In order to build wealth, you need to build a gap by having your income exceed your expenses. Using a budget is perhaps the most powerful tool you can use to analyze this gap. Why the budget? The budget tells you exactly what your money is being used on. To put it simply, it shows your cash inflows and outflows of any given month.
Unfortunately, most people do not take advantage of this effective tool. Some people scribble numbers on a piece of paper or excel spreadsheet while others store all this data in their head. In most cases, people see budgeting as this boring chore. What most people don’t realize is that using a budget is the fastest way to figure out their financial system and develop a plan on taking control of their finances.
Before I created my 2017 goals, I developed a budget. More specifically, I used a zero sum budget. The goal of this is exactly what the title says, sum to zero.
To be honest, I did not even know what a zero sum budget was until I created my 2017 budget. Here is how a zero sum budget works.
The Race to Zero
Start by entering your income for the month. From here, minus any expenses and see what is your net income which is income after expenses. If you cover all your expenses during the month and have $500 left over you are not done yet. You see, the purpose of a zero sum budget is to give your money a purpose. This is why I personally love this type of budget.
Rather than letting the money sit in your bank, you must tell that $500 where to go. You must assign it a purpose. Some ideas are using the money to help get you out of debt, build your emergency fund, invest in retirement, or grow your wealth. Give every dollar a purpose. The more money you have working for you is the less money you need to work for in your everyday job.
According to a Dave Ramsey survey, people who used a zero sum budget pay off 19% more debt and save 18% more money. The sooner you implement a zero sum budget as part of your financial planning, the sooner, you begin supercharging your wealth. Remember, every dollar counts.
Analyzing A Zero Sum Budget
One of the biggest problems I have found with budgets is that the majority people may create a budget but never actually analyze the numbers. If you are spending more than you make each month you need to start cutting back. If you went over your monthly food allowance you need to question why. Did you eat out more this month? Is this how you normally spend or is this a one off event?
This is the type of analysis that helps improve that gap I spoke about earlier. When I was reviewing my January budget I started by analyzing every single line in my budget beginning with the income. My income was roughly $200 higher than I originally budgeted, due to my employer reimbursing some expenses I incurred. From here I went down every line item to ensure that I was under my budgeted amount for each item.
Some items I went over on were Roth IRA contributions as well as miscellaneous investments. Obviously, these are investments that I hope will appreciate over time so this is not a concern to me. However, I found myself agitated as I dipped into my emergency fund to purchase a stock. This showed me that I need to be more discipline with my money as my emergency fund is not supposed to be used for this purpose.
Give your money purpose! Creating a zero sum budget will give you the “why” to help you analyze your gap between income and expenses.
What type of budgeting do you use? How do you give your money purpose?