Have you heard of a zero-sum budget? If so, do you know that it can be the answer to your money problems?
Maybe you routinely have more month than money. Or, maybe you want to save more money but don’t know how.
In almost any money situation, a zero-sum budget can help you be more successful with your money.
What is a Zero-Sum Budget?
A zero-sum budget is a tool that requires you to assign every penny of income a place to go. This leaves you with no money in hand at the end of the month.
That means there’s a smaller chance you’ll waste money during the month.
How Does a Zero-Sum Budget Work?
The goal of a zero-sum budget is to give every dollar of income a job. For example, let’s say that your net income for the month is $2,000. After writing down each expense for the month, your budget looks like this:
|Amount of Expense
|Emergency Fund / Investing / Etc.
$2,000 income – $2,000 ($1600 + $400) in expenses and savings = $0
In other words, you’ll earn $2,000 for the upcoming month, but your total expenses for the month will only amount to $1,600.
Your job, in a zero-sum budget world, is to figure out ahead of payday what you’re going to do with that extra $400.
Many people would just keep it in their bank account. But that gives you too much leeway to fritter it away on unnecessary expenses.
With a zero-sum budget, every dollar that comes into your pocket has an established destination. Consequently, with your extra $400 for the upcoming month, you now have some decisions to make.
Will a portion go into your emergency fund?
Will you sock extra away into a retirement vehicle such as a Roth IRA (this scenario assumes that your company 401k is a part of your pre-tax expenses)?
Similarly, will you invest some of the extra money in a non-retirement investment?
Maybe you’ll stash it away for a future expense, such as a home purchase or a replacement vehicle purchase.
The goal, you see, is that the money isn’t just left lying around. Rather than letting it sit without a purpose in your checking account, you give that extra money a job.
You might wonder why you can’t just leave it in your checking account. The answer is that money without a purpose will almost always disappear on something wasteful or unnecessary.
Rather than being used for good, money with no purpose often ends up being whittled away on lattes, dinners out and other non-essential items. These purchases are often ones you hadn’t planned for in your initial budget breakdown.
Planned expenses like these are fine. In contrast, unplanned expenses can equal lost money. What can that lost money mean? Let’s do a “what if” scenario.
What Happens to Money Without a Purpose
Let’s say that instead of letting that money sit around waiting to be spent, you put $200 of the extra $400 into the S&P 500.
The S&P 500 has averaged a 10.53% annual return over the last five years, according to Morningstar.
Let’s assume for the sake of this example that you’ll get the same return over the next five years.
If you were to take that $200 a month and put it into the S&P 500, you’d have $15,940 in your investment account, including a gain of $3,741.
In contrast, you could just leave that $200 a month in your checking account to be piddled away on stuff you’ll never remember in five years.
Now let’s see what would happen if you invested the whole $400 each month into the S&P 500. You’d have $31,881, or a profit of $7,481.
In contrast, you could enter year five with nothing to show for your extra cash but a latte addiction and some clothes that you’ve long since tired of.
Budgeting is definitely personal. For that reason, I’m a huge advocate of value-based spending. More on that in a minute, but in short, with value-based spending, you use your money in a way that most fits with the values you hold dear.
How much money do you earn that simply blows away in the wind because it doesn’t have an assigned purpose? Certainly, many people can attest to the fact that a lot of their monthly income does just that. It disappears into “I don’t know what” — the black hole of unplanned spending.
Spend-Tracking Your Money
If you’re unsure about whether you have lost money each month, consider this activity. For the next two months, write down every dime you spend and what you spend it on. Write down every latte purchase, drive-through run, big box store spending spree, etc. (There are apps that make it easier to track your spending.)
Do that for 60 straight days. When you’re finished, add up all of the unnecessary expenditures that just sort of happened.
That will give you an idea of how much money you lose each month to potential wealth accumulation. Furthermore, it will help you discover ways to spend less on wasteful items.
I’ve been spend-tracking my money for over six years now. It’s provided a great way for me to be better with my money.
I can look back at the end of each month and see where I could have spent less and rerouted those funds toward wealth accumulation, debt payoff, etc.
As a result, I can tweak my budget and my habits to better reflect my goals.
Spend-tracking, when combined with value-based spending, gives me a healthier financial picture.
Value-based spending is a way to use your money so that it reflects what matters to you. Note that there are no right or wrong answers in your budget, as long as you are paying your bills and fulfilling your financial responsibilities.
However, anything left over should be spent in a way that’s important to you. Money is a tool to bring value to you.
So my question to you, my friends, is are you spending leftover money in a way that brings value to your life?
If not, the zero-sum budget can help you. You can use it to budget for spending categories that are important to you. It helps to understand the recommended budget percentages for different categories of spending.
Spending your money on lattes is fine as long as that’s what’s important to you. Maybe it’s an indulgence you allow yourself once a week, or only if you’re hanging out with friends. If so, put it into your zero-sum budget.
Otherwise, divert that money into a category that’s more important. Maybe that’s a vacation fund or a stash for money you’d like to donate to a cause you believe in. That’s value-based spending.
In conclusion, a zero-sum budget can be a great way to do more with your money. Maybe it seems a bit overzealous to budget your money down to the last dime.
However, I think you’ll find that planning for each dime or dollar can help you reach more monetary goals. Furthermore, it can help you minimize wasted money.
Therefore, the zero-sum budget is most likely worth the effort you put into it. You can use it to reach financial goals such as paying off debt or saving for a large purchase such as a vacation, a car or a house.