Beat Your Bills in a Zero Sum Game
Dear Rich Lifer,
There’s been a lot of talk about financial resolutions here at The Rich Life Roadmap.
But one topic we haven’t covered yet is budgets.
Some of you might be rolling your eyes now. Believe me, I get it.
When I think of budgets, I think of recent college grads or young families trying to make ends meet, so they build a budget.
For whatever reason, the older we get the less budgets seem to matter. Maybe because money is not so tight.
However I’d argue that budgets matter even more in later years. When you’re young, you have the physical means to go out and make more money if you choose.
As you get older and your income is fixed, your chances of re-entering the workforce are low.
Having a handle on your monthly spending can mean the difference between living a rich life, and constantly feeling worry about the money you have.
So whether you’re retired or not, building and keeping a simple budget is one of the best ways to manage your money.
And while there are all kinds of different budgets you can follow, the one I recommend most to readers is the zero-sum budget.
What Is a Zero-Sum Budget?
The best way to think about the zero-sum budget is you must give every dollar a job.
What that means is your goal should be to make your income minus your outgoing expenses equal zero.
For example, if your monthly income is $4,000, after all your expenses are taken care of you should have $0 left to spend.
But hold on, I’m not recommending you spend all your income in the traditional sense. You’re assigning jobs to every dollar.
So if your utilities, housing, transportation, and food account for $3,000 of the $4,000, you need to assign jobs to the remaining $1,000. Think: savings, debt, emergency fund, entertainment, eating out, etc.
The point is you don’t want to have that extra money sitting idle in your bank account without it being earmarked for some other purpose.
Otherwise the money will get spent– but it won’t get spent on what matters most.
One other key thing to note is zero-sum budgeting works by using last month’s real income to pay for this month’s expenses, so you have to have a savings cushion equal to at least one month’s expenses before you start.
How to Build a Zero-Sum Budget
Building your first zero-sum budget is easy, just follow these five steps:
Step 1: Take Stock of Your Expenses
Start with the things you know you have to pay for every month, like rent/mortgage, utilities, phone, groceries, etc. Write these down.
Then, think about larger, less frequent expenses that will come up, like insurance premiums, car registration, Christmas, etc. Also account for medical emergencies, car repairs, a new cell phone.
Even though it’s hard to budget exact figures for these unpredictable expenses, they’re still real expenses that you’ll be on the hook for, and if you don’t have money saved, it’ll be stressful.
Lastly, consider any outstanding debts, like credit cards, car payments, loans, etc.
You can also factor in some fun money here too. Maybe you enjoy golfing or eating out every Friday night. Build these expenses into your budget.
Step 2: Determine Your Monthly Income
Once you’ve written down all your expenses, it’s time to figure out how much money you have coming in every month.
Most working Americans have only one source of steady income: their job. In retirement, you are likely going to have several sources of income.
According to a recent Gallup poll, the most cited sources of retirement income are retirement accounts, Social Security, home equity, pensions, and part-time work.
Identify which of these sources of income, or others, are providing you with steady monthly cash flow.
Once you tally up how much money you can expect to receive each month, then you can move on to step 3.
Step 3: Give Every Dollar a Job
Now that you know what your expenses are and have an idea of how much money you have to work with, you can start assigning jobs to your dollars.
Typically you want to start by assigning dollars to your most immediate expenses, like housing, groceries, utilities, etc. Then start assigning dollars to less immediate expenses, like emergency savings, insurance, debts, etc.
Finally, whatever you have left over should be assigned to a category that matters most to you. If one of your financial goals this year is to take a trip to Europe, then you should be socking away that extra cash to fund this adventure.
Step 4: Spend and Adjust as Necessary
Now that you’ve set up your zero-sum budget – you can expect your plan will fail.
Yes, the chances of you sticking to your budget exactly how it was laid out are almost zero. But that’s okay!
It’s expected, and the beauty of the zero-sum budget is you have this flexibility.
If you overspend on groceries this month, you can always adjust another spending category, maybe you skip a round of golf.
Sticking to your budget is less about sticking to exact figures for each expense and more about sticking to the process and philosophy of making every dollar work for you.
The closer you can align your spending with your zero-sum plan, the closer you’ll be to reaching your financial goals.
Step 5: Rinse and Repeat
Repeat step 2-4 every month or whenever money comes into your account. It’s up to you to decide how that money goes to work for you.
Budgeting shouldn’t be viewed as some tool for people struggling to get by. It’s a tool that helps you organize the money you earn so it’s serving you and not the other way around.
To a richer life,