Zero Sum Budget: Giving Money Purpose

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?  

15 comments… add one
  • Dividend Meter Feb 6, 2017, 8:28 am

    Good article Stefan. Zero sum budgeting has worked well for me over the years. The key was being sure to include a “fun & entertainment” category…

    • Stefan Sharpe Feb 6, 2017, 9:19 pm

      Thanks man. I think that is a category people either forget or allocated too much money too. There must always be a balance in life. It is borderline unhealthy to sock all your money away and it is borderline detrimental so life paycheck to paycheck.

  • Mrs. Picky Pincher Feb 6, 2017, 10:49 pm

    Aw, that sucks that you dipped into savings for stocks. Hopefully you’ll get a great return that’ll minimize the limited cash flow. 🙂

    At the start of my own FIRE journey I had ZERO self-control. I’m not always a big David Ramsey fan, but I did develop self-control using a cash envelope system. I learned needs vs. wants and my savings were prioritized automatically each month. I even locked up my credit and debit cards so I couldn’t use them!

    • Stefan Sharpe Feb 7, 2017, 11:54 pm

      I hope I get a good return as well. It was a good decision to take advantage of weakness but I need to control myself. I actually just opened a high yield savings account that I will talk about soon.

      The envelope system is great and it works for a lot of people. Once you can control yourself credit cards are the way to go. Those points are killer!

  • Brad, Financial Coaching Feb 7, 2017, 4:49 am

    “the majority people may create a budget but never actually analyze the numbers”

    SO true and such a big problem. It’s great that you have the zero-sum budget set. It’s very powerful when people actually check in with it and hold themselves accountable to it.

    • Stefan Sharpe Feb 7, 2017, 11:54 pm

      Thanks for stopping over Brad! It is a very powerful tool and I can’t wait to actually be able to analyze a large sum of data.

  • Erik @ The Mastermind Within Feb 7, 2017, 10:01 am

    I don’t pay attention to my budget.. I set one as a baseline, and while I do compile my statistics each month into a spreadsheet, I won’t necessarily make any changes to my day to day habits.

    That being said, I still am able to save around $3k a month between cash, 401k, HSA, and my home equity.

    • Stefan Sharpe Feb 7, 2017, 11:56 pm

      That is awesome Erik! I saved something similar to that in January and will get close to 2k in February as I have to begin rent payments now. For people who understand money they can usually do what you do but for the average person, and even myself, I find it helpful to have the numbers and check in every month.

  • Alexis @FITnancials Feb 7, 2017, 8:42 pm

    We’ve basically implemented a no spend budget which means we aren’t buying anything outside of the necessary bills. We’ve even cut entertainment spending for a few months and are using other options instead. (Renting library movies and the selection is surprisingly good).

    • Stefan Sharpe Feb 7, 2017, 11:57 pm

      Thanks for stopping over as always Alexis. No spend budgets are great and I am sure that you can find some good stuff in the library. I keep a small amount for entertainment because I am a firm believer in enjoying life at all stages but do so in moderation. Albeit, I rather spend on experiences than material things.

  • Divi Cents Feb 9, 2017, 10:24 am

    I’m not sure if I made this up but I call money that is doing nothing “dead money”

    People often say you need to have $10,000 in cash for emergency but I would argue that at the very least put in HIS account or a bond etf that trades in high volume.

    I think it was Buffett who said, If you don’t find a way to make money while you sleep, you will work until you die.

    Cheers

    • Stefan Sharpe Feb 12, 2017, 7:44 pm

      I love that quote! Having that much money in liquid cash can be good if you work in a high turnover field but I think that is too much to hold onto for the average person.

  • Dividend Diplomats Feb 12, 2017, 6:03 pm

    Stefan –

    Great article and I like the twist on it. Not just about budgeting, saving and monitoring expenses – it’s about knowing the purpose every single dollar. Is that for a house coming up? Make that dollar that purpose. Want to invest 12K per year in the market? Better make 1K/month of cash a purpose for that, etc.. Great way to look at the cash you bring in. Also – don’t like the purpose of $1K cash for housing? Research, negotiate and reduce it in a way that you can. Love it, hope your grind days will get better soon.

    -Lanny

    • Stefan Sharpe Feb 12, 2017, 7:46 pm

      Thanks for stopping over Lanny. We both know how much $1 can make, especially in dividend investing. Those who use their money most effectively will be the ones chilling on the beach while everone else is busy working.

  • Lance @ My Strategic Dollar Jun 9, 2017, 10:54 am

    There are a ton of millennials that I know that would greatly benefit from a zero sum budget. I often hear them say, I have $XX amount left over after paying all my bills, so I can spend that on whatever I want.

    If they were on the correct financial path, they’d know they are only setting themselves up for failure with that line of thinking.

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