The Power of a Zero-Sum Budget

In our last article, we discussed the power of budgeting. In this article, we explore my favourite way to formulate your budget. It is called a Zero-Sum Budget.

The Power of a Zero-Sum Budget

In the midst of the many articles on budgeting systems and strategies, a less publicised (but equally important technique) is the Zero-Sum Budget. This strategy involves “spending” every dollar that you make. However, you are not ‘spending’ your money in the usual sense of the word. In this situation, it refers to allocating your entire earnings into appropriate categories. The following steps demonstrate how you can apply this kind of budgeting:

Step 1: Determine your Single or Combined Total Salary

For most salaried workers who are paid on a monthly or fortnightly basis, this step is simple. Others may have to put in a little more effort if pay is based on an hourly rate, or particularly irregular. Try to work out your income as a monthly amount – you can then use the strategy of paying for next month’s bills using this month’s income. By always being “one month ahead”, you will find your budget much easier to plan and keep track of.

Step 2: Itemise Your Bills

Once you know the total amount of money coming in, your next step is to work out how much you need to spend next month for bills, groceries, everyday expenditures, etc. Be aware that some things may be yearly or quarterly expenses. Try and include everything you can think of, as the more accurate it is, the better your budgeting will be. Please find below an example list for your reference:

– Mortgage: $1,426
– Fuel/Miscellaneous: $200
– Electricity: $200 (estimate)
– Mobile Phone: $55
– Gas: $25 (estimate)
– Internet: $35
– Groceries: $500
– Life insurance: $77.31 (paid quarterly)
– Daycare: $500
– Rubbish: $56.25 (paid quarterly)
– Health Insurance: $377

Total: $3451.56

Step 3: Compare and Contrast

Once you have listed your income and expenses, you will notice how much is left over. How is this money currently being used? You may realise that you are wasting it on things you do not really need, or you may be gradually saving it. Regardless of what you decide to do with this money, the point is, you now have the knowledge of how much is left and can therefore make an informed decision on what to do with it.

For example: If a couple had a net income of $7000 for the month, a zero-sum budget may look like this:

– Mortgage: $1426
– Mobile Phone: $55
– Electricity: $200 (estimate)
– Health Insurance: $377
– Gas: $25 (estimate)
– Life insurance: $77.31 (paid quarterly)
– Groceries: $500
– Rubbish: $56.25 (paid quarterly)
– Daycare: $500
– Short-term savings: $1500
– Internet: $35
– Long-term savings: $1500
– Fuel/Miscellaneous: $200
– Holiday Fund: $548.44

Total: $7000.00

This strategy may also bring to your attention that you are actually spending every cent you earn. In this case, you might need to start considering the things you could live without. Some possible items you could cut back on are your pay TV, eating out, or excessive entertainment spending. Remember, everyone’s lifestyles and priorities are different and it is up to you how you allocate your money.

Step 4: Make a choice and stick to it

Once you know your excess cash flow, you can decide what you would like to do with the extra money. You might decide to pay off some debts, save, invest or put it towards a financial goal. The only trick is – if you decide to allocate a certain amount of money somewhere, stick to your decision and put it there straight away to avoid spending it on something else.

Step 5: Keep on top of your spending

It is important to check in every now and then throughout the month to make sure you are not spending over your self-allocated limit. Try to stick to the motto, “when it’s gone, it’s gone”. It may be painful in the first few months, but it can be one of the best ways to create good habits.

Step 6: Make Adjustments

It can take a few months before your Zero-Sum Budget is working efficiently. Do not be concerned if you have to make adjustments, as it is all part of the budgeting process. As with anything, you will become more aware of where you may need to allocate more funds to, or where you can easily shave a few dollars off here and there.

Don’t Forget

One last (but very important) part of your Zero-Sum Budget is an emergency fund. This is crucial in circumstances such as an unplanned medical emergency or car issue, and will allow a bit of leeway so that your whole month’s plan will not have to be abandoned. Just remember that when you have tapped into these funds, try to replace them again as soon as possible.

Summary

The power of using Zero-Sum Budget is that it allocates all of your money, so the opportunity to spend it on things that you don’t really need is no longer there. It helps you focus and prioritise. If you need help with your budgeting, call our office to make an appointment with one of our Team on 03 5134 1778.