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What the Heck is a ‘Zero-Sum’ Budget, and Why Should You Consider One?

January 5, 2015

Budgeting. It’s not exactly the sexiest topic out there, but it’s one that everyone needs to think about, talk about, develop, and set in motion. This essential spending plan basically helps you to determine if you’ve actually got the cash to do the things you want or need without sending you spiraling into debt.

While there’s lots of talk about the different ways to budget, what’s less known is the topic on zero-sum budgeting.

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What exactly is this, and how can you benefit from it?

Zero-Sum Budget – Defined

First off, let’s define what a zero-sum budget actually is. Money is allocated based on financial results that you can expect to achieve, then works backwards to accurately allocate to the necessary resource.

OK, so that might sound like a bunch of financial mumbo-jumbo. Let’s put it in simpler terms. Essentially, no dollar is left unspent. Every penny is accounted for. The idea behind this type of budget is to help you make sure that every dollar you make is put to good use before you even get paid. If you do this, you’ll be less likely to blow your cash on money drains. If you happen to have excess in your budget after paying your bills, you can put it towards your debts or savings accounts. Every dime you make is allocated to something.

Let’s illustrate. If you’ve been able to cover all your expenses during the month and have $1,000 left over, you’re not quite done with your budget just yet. That 1,000 bucks need to be told where to go. This gives you the opportunity to make it work for you in areas like getting out of debt, investing, saving for a rainy day, or paying off the mortgage. Make every dollar work for you.

 

How Can You Benefit From a Zero-Sum Budget?

Budgeting itself has its own inherent benefits. But when you tackle the zero-sum budget, you’re really putting your dollar to work for you. Here are 3 benefits associated with a zero-sum budget:

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1. You know exactly where your money is going – The only way that a zero-sum budget will work is if you understand what you’re spending your money on in order to accurately allocate your funds. Just doing this is already putting you ahead, since you’re being forced to open your eyes to where exactly your money is going, and how much you’ve spent on things that were totally unnecessary.

2. You can realize more savings and live realistically – One of the best things about a zero-sum budget is the fact that it leads to more savings. Before you can even start this budget, you need a month’s pay in your bank account, so that’s some savings right there. If you make more money in advance of your budget, you can start to think about how that money should be spent.

3. Your budget is based on real money – Instead of basing your budget on what you anticipate is coming to you, this type of budget is based on actual money that you already have in the bank. This month-in-advance approach is particularly useful for people who have variable incomes, where one month you’re rolling in dough, and the next month you’re dry. Until you’ve got the money in your hands, you can’t realistically assume that you’ll have it when you need it.

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The Bottom Line

The zero-sum budget approach basically gives you the chance to get a clear picture of your finances, and how well you are managing them. Not only that, but it also gives you a financial cushion to fall back on. Scrounging up a month’s salary worth of capital to start with might be tough for some, but this initial sacrifice is well worth it in the long run when you can boast zero debt in years to come.