If the thought of a budget makes you want to roll your eyes and pull the quilt cover over you, we hear you!
Enter: a new type of budget, the zero-sum budget.
What is a zero-sum budget?
A budget that encourages you to spend every dollar in your account, wisely.
Wait, what? Yep, it sounded counterintuitive to us, when we first heard it too. But hear us out.
How does it work?
By allocating every dollar you have.
Hopefully your incomings (salary, rental income, dividends or otherwise) exceed your regular expenses.
Traditional budgets try to save as much as possible between your income and your expenses. It tries to stretch the 'gap' between incomings and outgoings as wide as possible to allow for savings.
The zero-sum budget works in a somewhat opposite way.
Instead of refusing to spend money, you are now assigning money to a more useful purpose, including to savings and investment.
The biggest change is how you view budgeting.
If your account is at zero, it means you've done it right!
Principles of the zero-sum budget:
- A purpose for every dollar in your budget;
- The goal is for your regular transaction account to be at zero at the end of the month.
Why use the zero-sum approach?
By assigning each dollar a job, you prevent wasteful spending and maximise your income.
According to the zero-sum budget methodology, money 'without a job' will likely be spent, and often carelessly.
Steps to manage a zero-sum budget
1. Identify your regular incomings
Map out your incomings, whether it's your pay, investment earnings, birthday money or other income payments.
This helps you to have foresight over your money, so you can ensure you can put every dollar to good use.
2. Lay out your bills
Note all your regular bills.
Once you do, you'll see what you regularly 'need' to pay, things like mortgage repayments, car insurance, groceries and baby formula.
You should also be able to easily view this on your banking app.
Now you can see what you have left over; these are your 'wants.'
3. Create categories and make it all balance
You may need to create new buckets for your spending such as 'saving, 'investing,' and 'entertainment.'
Then you allocate a proportion of your incomings into these buckets, according to your estimated and known requirements.
After you have mapped out all of your expenses, the residual amount of income should equal zero.
4. Track and adjust
This approach will require tracking and tinkering to ensure you appropriately balance your income and expenses each month.
Perks of the zero-sum budget
1. Establishes discipline
Your spending pattern will be front and centre of your budget strategy, sometimes confronting, but impossible to ignore and therefore possible to change.
This way it familiarises you with your spending habits and will give you a better grasp on your money.
2. Helps your money go further
By giving every dollar a job to do, you can cut down on frivolous spending (which is not always apparent). Rather than hoping you have money leftover at the end of the month, you can automatically allocate a certain amount to assigned buckets such as saving or investing, leaving you with enough money for a rainy day.
If you know where every dollar of your hard-earned money goes, you can exercise better control and put it to good use.
Considerations of the zero-sum budget
1. Requires regular attention
With zero sum budgeting, there’s no 'set and forget' option.
When income and expenses move around (whether you come into a windfall, unexpected bonus or experience an increase in bills), it will force an adjustment and a rethink of your approach.
And it requires taking stock of and revising a new budget to ensure all of your dollars are allocated.
2. Admin heavy
If you're not keen on spreadsheets, documenting and planning, the zero-sum budget might not be for you as it does require regular and sometimes onerous administration.
Final thoughts
The zero-sum budget definitely has its perks, offering control, improving discipline and giving every dollar a purpose, but it isn't for everyone.
Regardless, we think it's worth considering some type of budgeting process to help you in managing your money and supporting you to hit your long-term financial goals. But the approach you choose is up to you!
