Hey, everyone! Today I’m excited to introduce you to fellow blogger Sandra Parsons. She’s talking about one of the financial basics that we here at Changing Our Default haven’t addressed yet: the zero-sum budget. And as a fun bonus, she hails from Canada, so I know you’ll enjoy those distinguished spellings. 🙂 Take it away, Sandra!
If you’ve visited my blog A Theory of Change, you know I’m all about finding ways to develop positive habits to make a better life. I believe that a big part of making a better life is getting in control of your finances.
I love the idea of making my money work for me. It’s not enough for me to know that I’m paying my bills on time and more or less living within my means. I want to know where every dollar is going, why it’s going there, and what it’s doing. I want to know that I’m maximizing the value of my money (’cause, you know, I work pretty hard to earn it).
So how do I that? Well, I track every cent that I earn, and every cent that I spend.
Now, I know a lot of people might find this extreme. And it is – extremely smart (was that lame? Sorrynotsorry).
How to track your spending
Hear me out. What I mean is that at the end of every month, I make a budget for the next month. I use an excel sheet to tally up all my projected expenses, and all my projected income. I know how much my salary is going to be, and I can estimate freelance income, so I give every dollar a job. Once I have budgeted my fixed expenses (which includes contributions to savings plans), I make some estimates for variable expenses, and then decide how I’ll allocate what is left over (if anything). Note that I allocate every dollar, even those that are left over after expenses and savings are covered. This is called a zero-sum budget because projected income minus projected expenses equal zero.
Then every day that I spend money, I log the transaction into my excel sheet and assign it a category. My excel sheet tallies a running total for each category I’ve created a budget for. Some people think this sounds like a lot of work, but popping my daily transactions into that spreadsheet only takes two minutes. There are also apps that connect to your bank/credit card account that can do this for you. With many banks, your financial dashboard via online banking can do this for you. There are lots of options out there, including good old-fashioned pen and paper. I just find the excel sheet works for me.
When you first try this out, you might be surprised to discover that your projected estimates were way off. Don’t be discouraged. It happened to me the first month, too. It really opened my eyes to the fact that I didn’t know where my money was going. After a couple of months tracking your spending and using a budget, you will get a more realistic idea of how you are allocating your money, and start developing ideas for how to improve that allocation.
Mrs. COD: Um, confession time! Mr. COD and I actually don’t keep a zero-sum budget. But I have no doubt that we could benefit from it, and here’s why…
Why bother tracking your spending?
Why do I bother tracking every single transaction? I’m glad you asked. There are actually three main reasons:
1) Tracking my spending day by day allows me to glean whether I’m on track with my budget. When I keep everything up to date, I know exactly where I stand. When I pop a restaurant bill into my spreadsheet and see that I’ve almost spent everything I allocated to my eating out budget for the month, I know I have to take a pass if a friend invites me for dinner tomorrow night (or, I have to adjust my budget somewhere else to make sure income minus expenses equals zero).
2) Tracking my spending makes me mindful of how I am spending my money. Lots of people are doing well financially without tracking their spending, and that’s awesome. But I can guarantee you, most of those people don’t know exactly where their money is going. And some of them would be pretty surprised if they took a few minutes to look at the details. My hard-earned money is one of the most powerful tools at my disposal, and I want to make sure it’s doing exactly what I want it to.
3) Being mindful of how I am spending my money allows me the opportunity to decide if I need to make a change. I really believe that you cannot improve what you do not measure. So if you never take the time to look at how you’re spending your money, you’ll never start thinking about ways to spend smarter. And that’s an opportunity I’m just not willing to leave on the table.
No matter how financially successful I become, I don’t think I’ll ever give up tracking my spending through a zero-sum budget. To me, it’s the most important behaviour in my financial arsenal. It is the basis of budgeting, and budgeting is the basis of other important financial habits like paying down debt and saving. If you’re not currently tracking your spending, I hope you’ll consider it. If you are, I’d love to hear from you. What prompted you to make the change? What is working best for you? Do you have any tips to share?