It’s time we talk about budgeting. No, not about how to cut $10 here and there by ditching coffee shops or sacrificing avocado toast. Instead, I want to talk about the Zero Sum Budget and how this budget can help you stop wasting money.
This budget is not designed to nitpick at every monthly expenditure.
Instead, the Zero Sum Budget focuses on balancing your income and expenses by utilizing every dollar that goes in and out of your bank account.
If effect, the Zero Sum Budget requires that every dollar you make is put to work for you.
Every. Single. Dollar.
“Put to work” can mean many things, and we’ll get to that, but just think about that concept for a moment.
Every dollar you earn should be put to work. Not wasted away in a checking account or 0.01% interest rate savings account.
If you are not utilizing every dollar you earn, then you are wasting it.
Ask yourself one question: “Is there money left over in my checking account at the end of the month?”
If the answer to that question is “not sure” or “yes”, then the Zero Sum Budget is for you.
It could be $0.25, $250, or $2,500. The point is, whatever the value, it’s being wasted if it is not being put to work.
The Zero Sum Budget
As stated, the goal of the Zero Sum Budget is to use every dollar earned. Put another way, the goal is zero.
Zero dollars left over in your budget each month.
The Zero Sum Budget method prescribes that every single dollar is allocated toward something.
But it’s important to understand what Zero means. Zero means that if you make $3,000 a month and typically spend $2,800, there is an extra $200 that needs to be taken care of.
Assuming that the $2,800 was spent on typical living expenses such as housing, food, and entertainment, the remaining allocation should be aligned towards debt repayment, savings, and investment.
Here is an ordered list for you to consider:
- Pay off high interest debt like credit cards or student loans
- Contribute towards an emergency fund*
- Fund retirement accounts like a 401(k) or IRA
- Invest in low-cost index funds through a taxable investment account
- Other – real estate, business, travel fund, etc.
By telling every dollar where to go, you are optimizing your finances and increasing your savings rate at the same time.
Stop wasting money
A great thing about the Zero Sum Budget is that it is easy to start right away. You can do it in as little as three steps, and you may already be doing two of them.
- Track your monthly expenses**
- Track your monthly income**
- Subtract your expenses from your income then allocate the rest to one or more of your goals
Let’s review the example scenario above to see the power of this way of thinking. Recall, the example has an individual making $3,000 a month and spending $2,800, leaving $200 extra each month.
For simplicity’s sake, the values are annualized and we assume they stay level. We will also assume this person has no high-interest debt and has a fully funded emergency fund, leaving them somewhere between Step 3 and Step 4 on “put your money to work” list above.
Here is what their potential saving could look like if invested for the next 35 years:
Annualized, that $200 a month is equal to $2,400. Invested at 7% annually over 35 years and that savings is now worth over $350,000.
This is a simplified and long-term example, but it shows the power of utilizing every dollar you make.
For a copy of the Google Sheets spreadsheet I used to run these values, enter your name and email below and I will send them to you.
Zero waste. 100% work.
Instead of viewing your budget only as the amount you can spend on things, view your budget holistically. Account for the inflows and the outflows. By allocating every dollar, you are able to prevent careless spending.
If you follow the Zero Sum Budget, your goal should be zero.
Zero waste. 100% work.
Don’t waste your money by leaving your left overs to spoil. Take those leftovers and make something with it.
What are your thoughts?
Do any of you follow a Zero Sum Budgeting approach? How has it worked for you?
– – – – – – – – – – – – – – – – – – – – – – – – –
*I use an online savings account for my emergency fund since it pays 1.3% interest. It’s still lower than a 2% inflation target, but it sure beats big banks savings rates of 0.1%.
**I suggest Personal Capital or Mint (non-affiliate links) to track my income and spending, along with investments and any debt. I find Personal Capital more to my taste, but to each their own. It’s worth it to try both if you haven’t tried one yet.