How to use a zero-sum budget, the strategy that gives every single dollar a specific job

A zero-sum budget helps take advantage of credit card rewards like travel, without incurring any debt. The author is not pictured.

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A zero-sum budget helps take advantage of credit card rewards like travel, without incurring any debt. The author is not pictured.
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  • What is a zero-sum budget? It’s a type of budget that requires you to “spend” every dollar you earn by treating savings and investments like any other bills.
  • Holly Johnson’s family uses a zero-sum budget to manage their spending while they put everything on credit cards to take advantage of points and rewards.
  • For the zero-sum budget to work, they track their spending, pay off their cards multiple times a month, and keep an emergency fund for when unexpected expenses come up.
  • Visit Business Insider’s homepage for more stories.

Financial planners and experts like Dave Ramsey tend to agree on one important fact about credit cards – by and large, using them causes consumers to spend more money.

This concept of overspending is also underscored by multiple studies, including one from Dun & Bradstreet that shows when consumers use credit cards, they tend to spend 12% to 18% more than if they were paying in cash.

It’s easy to see why this might be true. After all, using credit is incredibly convenient, and we all know just how quickly your balance can rise if you’re not paying attention. Using credit also prevents you from facing the immediate impact of your spending; you may not receive the bill from a credit card purchase for another 30 days, after all.

Still, my family uses credit cards for nearly all our purchases (at least the ones we can) and I believe wholeheartedly that credit doesn’t cause us to spend more. But this isn’t by accident – it’s by design. My husband and I take steps to ensure our credit card spending aligns with our goals and that it never surpasses what we expect by using a zero-sum budget.

Obviously, we don’t just do this for convenience. We love credit cards due to the consumer protections they offer and the generous rewards they dole out. My favorite travel rewards credit cards (Chase Sapphire Reserve®, Hilton Honors Aspire Card from American Express, and Citi Premier℠ Card) help us save big over time since we travel around 16 weeks of the year, often to the tune of tens of thousands of dollars per year.

What is a zero-sum budget?

My husband and I use a zero-sum budget to plan our spending every month.

This type of budget requires you to spend every dollar you earn on paper and “give each dollar a job.” This ultimately results in a checking account balance near zero at the end of the month after all bills, spending, and investing has been taken care of. At that point, you start the next month over with a new spending plan and a clean slate.

With a zero-sum budget, you plan for regular bills, savings, and investing goals and pay each of them as if they were required. You pay your electric bill and mortgage just as you normally would, but you also pay your savings and your investment accounts as if they were bills as well.

In terms of fluctuating expenses, this is where the zero-sum budget becomes incredibly handy. We use our zero-sum budget to estimate all our fluctuating expenses for the month – things like gas, clothing, groceries, dining out, and entertainment. We set firm spending goals for each of these categories, then we aim to make sure we don’t spend more than we planned.

We track our spending

The zero-sum budget only works if you actually track your spending. We do this throughout the month by “checking in” with our credit card bills to see how much we’ve spent in fluctuating categories and how much we have left.

I typically budget $600 per month for groceries and dining out, for example, so I look at our credit card bills throughout the month to see where we are. If we have ten days left in the month and we have already spent $500 on food, I make sure we only spend another $100 in that category until the new month begins and I can replenish funding.

We also track other spending such as travel spending, gas, and entertainment. With the goal of spending only a set amount of money in each category each month, it’s crucial to keep up with your spending so you don’t go overboard.

We pay off our credit cards several times per month

Tracking our spending goes a long way toward keeping us accountable toward our goals, but we take one more step to ensure we don’t get off track. We pay our credit cards in full several times per month!

Doing so helps us ensure we are staying on track with our spending limits in each category, but it also help us feel the pain of our spending right away.

And while this is just a side benefit, paying our credit card bills off several times per month also helps us ensure our utilization (the percentage of our full available credit we’re using) remains extremely low. This helps us maintain an excellent credit score, which is an important component of our financial health.

We have an emergency fund

One reason our plan works so well is because we have a fully-funded emergency fund. This means that, if we face a surprise expense we didn’t plan for (home repair, car repair bill, medical bills, etc.), we can access our emergency funds to cover the expense instead of using money from our regular budget or our credit cards.

Read More: I moved my emergency fund to a high-yield online savings account, and after earning 20 times more interest I’d tell anyone to do the same

Having an emergency fund is crucial to using this budget successfully, especially if you own a home, have your own car, or have children. You never know what kind of surprises life will throw your way, but an emergency fund can help you ensure they don’t wreck your budget – and your finances.

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