You probably have little experience with zero based budgets since most businesses use line-item or categorical budgets. A zero based budget, also called a zero sum budget, can help you learn to properly manage your money though.

The zero-based budget puts every dollar you earn to work for you. You do not spend every dollar, you simply allocate each dollar.

Sometimes this means you allocate it all and there is nothing left without any going into savings or investments. That indicates that you need to make more money or cut your expenses. You should have money going into savings each month and ideally also putting money into an investment fund.

Zero Sum Budget Defined

A zero sum budget allocates every dollar. You should have nothing left as pocket cash or spending money at the end of the month since this budget would have allocated those funds to savings, paying off debt, or investing. This comprehensive budget ensures every bill gets paid.

Who Is It for?

This type of budget works for any person. You can use it whether you earn a regular or irregular income. So, on to creating a budget.

How To Make a Zero Sum Budget

I heard that groan. I know. I have led you through the budget making process before and unless this is one of your first articles you read at Budgetry, you know this is going to take a while.

Go put the coffee on and pour yourself a cup. While it brews, gather your bills from the past 12 months. Yep. You need a year’s worth because you have got to budget for it all – the monthly stuff, the semi-annual, and the annual.

Got your java? Okay. Let’s go.

Calculate Your Actual Monthly Income

Calculate your actual monthly income. You can write it all down or use a spreadsheet. Make a list of all of your sources of monthly income. Include the following:

• paychecks,

• self-employment income,

• child support,

• workers compensation payments,

• alimony

Any type of monthly disbursement should make this list. Total them all and you have the number with which you will work to begin your budget allocations.

Make Your Expenses List

Next up, make a list of your expenses. Some sources tell you to ignore the items that are not monthly, but if you have to pay it, it needs to be there. This is where a spreadsheet comes in handy. You can make one spreadsheet, then copy it for each month. That means you just need to add in the semi-annual and annual items on the months in which they are due. Your expense list should include:

• mortgage or rent payment,

• utilities (electric, water, gas, etc.)

• auto loan payments,

• insurance payments,

• groceries,

• cell phone or (gasp) landline phone payments,

• cable or digital television,

• The Internet service provider (ISP),

• credit card payments,

• other loan payments,

• child care,

• charitable donations,

• entertainment and dining out.

You will not give up anything in the budget. You are creating every bill and category that you need. Everyone needs to go out and have fun sometimes, so that is a category, too.

Add your non-monthly expenses to the months in which they are due. Rather than paying the lump sum out of that single month, divide the number of months from now to then by the amount. This lets you save that specific amount each month for that payment. That means that the first time you make this budget, you might have only eight months before your life insurance payment comes due, but thereafter you will have 12 months to save for it. On the initial spreadsheet, you divide the total cost by eight. Once it is paid, you amend the budget to divide by 12. Here are a few occasional, annual or semi-annual payments you might have to include:

• property taxes,

• income taxes,

• car insurance,

• life insurance,

• homeowners’ insurance.

If you use PayPal, you can easily use its Goal Setting feature to set aside money for these types of expenses each month. This method means you do not need to open a separate savings account, nor do you have to track items manually. You can set multiple goals in PayPal and it will automatically move the money for you on the date you specify on a weekly, semi-monthly, or monthly basis.

The Other Kind Of Goal Setting

It is now time to work on your financial goals. Suck it up. Grab some biscotti. It will go well with the coffee. Dunk your cookie and let’s get financial planning!

You need to set a savings goal. You do. It is a fact.

Here, too, you need multiple goals. First and foremost, you need a liquid emergency fund. Liquid means you can simply withdraw the funds. You do not have to sell stock or cash in a certificate of deposit (CD) to access your money.

Next, you must begin saving for retirement. Even if you plan to continue working until you die, you need to plan for aging. It would be good if you already owned a home. Plan ahead. Decide how much you want to save, then divide by the number of years you have before you plan to retire or change careers, etc.

You may want to fund other items, too. These might include:

• education savings,

• vacation savings,

• debt reduction payments.

Here you are. This is the final step of creating your zero sum budget. Set up your third spreadsheet. Okay, refill your espresso first. At least I am honest.

Now, see that HUGE number at the top of the spreadsheet that represents what you earn every month. It is about to go bye-bye as you subtract your expenses from income. Once you finish with the actual bills, you subtract the entertainment, eating out, the portions of the annual payments, and the savings allocations. If there is anything left, you allocate it to a category. You literally allocate every dollar you make until the budget amount reaches zero.

Cut Your Expenses

Let’s hope that does not happen before you get everything paid. If it does: time for a side gig.

Really, before you resort to that, you do need to cut expenses. You can reduce the number of cable channels to which you subscribe, reduce your phone plan, eat out less often, etc. There are always options. Once you work on it and reduce your monthly costs though, if you still do not have enough to pay your bills, it is time to earn more money.

Some folks suggest you temporarily stop contributing to your savings or investments. I do not. Just get a job. Get a part-time job or a side gig. It is not tough to do it. You work. You earn. You have the money you need.

You can pay all of the bills and put money into savings. You can have the groceries, the sundries, the cutesy stuff for the kitchen. Okay. Maybe guys do not do that, but I do. I think most women do. So, the kitchen needed some cute new towels and potholders. Shopping happens.

If you want the money for that when you want to go do it, you need money in the bank. Whatever you like to spend on – whether it be football memorabilia or baseball cards or Pampered Chef cookware.

Help Building a Zero Sum Budget

If you are not a budget guru, just use some handy budget tools to get started. For example, the software program You Need a Budget (YNAB) was specifically designed for making zero-based budgets. You just type in your information and the program handles the rest.

The point of a zero-based budget is to make income minus the outgo equal zero. If you cover all your expenses during the month and have $500 left over, you aren’t done with the budget yet. You must tell that 500 bucks where to go. If you don’t, you lose the chance to make it work for you in the areas of getting out of debt, saving for an emergency, investing, paying off the house, or growing wealth. Tell every dollar where to go.

- personal finance author Dave Ramsey.

Budgeting to zero often follows tracking your spending for a few months. You do not necessarily have to do that, but it can help you determine where your money keeps going.

You might discover you just eat out too often. You might realize no person really needs as many pairs of shoes as you own. You might realize it is time to save for a major home repair rather than throwing money at home repairs. Maybe you just really need to replace the roof.

Your journey of financial discovery can help you discover what really matters to you. What do you love so much that you would allocate money for it no matter what?

Know What Is Essential to You and Keep It

For me, it is simple. Coffee. Chocolate. Football. I can live without almost anything else, but those three things are super essential. Otherwise, I can get downright mean. You can still eat well. You just buy groceries and cook nice meals yourself. You save a lot from eating out.

The trick to making a budget you want to stick to is making sure you actually get what you actually love each month. As long as you can afford the things you truly love and cannot live without, you won’t mind the budget. Fact.

Why a Zero Sum Budget?

A zero sum budget makes you put your money to work. You must allocate to saving and investment.

• You do not get a choice.

• You do not get money to play with each month. You get a budget. You get to pay your own bills.

• You get to put money in savings and an investment fund.

• You get to be a grownup. Isn’t this fun?

• You have no discretionary income with a zero sum budget. You either made a category for the expense or it does not exist.

It is like tough love on yourself. Tough self-love.

It works though. You can not look at your checking balance and say, “Hey, I have $500 extra. Let me go shopping.” That is because you will allocate and immediately use everything. Your checking account balance SHOULD be zero. Every bill should be paid. You have it made it the shade.

Most people find themselves financially better within months of starting to use a zero sum budget. That is because they lose the “extra” mentality. They begin to understand that money needs to go into pots or savings accounts that it does not get spent. It needs to accrue. It needs to earn interest. Stocks need to mature. You might start freaking out the first time you actually spend your account to zero. Do not worry. Remember that you transferred money into other accounts. Just do not write a check.

Stick to the budget. You have what you need. You buy the groceries and you cook at home. You make your fancy coffees at home. Drop cable; add Netflix and Hulu. You purchase what you need and if anything that is a genuine emergency comes up, you withdraw the money from the emergency fund only.

What Qualifies as an Emergency?

I am so glad you asked.

The cute shoes on sale at Macy’s in your size are not an emergency. You car blew a gasket and must get repaired in order for you to commute to work is an emergency.

The sale on football gear at Dick’s Sporting Goods does not qualify as an emergency purchase. A tree falls on your home and you have to have the roof leak it causes repaired does qualify.

Only use the emergency fund on actual emergencies. Savings get to stay savings. Keep what you have invested, invested. Buy and hold.

What if you do not yet have an emergency fund?

You will. You are going to live on a budget! Part of what you earn each month you will put into an emergency fund. Your first goal for this fund is to save one entire month’s worth of bill payments.

Divide by 12 the amount of your actual bills for the month. You now have the amount you need to contribute to your emergency fund each month in order to save up the emergency money. This makes it more manageable.

Your next goal will be to save three months’ worth. Since you are contributing each month to your own debt reduction, in the first year of following the zero based budget, you will eradicate some of your debt. You will pay off a credit card or two. You will. Trust me. Follow directions. This means in year two of following this type of budget, you will have money to move from the debt reduction area to your savings. Your first re-allocation should be to build your emergency fund.

This helps you build the emergency fund more quickly. Divide the sum of three months worth of bill payments by 12. That is how much money you need to pay your emergency fund to fund another three months’ worth of cushion.

By now, assuming that you have not needed to dip into it, you have saved four months worth of bill payments. If, God forbid, you lost your job, you could easily pay for everything for four months. You have a little further to go though. Most financial consultants recommend having at least six months of a cushion saved up. That lets you breathe easily while you look for another job.

So, you leave the amounts alone for the third year you follow the zero sum budget. This results in you having a massive seven months of cushion saved up by the end of year three.

Build Wealth while Budgeting

What? You did not realize that you have been doing it?

Yep. That seven months of cushion you saved up collects in the bank in a savings account. You earn interest on it. Your money sits around and makes you money. Makes you feel a little Rockefeller doesn’t it?

Now, think of the fact that you are actually contributing to a retirement fund and an investment fund. You have all this money now and you can make it work for you.

As to the investment fund, unless you really love the stock market and you know what you are doing, find a financial advisor. Many stock brokerages employ financial advisors as well as stockbrokers. You can find both at a full-service brokerage.

To Conclude,