How to Repay Massive Amounts of Debt With a Zero Sum Budget
Updated May 3, 2017
A few years ago, I was successful at zero sum budgeting for the first time, and it helped me pay off my student loan.
I was inspired to pay off my student loan because I wanted to pursue a dream of running my own business full-time. Doing that with student debt wasn’t something I wanted to do.
I had tried budgeting before but was never able to stick to the process.
So, I tweaked my budget method to make it work for me.
I thought what I came up with was a unique budget idea.
I later found out it has a real name:
The zero sum budget (also called a zero based budget)!
In this post, I’m going to share with you how it works. Prepare to be amazed!
(Before we head into the budget, I put the step-by-step process in a workbook that you can use to fill out your own. Holla! Grab it here.
The Zero Sum Budget Explained
With a traditional budget, you make estimates of how much you’ll spend in each area for the month.
Then you monitor how much you’re spending for each line item.
If you spend over in one area, you make adjustments in others to compensate.
For me, there’s too much gray area in this type of budget.
I don’t have the presence of mind to check my budget daily or weekly to make sure I’m on track. So I tend to fall off track even if I’m using a nifty budgeting app like Mint.com that logs my spending automatically.
This type of budget, in my opinion, gives you an overview of your spending, but not how it relates to the actual money being brought in.
You can estimate all you want, but if what you spend sums up to be more than the cash you’re bringing in you’ll eventually rely on credit cards.
A zero sum budget is a little different.
It’s called a zero sum budget because your income minus expenses, debt, savings, investments, etc. should equal zero.
The budget is more centered around your income.
This means every dollar and cent of your income has a purpose. After you use this budget to pay off debt, it will help you avoid debt in the future since it’s a cash-based budget.
Way, way less ambiguity here.
To create this budget, you write down your income then list all of your expenses and the amounts you want to put towards debt, savings goals or investments.
At the end of this calculation, you’ll either have money remaining or a negative balance.
If you have a positive balance remaining – you can use the extra money as an allowance, which is what I did. Or you can redistribute some of the money back into your other line-items.
If you have a negative balance (not enough money to go around) – you can cut from non-essential parts of your budget or the amount going towards savings or debt. You can also negotiate for lower reoccurring bills. (Here’s a service I recommend if you have trouble reducing your bills).
Whatever you do, keep tweaking the budget until the ending balance is $0.
Putting the Zero Sum Budget into Practice
Okay, so you may be thinking the zero sum budget seems like a regular old budget. (Or a little confused by how it works. Don’t worry; we’ll go through an example.)
When I put it into practice, the zero sum budget was easier to keep track of than a traditional budget.
Since I knew exactly how much I could spend in each area and there was no money left over, I didn’t fall off the plan. And I only needed to check my budget each paycheck, which is when I distributed money according to my budget.
I kept a simple checklist in my day planner I took out each payday. It laid out where the money I earned should go whether to my checking account for groceries, bills, debt or savings.
Here’s a super simple example of how to create this budget.
First, write down your income, expenses and due dates for your bills.
Then subtract your income by expenses.
After doing the math, you’ll see in our example; there’s $1,005 left over to play around with per month.
In this situation, you would figure out what goal you want to put that extra money towards.
$300 to an allowance (and to serve as backup in case line-items like gas or groceries go over a little.)
$400 more to debt.
$305 more to savings.
Now, here’s the updated budget:
Here I played around with the numbers to get the budget to equal zero.
Remember, we tweaked the savings, debt payment and added allowance.
Now, every one of the dollars has a purpose and the budget balance is $0.
Getting Jiggy Each Pay Period
The next step I took is checking the due dates of each of my bills and organized what I could cover with each paycheck by the due date.
Essentially, using my first paycheck of the month for bills due around that time and the second check on bills later in the month.
Again, I had to tweak and split some of the line items throughout both paychecks to make sure bills were paid on time.
Here’s an example of it broken down by pay period:
Getting this budget started will take some time to organize and a calculator to crunch the numbers…
…but once you do its smooth sailing.
All you’ll need to do is use your budget as a checklist each time money comes in.
To hold yourself accountable, you can draw cash for line items like gas and groceries to avoid overspending. If you’re disciplined enough, you can simply keep this cash in your checking account.
But make sure you transfer money for savings and debt so you avoid having it in your grubby hands.
I always thought budgeting was tough, but this totally dumbed down version of the budget I did with a pen and paper is what I found helpful for aggressive debt repayment.
What can you do next?
If you want a template to create your own budget, head here.
If you want some more tips on how to save money (particularly when you’re broke) head here.
— This post or page may contain affiliate links. Don’t worry, though. I only promote products that I’ve used or truly believe in.