Zero-Sum Budgeting: Everything You Need to Know

Financial stress is a problem.

30% of Americans are “constantly stressed” about money, according to a bank survey. And 85% say they’re “sometimes stressed” about finances.

If you find yourself pulling your hair out about money, take a deep breath. It doesn’t have to be this way.

You can take control of your finances, reduce your daily stress, get on the path to financial security. You just need a plan.

Enter zero-sum budgeting, a popular budgeting strategy for households. With zero-sum budgeting, you account for every dollar you earn. In its simplest form, a zero-sum budget involves one formula:

Income - expenses = 0

This may confuse you if you’re not familiar with zero-sum budgeting. But the budgeting method considers things like savings and investments as expenses. That means every dollar has a purpose on the budget spreadsheet, even if it’s put into a checking account.

In this article, we’ll cover how to make a zero-sum budget and the benefits the strategy can have towards achieving your financial goals.

How to create a zero-sum budget

There’s a reason why massive investment firms, such as 3G Capital, utilize a zero-based budget. It’s simple yet intelligent and can keep you from wasting money or missing opportunities.

Because with a zero-sum budget, you give every dollar a job. The goal of the budget is for monthly income minus monthly expenses to equal zero.

To make a zero-sum budget, do the following:

  • Live off last month’s income: Pay yourself on the first of the month. This allows you to plan one month ahead, instead of budgeting as the month progresses (which can get confusing to track).
  • Save your entire paycheck to use for next month: Since zero-sum budgeting involves planning ahead, get in the habit of saving it all first. For instance, if you receive your March paycheck on the 28th, allocate for your April budget on the first of the month.
  • Aim to end the month with a balance of zero: Every dollar must go somewhere. Within your worksheet, treat savings and investments as regular bills. This will ensure you “spend all your earned income.” It will also help you save for the future.

If you still have money left over at the end of the month, that’s great! But you should also put that money to work. You could build your emergency fund, pay off debt, or set aside a bit for retirement.

Remember: There is something called the time value of money. Allocate current extra money to paying off debt and saving for the future, and you’ll reap the rewards. Money has earning capacity!

But if you’ve fallen into the red, you should find out where you overspent. As a report published by the Motley Fool shows, people believe they can reduce expenses on things like:

  • Eating out: Nearly 69% of consumers think they can save money on dining.
  • Clothes: Almost 14% of people think they waste money on clothes.
  • Alcohol: Over 25% of folks say they overspend on alcohol.

So examine your budget thoroughly. Find out where you can save—whether through groceries, car payments, or recurring subscriptions. As an example, you could probably save hundreds more per year with a cheaper cell phone bill and internet plan.

You may even be able to save by consolidating your debts. If your credit score or financial situation has improved recently, consolidating multiple debts into one payment can simplify your finances and sometimes lower your monthly payments. Read our blog about how debt consolidation works now.

Example of a zero-sum budget

To give you an idea of how to make a zero-sum budget, let’s do an example. Let’s assume Bobby earns $5,000 per month in after-tax income.

Before making a zero-sum budget, his expenses average the following each month:

  • Rent: $1200
  • Auto loan: $400
  • Utilities: $250
  • Cell phone: $50
  • Travel: $300
  • Dining, travel and entertainment: $800
  • Groceries: $300
  • Credit card debt: $500
  • Clothing, household items, electronics, misc. expenses: $400
  • Student loan: $500
  • Savings for a house: $400
  • Retirement savings: $300
  • General savings: $200

Total: $5,500/mo.

As you can see, Bobby is spending $500 more than he makes each month. This will make it increasingly harder to accumulate savings and eliminate debt. In fact—it will just lead to more debt.

Not sure how much you should be spending? Take a look at the 50/30/20 budgeting strategy, which classifies your expenses as needs, wants, and savings to give you more control and create a better balance.

So to take control of his finances, Bobby starts utilizing the zero-sum budgeting strategy. He figures out that he can cut down on several expenses. With zero-sum budgeting, he then reallocates his expenses like this:

  • Rent: $1200
  • Auto loan and insurance: $200
    • Bobby downgrades to a cheaper used car and saves $200/mo.
  • Utilities: $250
  • Cell phone: $50
  • Transportation: $200
    • Bobby takes public transit and carpools, saving $100/mo.
  • Dining, travel, and entertainment: $400
    • Bobby eats at home more often and saves $400/mo.
  • Groceries: $200
    • Bobby uses coupons and buys generic brands, saving $200/mo.
  • Credit card debt: $500
  • Clothing, household items, electronics, misc. expenses: $100
    • Bobby reduces spending on misc goods, saving $100/mo.
  • Student loan: $700
  • Savings for a house: $500
    • Bobby pays $100/mo more into his house savings.
  • Retirement savings: $500
    • Bobby add $200/mo more to his retirement savings.
  • General Savings/mo: $200

Total: $5,000

As you can see, using a zero-sum budget helped Bobby reassess his goals. The budget leaves him with zero remaining dollars at the end of each month—but he’s in much better shape.

In fact, he’s paying off debt faster and building savings more quickly.

Making zero-sum budgeting work for you

The goal of budgeting is to empower you to live a healthier financial lifestyle. Different budgeting methods work for different folks. But the zero-sum budgeting strategy can work for anyone.

That's because a zero-sum budgeting habit teaches you to analyze how every dollar is spent and track your spending diligently. Over time, you internalize these habits, and your savings will reflect that.

The best part? You don’t need fancy spreadsheets or software to do zero-sum budgeting. A pen and paper are fine.

With discipline and consistency, a zero-sum budgeting strategy can work wonderfully for you. And you’ll be on your way to financial security and a better life.