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Budgeting. There! I have said one of the scariest words someone struggling with financial freedom can hear.
There are many different types of budgets out there and many different ways to track them. Today I am going to teach you about my favourite method of budgeting: Zero-Sum Budgets.
There are two main rules that drive a Zero-Sum Budget:
1. Every dollar needs a job.
Each dollar of your income should be allocated for a specific purpose. When allocated correctly your income minus your expenses will equal zero.
Why would you ever want to have NO leftover money? Well, “extra” money can lead to frivolous spending. After paying all of your fixed expenses, if you have a balance remaining in your budget you may end up spending this extra money on things you don’t need. You may see $100 remaining on your budget, feel like you have a lot of extra cash, and decide to treat yourself to a night on the town. This will only drive you further away from your financial goals.
By assigning a job to this “extra” money, you are less likely to spend it on something you do not need. When you decide you want to go out for a night out, instead of looking at your bank balance, you will take a look at the ‘Dining Out’ category of your budget to see if you have enough money allocated for the night.
2. Live on last month’s income.
This is the rule that will allow you to stop living pay cheque to pay cheque. It is also the rule that I have struggled with the most.
This rule requires you to save enough money to go an ENTIRE month without touching your regular income. Then next month, you spend the previous month’s income while earning this month’s income.
How is this possible? When you start using this budget, you will allocate as much leftover income (after paying your fixed expenses) to a Buffer category. For example, if you have $1,000 left after paying for fixed expenses, you may choose to budget $500 to your Buffer and the remaining to discretionary spending categories. After saving for a few months your Buffer should equal your income for one month. Once you have that money saved, you’re golden! Simply use the money in your Buffer to pay for this months income.
By living on last month’s income you reduce the amount of stress your finances can cause on your life. You will always have some money in your bank account in case an emergency arises.
You Need A Budget
Does this sound way to complicated? I promise it’s not!
I was introduced to Zero-Sum budgeting through a post on Budget’s Are Sexy. The software seemed super easy to use and I loved all of the learning tools they provided (for FREE).
The program looks something like this every month:
On the left-hand side, you can set the categories of your budget. There are many different ways to set up your categories. Personally, I like to categorize the majority of my categories into Fixed Expenses and Flexible Expenses.
Fixed expenses are all of the non-variable expenses that I have to pay. This means that the cost of these expenses is the same month over month.
Flexible Expenses is my “everything else” group. This is where I put the expenses that vary in cost month by month. This grouping includes categories such as groceries, dining out, and clothing. I choose to categorize my expenses this way because it allows me to see what areas I can cut back on spending. I know I cannot easily change my fixed expenses, so sorting my expenses in this way allows me to see which variable categories I am overspending on.
Related: Ultimate YNAB Review and How To Start: Best Budgeting App 2017 by fellow personal finance blogger Nick, of Mapped Out Money.
Stuff I Forgot To Budget For
Regardless of what budgeting method you decide to use, it is important to remember that budgets are meant to be flexible. By allowing yourself to be flexible with your budget you are less likely to become discouraged if you happen to go over in one category.
So, how can you have a flexible budget? If you are using a zero-sum budget it is super easy to maintain some flexibility. You may have budgeted $50 to dining out for the month of January, but near the end of the month, you notice that you accidently went over budget and your category is now over budget at $75. This is okay! Look at your budget and see if there are any categories are under budget. You may find that you are under budget on groceries for the month. All you need to do is remove $25 from your grocery budget and slot it into your Dining Out category. Now you are back on track with your budget!
In my budget, I also choose to include a “Stuff I Forgot to Budget For”. Sometimes, strange expenses come up and you won’t know where to categorize the expenses. By having this category available for those smaller random expenses, I am able to have additional flexibility while budgeting.
I love zero-sum budgeting because it is motivating, goal-orientated, and extremely flexible.
Do you have a budget? What method do you use to stay on track?
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