The Zero Dollar Budget

Monday, 21 November 2011

“ZERO Tolerance” or learning to spend every dollar you earn and still save, by Louise Upton


The term “zero-based budgeting” or “zero-dollar budgeting” is the practice of budgeting every dollar of income received. The concept is to ‘spend’ every dollar you earn before payday. It’s a whole new mindset and you will find you need to reduce some areas of spending to allow other more necessary areas the funds they need for you to function.

In a zero-based budget, your total income minus your total expenses equals $0. In other words, you assign every dollar of income (wage/salary, pension, income from any passive regular income streams) to an expense (or savings) category.

The idea is that if everything is assigned and you begin to reach your limit in any particular category – for example everyday food and drink expenses – you find a way to reduce the costs in that area. It might involve bringing lunch from home, cutting coffee spends back, or cutting costs in another area (for example, how much you drive to save on petrol), in order to move funds from one category to another.

If this way of budgeting is to work you’ll need to organize a half hour or so each month to work out all your monthly expenses. It requires rigorous scrutiny and you’ll have to be brutally honest about how, what and where you spend.  (If you’re thinking about doing it as a household, it’s important everyone is happy with the way categories are allocated and budgeted.)

Why a zero dollar budget will work:

  • The allocation of resources is based on needs and benefits.
  • Good for problem solving: finding cost effective ways to improve your routines.
  • You will know immediately if you’re budget is inflated.
  • Increases motivation by posing problems and requiring answers.
  • Increases communication.
  • Identifies and eliminates waste and the unnecessary.
  • Forces everyone to think about their goals and what they really need as against want.

Hurdles you may have to overcome:

  • A zero dollar budget takes time and is detail driven – you need to work at it to implement it.
  • Forces you to justify the expense and determine needs versus wants. The lifestyle and leisure department will be threatened, but remember that can have dire consequences leading to complete budgeting breakdown.
  • The volume of detail can be daunting but cutting corners could remove critically important information.
  • Honesty must be reliable and consistent.

7 quick and easy steps to building a zero dollar budget:

Step 1: Cash In.

Record the amount of all regular income (wages, salaries, pension, investments, etc) and whether received weekly, fortnightly or monthly. (Work out your total income for a month.)

Step 2: Cash Out (if you’ve worked your Cash In on a monthly basis then your Cash Out amounts should be done for a similar time period).

  • Repayments  – Record all the repayment commitments you have.
  • Living Expenses  – Record all essential expenses for Food, Housing, Transport, Clothing, Telephone, Health, School. 
  • Savings – Record the amount you will save each period.
  • Lifestyle Expenses – Record the amounts you will budget for optional spending on leisure and lifestyle.

Step 3: Allocate expense category types.

  • Establish which expenses are fixed, partially fixed or variable.
  • Fixed expenses rarely change from month to month, e.g. school fees, loan repayments (if we’re lucky), weekly transport cards, gym memberships, Pay TV, insurance.
  • Partially fixed expenses vary slightly from month to month usually only by about $10 - $12 in a month: e.g. telephone, internet, utilities, strata, water.
  • Variable expenses are those that go up and down by more than $12 a month, e.g. food shopping or running the car, clothes, many lifestyle expenses.

Step 4: Allocate initial funds to expense category types.

According to a number of experts determining expense category types makes it easier to begin working out where to begin allocating money.

First, allocate your fixed expenses. (Fixed expenses may not be necessary expenses, but we do know their actual cost.) Fixed expenses will probably include your largest expenses, such as loan repayments. Best to get them out of the way and know what you have left to work with… or, if any of them are indulgent wants rather than absolute necessities, you may be able to ditch the spend and move the money elsewhere.

Secondly, get an average of your partially fixed expenses. Take a look at these for a quarterly period and get a month average and allocate a budget to them. It will be approximate.

Now, it’s time to deal with what’s left and allocate your variable expenses. If you want, you can do a quick calculation at this point so you know how much you have: income minus fixed and partially fixed expenses. The variables will include a great many necessities: food, clothing, car, lifestyle and leisure. Try not to underestimate these categories.

Step 5: Calculate the difference between Cash In and your total initial expense allocations.

Subtract your total expenses from your total income.

Step 6: Adjust your allocations until income equals expenses.

This is where you will need to make adjustments between one category and another so that everything is spent (or saved). Remember it’s your budget. Things can change and be modified.

Step 7: Print out a hard copy.

A hard copy allows you to put a line in the sand against which you can compare changes and modifications from month to month and within months.


Income – expenses = What to do with a positive difference.

  • Pay off your loans or debts faster.
  • Save for mid- or long-term goals – new car, travel.
  • Invest and create passive income streams.

Income – expenses = What to do with a negative difference.

  • Evaluate your priorities – distinguish between wants and needs. Realizing and making lifestyle changes can be really hard. In the end it’s your decision.
  • Be honest. Pay TV is not a necessity. Gym memberships can be replaced with a free outdoor walk/run. Identify all your non-necessities. Eliminate or reduce those that are a low priority. Keep moving up the scale of priority eliminating or reducing as you until you reach $0.

Periodic expenses.

Most people just divide these expenses by 12 and try and save that amount each month. It rarely works and you’re never right on the full year when you begin the process. For example, registering your car. Count how many months away it is, and divide the total payment amount by the number of months. Save that amount. Once you make the payment, and can start with a full year ahead of you, your monthly allocation will go down for that category freeing up extra cash for other areas.

Winning the “lottery”.

Don’t depend on the unexpected (bonus, tax returns, etc, etc) but do allocate them when they happen – if you can to savings to build a nest egg.

Personal money.

Don’t set impossible tasks by allocating everything to the big picture. Having your own money to spend however you want is crucial to making a budget work.