How To Build a Zero Sum Budget

zero sum budget manage money
This is Part Four in a series of posts about managing your money better by creating a budget. If you have not read Part One, Part Two and Part Three already, read them first, then come back.

Zero Sum Budgets

Why zero sum budgets work

Do you run short on money long before it’s payday? Find yourself putting more things on credit every month?

You need a zero sum budget. You overspent because you had money in your account, so you spent it. You didn’t have a job for every dollar assigned, so you forgot about the bills that arrive later in the month and spent that money on other things.

With a zero sum budget this won’t happen. Expenses will be subtracted from income as soon as you get paid so you won’t spend money you really don’t have.

Writing out the Budget

After all of your preparation, this part is pretty simple.  I suggest you do in pencil if you’re writing it down. All this work will pay off, I promise.

  1. Write down your income at the top of the page. (Zero sum budgets work well if your income varies because whatever the amount is you bring home, determines how much money you put in each category.)
  2. List your fixed expenses and their amounts and subtract from your income.
  3. Subtract your flexible expenses, with your estimates of the amount you spend per month.
  4. Subtract the total amount to be put into your freedom accounts.

What are you left with?  Is it a negative number? If so, how big is the negative?


budgetThis is not my real budget, btw.

I have focused on on a monthly budget, however, weekly or biweekly budgets work as well.  You just need to divide things by the number of paychecks you receive in a year instead of twelve for your freedom accounts and figure out your budgeted amounts for your envelopes for weekly or biweekly instead of monthly.

If You are in The Red

If it is a negative number, you know changes need to be made. 

Take a look again at how much money you have budgeted for different categories and think about how you can reduce what you spend.  Some categories, like entertainment and groceries are easier to cut back on than others. You could also make changes by reducing cable or calling your cell phone company to see if you can get a better plan.

Keep playing with the numbers in your expenses until you end up at zero or (better still) you have money left over. For example, if you are $50 short after subtracting all your expenses, then you could reduce your entertainment fund by $25 and your grocery fund by $25. Now you’re at zero.

Once you are at zero. . .

Subtract everything from your checking account and fill your envelopes as soon as you get paid. Even if the cable bill will not actually be deducted from your account for another three weeks, go ahead and subtract it  right away so you don’t accidentally spend that money. After deducting all automatic payments from your check register and paying any bills, add up the amounts budgeted for flexible expenses and freedom accounts and write a check for cash for the total.

When I first started using envelopes, I would go to my bank and ask for separate envelopes with specific amounts in them, $200 in one, $300 in one, $40 in one. I always went inside so I didn’t hold up the drive through window and the tellers never complained. Besides, it is your money, you should be able to get it however you want, right? Just be organized and know exactly what you need before you get in line.

Once you have your cash, divide it up among your envelopes. Grocery money in the envelope marked for groceries, entertainment money in the entertainment envelope, etc.

I choose to use cash for my freedom accounts, but if you want that in a savings account you would just transfer the appropriate amount to the savings account instead of getting cash.

Over the years, the number of envelopes I keep has reduced as I have found more ways to automate my payments and I don’t have as many small denominations in my budget. I now just let them know if I need some twenties or certain denominations in particular and divide it up in my envelopes at home.  Because I pay cash for most things, I’m able to do this easily, because I have it on hand.

If You Still Have Money Left,  Hurray!!   🙂

zero sum budgetDon’t you just love my professional looking budget ?  Paper, pencil, colored pencil . . . it still works!

If the number is still a positive number after you have subtracted your fixed and flexible expenses and freedom accounts, Congratulations! You’re in a better position than many people.

You have some leftover money that needs a job. The reason this is a “zero sum” budget is because we want to assign every dollar a job and place to go, hopefully some goes to savings or paying off debt. For me, every dollar gets assigned it’s place, leaving about $100 in my checking account as a cushion,$100 is my “zero”.

What to Do With the “Leftover” Money

I follow Dave Ramsey’s Baby Steps  with the leftover money.

  1. Establish a baby emergency fund of $1,000. (“Baby” because it is small, not because you’re saving for a baby.) Put it in a simple savings account you can have easy access to if needed. If you already have that, great.
  2. Pay off debts except your house. Money leftover after you’ve subtracted your expenses from your income would go to pay off debt in addition to the minimum payments. Credit cards, car loans, student loans, whatever they are.  They need to be paid off. I don’t care if they have zero percent interest.  Pay them off. I recommend the “debt snowball” method.

The debt snowball ties into our emotions and motivation. Basically, you don’t pay attention to the interest rate when determining which debt to pay off first. You pay them off smallest to largest. You make the minimum payments on all the debts except the smallest, which you throw all additional money you can find, earn or scrounge up in some fashion towards. When the smallest debt is paid off, you take the money you were paying on it and add it to the minimum payment of the second smallest debt and so on.  As you pay off debts you are able to put larger amounts towards the bigger debts as your snowball builds in size.

The emotional benefit of seeing the debts eliminated quickly with the debt snowball motivates you to keep going.

If you were instead to focus on the higher interest rate debt which maybe has a much larger balance, you would be more likely to give up as progress would appear much slower. Being in debt and how you manage your money is an emotional issue. It makes sense to do what is going to be more beneficial emotionally and keep you motivated.

If you do not have any debts except your mortgage, the third baby step is to build up your emergency fund so it is fully funded with at least 3-6 months of living expenses.

You want to keep this emergency fund in a money market account or something similar so it is easily accessible, but not too easily accessible. It is for true emergencies, not because you decide you want to take a vacation or buy a new car. Budget for those items in your freedom accounts and save for them so you can pay cash.

Your emergency fund is in case you lose your job or get sick and miss a lot of work. Your emergency fund helps you sleep at night. It’s your “just in case” reassurance.  It’s how I was able to stay calm when I lost my job this past spring.

Once your emergency fund is fully funded with 3-6 months of living expenses and you have all your debt paid off except your house, then the extra money left over is put towards your retirement, kids’ college savings and extra principal to pay off your house quicker.

Don’t be surprised if you don’t stick to your budget perfectly the first several months.  It’s a process.  You will probably need to make changes here and there until you figure out your sweet spots for your expenses. That’s okay, it will get easier with practice. You could rewrite your budget every pay period if you want. It’s not written in stone. It can change as your needs change.

Hopefully, going through this process has opened your eyes to a few things and you have a better understanding of where your money is going. You are on the path to gaining control of your money. If you want to change and do things different, now is the time.

What do you think? Are you up for the challenge? Let me know in the comments how you think this could help you and don’t forget to subscribe for more information to come.





  1. I can’t wait to get started on this. I have tried many things even the envelope system but not with the freedom accounts and all money assigned to a job. I love this idea and can’t wait to get started. I just did a ruff draft and i’m in he negative by $750 so I’m going to play first with the grocery budget and then move on to others. Thank you so much!

    • You’re welcome, Tonya! You do have to play around with the numbers to see what will work. There are times I increase or decrease the amounts I put into the freedom accounts, but it still feels good to know you’re saving for the things that come up now and then. When you have an “unexpected” expense occur when something needs a repair or replacement it is an awesome feeling to be able to pay cash and it not even hurt. Good luck!

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