well for individuals who have ample financial means but lack a solid plan. Enter zero-sum budgeting, the savior for our finances.

##What is zero-sum budgeting?

Zero-sum budgeting isn’t that different from traditional budgeting where you write down all your expenses and compare them to your income. The big difference with this budgeting strategy is in how you budget your money and the ultimate goal.

Here’s how zero-sum budgeting works:

  • You live off last month’s income. Instead of budgeting your money as the month progresses, zero-sum budgeting requires you to build up a month’s expenses in savings then pay yourself that amount as a salary on the first of the month.

  • Your goal is ending the month with an account balance of zero. With zero-sum budgeting, you take last month’s income and spend every dollar on paper. By the end of the month, you should have very little leftover in your checking account.

  • Pay savings and investments as if they were regular bills. Since you have to “spend every dollar you earn,” both savings and investments are paid as bills. Prioritizing these payments in your budget ensures your savings goals don’t fall to the wayside.

  • Save all your paychecks. Once you get to the point where you’re living off last month’s income, you start saving your entire paychecks for use in future months.

##An example of zero-sum budgeting

When we first started using a zero-sum budget, we earned less money but had more bills to pay than we do now. Since zero-sum budgeting requires you to “spend” every dollar you earn, however, it doesn’t matter. The more bills you have, the less you’ll have to allocate toward savings and investments. But, as you pay off debt, you learn to reconfigure your monthly zero-sum budget so you’re saving and investing more.

It’s a natural progression, and one that leads to amazing financial results if given enough time. Here’s an example of how zero-sum budgeting might work its magic over many months or even years.

Let’s say a couple is earning six figures and wants to save more and pay off every soul-sucking ounce of their credit card debt. By using a zero-sum budget, they would be forced to prioritize their savings and investments while planning their spending around what’s left.

Earning six figures may net $8,333 per month, but this couple is only bringing home around $5,833 per month after paying 30% in taxes.

Before they start using a zero-sum budget, their monthly income might be spent like this:

  • Mortgage $1,500

  • Car Payments $800

  • Utilities: $300

  • Gas: $150

  • Insurance (can't forget this!): $200

  • Restaurant Dining: $1,000

  • Groceries: $500

  • Miscellaneous Spending: $1,000

  • Credit Card Bills: $500

Total: $5,950

At this rate, the couple is spending all their money and actually going into more debt every month – and all without saving anything meaningful for the future.

Once they sit down to create a zero-sum budget, tracking their spending forces them to come to terms with how crazy they’ve been. After all, forking over $1,000 for restaurant dining and another $1,000 for random purchases doesn’t make a lot of sense.

With their new zero-sum budget, they learn to prioritize debt repayment and saving so they can build up a one-month savings cushion to use for zero-sum budgets in the future. They also learn to eliminate waste and divert more dollars to their financial goals.

Here’s what their next month’s zero-sum budget might look like once they rethink how they’re spending:

  • Mortgage $1,500

  • Car Payments $800

  • Utilities: $300

  • Gas: $150

  • Insurance: $200

  • Restaurant Dining: $200

  • Groceries: $500

  • Miscellaneous Spending: $200

  • Credit Card Bills: $1000

  • Savings: $983

Total: $5,833

As you can see, using a zero-sum budget forced this couple to reassess their goals. They quit dining out so much, learned to stretch their grocery budget further, cut their miscellaneous spending, and boosted their savings and debt repayment. At this rate, they’ll be debt-free and have an ample savings cushion (i.e. an emergency fund) in no time.

##Why zero-sum budgeting works for us

Our experience with zero-sum budgeting with similar to the example offered above – with a few caveats. Not only did we have some credit card debt, but we had student loans, too. We also had to build in the costs of daycare when we had our first child at age 29.

Still, the outcome for us has been nothing but amazing. Now in our late 30s, we’re entirely debt-free (aside from a small mortgage) and saving a large percentage of our income. We splurge on “stuff” or “experiences” we want from time to time, but we always list the expense in our zero-sum budget.

It’s amazing what budgeting – and specifically zero-sum budgeting – can do if you give it some time. With just a pen and paper, we learned to be more intentional with how we spend the money we earn. We also learned how to reduce financial waste and divert our dollars to help us achieve our goals.

Most importantly, we learned that we are the only ones who have the power to improve our financial future. With our zero-sum budget on our side, we are finally in charge.

Want to make a digital budget? We've got a review of 8 apps that can help families save money here.

Image: Geber86