4 Reasons Zero-Sum Budgets Are Awesome

4 Reasons Zero-Sum Budgets Are Awesome - picture of man at laptop on his couch

This article may contain references to some of our advertising partners. Should you click on these links, we may be compensated. For more about our advertising policies, read our full disclosure statement here.

One of my clients hasn’t paid me in three weeks.  Another just asked for additional work, which was fine, but it means that my invoice will be late.  Meanwhile, my website made considerably less money this month than last month, meaning my income projections for January are going to be off.

But pssshhhttt…. I don’t care, even though most people I know would be freaking out.  Why?

Because I use a zero-sum budget.  That’s why.

How Zero-Sum Budgets Work

The basic idea behind zero-sum budgeting is that you use last month’s income to fund this month’s expenses.  By using this method, you escape the paycheck-to-paycheck lifestyle completely, freeing yourself from the confusion and stress of real-time budgeting in the process.  As a self-employed individual, my income fluctuates a lot.  But with a zero-sum budget, it really doesn’t matter.  As long as I earn enough this month to pay for next month’s bills and savings goals, I’m good.  Here are some of the other reasons zero-sum budgets are awesome:

Zero-Sum Budgets Take the Stress Out of a Fluctuating Income

If you are self-employed, work on commission, or have an otherwise fluctuating income, zero-sum budgeting can take the ups and downs out of the equation entirely.  How?  Since you’re budgeting for this month on last month’s income, you’re not stuck guessing how much money you will make.  It’s hard enough being self-employed, but things can get pretty sketchy when you’re basing your budget on how much money you hope you make Using a zero-sum budget solves that problem for you by giving you real numbers to work with – not just projections.

Zero-Sum Budgets Let You Focus On Your Business, Not Your Income

Before we started using a zero-sum budget, I used to stress about our income throughout the month.  I would wonder, “When is payday?” and freak out when either one of us brought in less money than I expected.  Now that I use a zero-sum budget and make plans off of last month’s income, I no longer have to wonder if I’m going to bring in enough to meet my goals.  I can simply focus on my work and make as much money as possible without worrying about specific dollar figures all month long.

Zero-Sum Budgets Help You Pay Yourself First

Out of all of the financial moves we’ve ever made, zero-sum budgeting is probably the smartest.  Why?  Because when you create a budget off of last month’s income, you’re forced to figure out the difference between what you earned and what you plan to spend.  The benefits of this are two-fold.  First, it helps you realize if you’re spending more than you should be compared to your earnings.  And second, it forces you to realize how much you can save.  In each zero-sum budget I make, I take the difference between my earnings and our spending and allocate it to long-term savings, retirement savings, or other investments.  Doing this month after month has really helped our nest egg grow.

Zero-Sum Budgeting Gets You Out of the Rat Race Mindset

One of our biggest goals is becoming financially independent.  In addition to investing and saving for the future, one of the things we need to do to get there is learn how to escape the 9-5 lifestyle and look at our financial situation from a different angle.  We need our investments to cover our monthly expenses once we retire, and we hope to get to the point where it doesn’t matter how much we make any given week.  Zero-sum budgeting has forced us to think of our income in terms of months, not in terms of days or weeks.  Once we bring enough in through investments and not our labor, we will be in a good position to throw in the towel.

Now that I’ve been using a zero-sum budget for a few years, I can’t imagine doing it any other way.  I know that one day all of our budgeting, plotting, and planning will pay off.  In the meantime, I’m going to stick with the thing that works.

If you want to learn how to create your own budget, Greg has written a great guide that will walk you through the entire process. Check it out by clicking the link above!

Have you ever tried a zero-sum budget?

Additional reading:

Similar Posts

Disclaimer: Comments, responses, and other user-generated content is not provided or commissioned by this site or our advertisers. Responses have not been reviewed, approved or otherwise endorsed by this website or our advertisers. It is not the responsibility of our advertisers or this website to ensure that all comments and/or questions are answered. Club Thrifty has partnered with CardRatings for our coverage of credit card products. Club Thrifty and CardRatings may receive a commission from card issuers.


  1. I haven\’t tried this zero-sum budget work and it sounds very interesting to me. Maybe, I should try this for this coming month. Honestly, I was living paycheck-to-paycheck and I really want to change it.

  2. Having salary jobs, this approach to budgeting doesn’t really apply for is. But in a variable income situation I really see it as the only viable option. The only option where you maintain your sanity at least!

    1. Yeah, I hear you. If you truly get paid the same amount no matter what, budgeting should be a piece of cake!

      We have never been in that position. Greg’s old job was salary but he also got commissions. I’ve always been hourly or self-employed so my income has been all over the place.

      1. “budgeting should be a piece of cake!”

        It *should*, but if you overspend like we used to, looking at the facts can be scary. And people don’t like to be scared by facts, so they ignore.

    2. I guess I am in a “hybrid” budgeting situation.

      I have a FIXED annuity (my “salary”) which covers my BASIC living expenses at set monthly rates that do not vary. But I also have a VARIABLE investment income stream that funds my DISCRETIONARY spending, and that spending gets set quarterly on a zero-sum basis according to the investment income that has come in the previous 3 months.

    3. I have a salaried position, and I love zero-based budgeting. I don’t keep track of receipts and such, but I use the method as a sure way to know whether we are staying within our budget. For example, when my wife and I work on the budget each month, we take out the cash for food and household/misc. Once this cash is used up, we know we have used up our entire budget for the month. We don’t have to keep track of receipts to know whether the budget is used up, because we can see the cash disappearing :). Once we feel a need to swipe the credit card, is when the cash has been used up.

  3. I don’t really budget at all, but if I did budget, I’d probably employ the zero-sum approach. In addition to the security it provides, I think it encourages more saving. And, it seems like the absolute best way to handle fluctuating income.

    1. I think it encourages more saving too. Once you put all of your details down on paper, you’re forced to see what your saving potential is!

  4. Since I’m salaried, I don’t really use a zero-sum budget, though I do try to make sure to have a month’s worth of expenses in my account on the 1st (savings have already been siphoned elsewhere).

  5. We are on a variable income ourselves and it can be so tough to budget sometimes when you don’t know what your income for the month will be. I used to think it was impossible and thought everyone else’s ideas sucked. Wish I would have read this a few years ago and maybe I could have gotten us on track this way. 🙂

  6. I have never tried budgeting this way. Having a salaried position and pay check every 2 weeks, our income is predictable. I do like he idea of being a month ahead, gives you even more of a cushion.

    1. With a regular paycheck, it isn’t as important. We have never really been in that position. Our incomes varied some before, but now they vary a lot.

  7. I have a salaried position and my expenses are pretty fixed, so there aren’t usually any surprises along the way. I feel I *kinda* incorporate this method into my budget now as I list all my income and expenses in a spreadsheet for the entire year, so I can see already see where my money is going.

    How do you plan one time expenses, like car maintenance or an emergency? Do you take from a separate account?

    1. I budget for things I can anticipate- if I need an oil change, am going to get the furnace serviced, birthday presents, etc. I put them in my zero-sum budget at the beginning of the month.

      I also have short-term savings and an emergency fund. Anything unexpected comes out of either of those- surprise car repairs, emergencies, etc.

    2. “How do you plan one time expenses, like car maintenance or an emergency?”

      Put “car fund” and “e-fund” in your budget, to get “paid” every month just like all the other bills. You can open a separate bank account for each fund if your bank doesn’t have minimum balance fees, or — like us — use a spreadsheet to track a bunch of virtual funds (who’s amounts must sum to the amount in your actual bank savings account).

      The benefit of lots of small virtual funds backed up by one or two big savings accounts is that it’s ok for a virtual fund to go negative but obviously not so much for real bank accounts.

    1. Yes, exactly. And let a surplus build up in savings to cover those bad months!

  8. We’ve moved to where we’re doing this as well. We have months that are great income wise and other months where it’s no so hot. My wife and I were just talking about that this morning in fact because we have a client who takes up to 4 months at times to pay us. A few years ago I would’ve been nervous, but that’s not the case anymore. I think you’re spot on about it encouraging you to save more as well – I know it’s definitely true for us.

    1. 4 months! I think I would really freak out about that!

  9. Our income was fairly predictable until the government job stopped paying me in October. I’m told it is an internal problem and I will be paid as soon as possible but it’s actually made us more aware of other income sources. I think when I finally get a huge payment, it can all go straight to retirement savings.

    1. Yikes. Good thing you aren’t counting on it to pay bills or anything.

  10. I haven’t tried zero-sum budgeting. When I was self-employed and was supporting myself on a fluctuating income I built up my cash cushion, had a pretty tight budget, and wrote myself a cheque from my business account each month. It was so much easier at tax time and was easier for my cash flow too.

    The benefit of zero-sum budgeting would be that there would be less cash just sitting around not being productive.

  11. So what’s the difference between what you mentioned and writing down your expected income for the month of February and bringing it down to zero with expenses, savings, etc? I think I missed something or I’m not reading things correctly, thanks.

    1. If you have a fixed income, this probably wouldn’t benefit you. But what if you have no idea how much money you make?
      That is the main problem for most of us who are self-employed. We can’t simple “write down our expected income for the month of February.” Between my income and my husband’s income, we can fluctuate 3-4K from month to month. A lot of self-employed are in the same boat.

      If you get the same paycheck every two weeks, you just don’t have that problem.

  12. I have gotten paid monthly for the last seven and a half years and my new job is going to pay semimonthly. Do you deposit your paychecks into a holding account until you have all of them for the month and then that’s what you use to form your budget for the next month? I’m trying to figure out the logistics of this new payroll system!

    1. Yep, pretty much! All of my income goes straight into my business account. Greg’s gets deposited directly into savings. On the 1st of the month, I write a check from business and transfer gregs income to our regular checking we pay bills from. Since I earn significantly more than we need, a surplus builds up in my business account. I use it to pay taxes and occasionally transfer some to investments, kid’s college funds, etc.

      The result is that, on the 1st of the month, I have a zero-sum budget that says I need X amount of dollars for the month and my checking account is stocked with that exact amount.

      1. “I use it to pay taxes”

        I’m very surprised that “taxes” aren’t one of your monthly business expenses which get allocated to a separate fund (whether real or virtual) to get paid quarterly. Otherwise it would be too easy to “accidentally” under-fund it during a slow month and get behind on your taxes.

  13. A zero-sum budget sounds perfect for people whose income fluctuates. Our income is about as consistent as it gets and our expenses are almost exactly the same each month (or at least the fluctuations can be expected/predicted).

  14. I recently realized I accidentally zero-sum budget, to a degree. I get paid once, at the end of the month and I use that money to both pay off credit cards and prep the next month’s budget. For example, I just got paid for January. I paid off items I’d purchased on my credit cards (ie: Hulu subscription, flight to TX etc) and after all my savings and such, I take the remaining amount to determine my February budget. I never realized I was essentially doing the foundation of zero-sum budgeting. But I guess paying off last month’s credit cards negates it a bit.

  15. Ben Luthi says:

    We’ve been using You Need a Budget’s software for a few months and I really like the idea of it. We’re still trying to get to the point where this month’s expenses aren’t eating into this month’s income, but we’re getting there!

  16. I think zero-sum budgets are an excellent tool for those with highly variable income because, as you said, it really helps take the stress out of paying your bills. And feeling stressed about bills and having enough money is not typically conducive to earning more money. We don’t follow a zero-sum budget per se as Chris is a salaried employee but we pay bills first (including savings/investments goals), then we look at what we have left. Sometimes we have extra so we can decide whether to save or do something special with it. Either way, we stay honest and debt-free, which is what I care about.

    1. Yes, that is definitely the most important thing!

    2. Budgeting is important, even though you have adequate income and are debt free.

      That’s because the *process* of looking over your expenditures can lead to better allocation of what you *do* have — maybe you can get a better deal on car insurance, do you really watch all those cable channels, can you convert that whole life policy to term-life) as well as stimulating thoughts about what you can/should save for (vacation, unexpected car repairs, medical bills, insurance, etc, etc, etc ad nauseum).

  17. We don’t budget, but we do make sure to have at least a month’s worth of expenses in our emergency fund at all times. That helps when there’s a payment or reimbursement snafu.

  18. Haven’t tried this zero sum budget idea but sounds quite interesting and beneficial. This seems most beneficial to someone who’s self-employed and may have fluctuating income month to month.

  19. So not only do you use a zero-sum budget but you are combining it with the budgeting style of “living off last month’s income”? If someone isn’t currently living on last month’s income, how do they get to that point? I do a zero sum budget (well, I used to when I didn’t have variable income in the mix) but I don’t live on last month’s income. Do you recommend starting to save as much as I can until I reach an amount equal to about a month’s worth of income and then each month I’ll be able to live on last month’s income?

    1. That is what most people do. Save until you have one months’ worth of expenses that you can use to bankroll your first month on a zero-sum budget. Then, as you earn money throughout that month, set it aside for the following month.

      1. It’s also why people with stable income streams “just” need an E-fund instead of living off last month’s income: you know when and how much you’ll get paid, and you know when (most of) your expenses are due.

        This is where *disciplined* use of credit cards (is that taboo on this site?) works: pay for all groceries with the card, and have things like the cell phone bill auto-payed with the card. Thus, if it’s due on the 5th, but you don’t get paid until the 9th, there are no worries.

        Web bill pay is also useful here: schedule a CC payment for the amount of your cell phone bill to be sent on the day after you’re paid.

        Discipline — via rigorous bookkeeping and knowing how much you have to spend in each category — is the key, though.

  20. I always wondered how I would manage my expenses if I went freelance. I’m good at saving so I figured it wouldn’t be a big issue but this method is pretty genius.

  21. Having always had a job there\’s never been a need for me to use this type of budgeting approach. But in the future I hope to quit my day job and work from home. Income will definitely be more variable. The plan was to have a large emergency fund to balance out the months. We\’ll have to see which method works best for us.

    1. An emergency fund helps a lot! I have a short-term savings account and long-term emergency savings. I can use them if we have a surprise expense!

  22. One of the hardest things is shifting that mindset from being an hourly employee and earning a paycheck to figuring out how to live 100% on passive income. It definitely forces you to look at your income in a different way.

    I\’ve been using a zero sum budget as well and once you get the hang of things at first, you always have that \”ah-ha\” moment of why the heck didn\’t I do this years ago?!

  23. This is a great idea. I’m going to give this a try. I’ve been trying to zero out the checking account at the end of the month by putting the remainder in savings, but I like this a lot better — particularly when this month’s expenses are paid next month because we put things on our credit cards a lot. Because of that, maybe we should use our income from two months ago to make this month’s budget?

    1. Hey, whatever works. As long as you bankroll your first month with money you already have and save this month’s earnings for next month, it doesn’t matter. Just remember, you need your February budget created and ready on February 1st with the exact amount of money you need for the month in your account. Then save *this month’s income* for next month.

  24. I’ve never tried doing it but it makes sense. What happens though when your income is less than your expenses? I mean even your necessary stuff?

    1. Before I was salaried we kept an income smoothing fund- which is different from an E-Fund, or short term savings or anything like that.

      The amount in there (for us) is =((Fixed Expenditures+ Food+Daycare)- (Minimum Reasonable Salary Expectation for a month))* # of months per year we expect to earn less than our fixed expenses, food and daycare combined.

      This is the second account that we filled up on a fat month (after our living expenses for the next month).

      1. People who are paid bi-weekly but need a semi-monthly income can use that technique too for those two extra-paycheck months.

  25. Even though I have my budgets laid out in the Income – Expenses = Savings format, my budgets are essentially zero sum because I adjust my expenses to hit a certain savings target. Then I take that savings right off the top in the beginning of the month.

  26. We’ve never tried a zero-sum budget, but it definitely sounds like an interesting concept! We typically always have a little extra stocked away for unexpected expenses that may come up during any given month, but I like this approach. My Husband has a set salary, but my income fluctuates a lot so I might try to incorporate this for us!

  27. “use last month’s income to fund this month’s expenses.”

    From the very meaning of the words “zero” and “sum”, that’s NOT what “zero sum” (inflows – outflows = zero) means.

    Note that I’m not denying that living off last month’s income — especially if your income is variable — is a useful strategy. It’s just not “zero sum”.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.