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The Power Of A Zero-sum Budget

There's been a lot of talk about budgeting here at Get Rich Slowly. For instance, Kristin recently wrote about her adventures using the envelope system. I wrote about the reasons your budget might be failing. And, a variety of guest posters and staff writers have touched on the topic with articles like these:

How I kept to my budget and still have everything I want

Budgeting: The Most Important Thing You Can Do With Your Money

How to Build a Better Budget

When One Partner Won't Budget

However, among the articles on budgeting systems and strategies, there has been very little written on using a zero-sum budget, which happens to be the budget that I use and love. So, I wanted to write about why I'm a zero-sum budget enthusiast, why I think they work so well, and how you can harness the power of the zero-sum budget for your own financial well-being.

Why should you use a zero-sum budget?

In my opinion, a zero-sum budget is superior because it forces you to "spend" every dollar that you make. And, no, I don't mean you should spend it on dinner at Outback or a weekly mani/pedi. Instead, you allocate all of your earnings into the different categories that your finances require. You don't need an Excel spreadsheet or a complex software program to use a zero-sum budget. In fact, all you really need is a pen, paper, and the desire to begin budgeting for your benefit. So, how do you begin using a zero-sum budget? Follow these simple steps:

Step 1: Determine how much you make

Whether you're paid hourly or salary, you need to figure out how much money you make on any given month. So, you need to ask yourself a few questions. For instance, "How many paydays fall within this month?" And, "How much will each paycheck be?" For salaried workers, this should be fairly easy. For those with a fluctuating income, it can be much more difficult. However, one of the easiest ways to make a zero-sum budget work for your family is to get all of your finances "one month ahead." Easier said than done, I know. But, using that method, a fluctuating income won't matter as much. Since you're using this month's income for next months' bills, it will be much, much easier to plan.

Step 2: List your bills

Once you determine how much money you'll make this month, you need to figure out how much money you need to spend next month. Using pen and paper, write out all of your monthly bills, estimating bills that fluctuate like utilities. You'll also need to set a reasonable allowance for spending categories that you're trying to keep under control (like groceries and gas). And, don't forget about bills that are paid quarterly or seasonal expenses. The best way to make a zero-sum budget work is to include everything.

I'll use a generic version of one of my old budgets as a real-life example:
  • Mortgage: $1426
  • Electric: $200 (estimate)
  • Gas: $25 (estimate)
  • Groceries: $500
  • Daycare: $500
  • Internet: $35
  • Fuel/Miscellaneous: $200
  • Cell Phone: $55
  • Health Insurance: $377
  • Life insurance: $77.31 (paid quarterly)
  • Trash: $56.25 (paid quarterly)

Total: $3451.56

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