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How to Create a Zero-Sum Budget

Last updated 03/21/2024 by

Audrey Henderson
Do you perpetually deal with the dilemma of “more month than money”? If so, it’s time to get real about your finances and your budget. One way to get a handle on your spending is to establish a zero-based budgeting system. With a zero-based or zero-sum budget, you “spend” every penny that you accumulate each month as income. However, when executed properly, a zero-sum budget can help you save money without sacrificing the things that are truly important to you and your family.

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Assess Your Income

If you have a regular job where you are paid weekly, bi-weekly or monthly, figuring out how many paychecks you receive during the month should be a simple task. However, if you’re an independent contractor or you own your own business, making that determination can be a challenge. Don’t be overly optimistic and go by that one month where you really raked in the cash. Look over the last six to twelve months and take an average of your payments, erring on the conservative side.
You don’t have to count an inheritance from Great Uncle Delbert in your zero-based budget. Windfalls are dealt with on a case-by-case basis. On the other hand, if you receive regular payments from a trust fund (lucky you!), you must include those funds.

Grit Your Teeth – and List Your Bills

Next, assess your bills for the coming month. Obvious expenses include your rent or mortgage, car payments, groceries, utilities and insurance payments. If you’re billed quarterly, divide the payments into monthly “chunks” and set aside funds each month to cover the entire payment when it becomes due.
That vacation you paid for with plastic? The monthly credit card payments must be included as well, along with your other credit card payments. Begin by budgeting for minimum monthly payments, with the understanding that you will actually make much larger payments if possible. However, you don’t have to estimate the cost of a broken axle on your car. That’s a matter for your emergency fund.

Reconcile the Differences

If your assessment reveals that your income meets or exceeds your bills for the coming month, congratulations. But don’t pat yourself on the back yet – there’s still work to be done. That extra money has to go somewhere to get you back to zero. Remember the emergency fund mentioned earlier? Many financial experts recommend holding enough reserve funds to cover at least six months of expenses. You’ll also want to increase the monthly payments on your credit cards to begin shrinking your balances down to size – and eventually to zero.
And don’t forget saving for next year’s vacation, a down payment on a home, higher education for your kids (or yourself!), as well as for your retirement. It’s unlikely that you will be able to cover all those categories at once unless you really do have a Great Uncle Delbert. This means reassessing your monthly budget with monthly allowances for each of your short-term and long term savings goals.
If you have more expenses than resources, either before or after accounting for savings goals, you must make changes immediately. Can you ditch your cable TV subscription? Do you really need a second car? How about cooking at home and saving dinners out for special occasions? Be honest with yourself about what you can and cannot live without.
Once you’ve brought income and expenses into balance, it’s time to put your budget into action. Don’t be afraid to make changes if certain aspects of your budget aren’t working. However, once you have been living with a zero-based budget for a few months, you may wonder why you waited so long.

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Audrey Henderson

Audrey Henderson is a Chicagoland-based writer and researcher. She holds advanced degrees in sociology and law from Northwestern University. Her writing specialties are sustainable development in the built environment, policy related to arts and popular culture, socially and ecologically responsible travel, civic tech and personal finance.

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