Want to make your money grow? Here’s the best advice I can give you – idle money will find its way into another person’s pocket. Put another way, if you don’t put your money to work for you, it will go to work for someone else.
You see, every dollar you have should have a specific function. It should have a job. I mean real work, either paying bills, building savings, accumulating as investment capital or for fun (yes, it’s OK to have fun while you’re building wealth).
The idea behind this is that no dollar should be allowed to sit idle, with nothing to do. The reason? Because idle money has a strong gravitational pull to be spent. With “uncommitted” dollars, your mind will get busy thinking of a thousand and one ways to spend it – a new couch, a new car, a new camera, and so on. And before you know it, you’ve blown all your income after expenses and realize that you’re not getting ahead.
There’s a better way – it’s called zero-sum budgeting.
Before we begin, I want to address a sore point with many – budgeting. The word “budgeting” has become something of a four-letter word of late. I see many personal finance bloggers do all manner of word contortionism just to avoid saying “budget” because it’s apparently so off-putting. People cringe when they hear this word because it conjures up sacrifice, difficult decisions and constraint.
This is complete nonsense.
Here’s my take on this – if a person is such a delicate, free-spirited flower that they can’t bear the thought of using a disciplined method for managing their money, then they are not ready for the soul-liberating, life changing benefits of financial freedom and wealth.
They want the gain without the pain. It’s doesn’t work that way friends.
If the very thought of using a budget violates your sensibilities, then my suggestion is to give-up on the idea of financial freedom. Strong words? Yes, but wealth is built with discipline. Discipline with investing your money and discipline with spending your money.
There isn’t a second way. It’s the only way. Budgeting is not a demon. It’s a very useful tool to help you get to where you need to go. I always say, that you should fall in love with the process of getting wealthy (saving, budgeting, investing) as much as you’re in love with getting wealthy. Fall in love with budgeting and watch it help you grow your bank account.
Now, onto zero-sum budgeting.
A zero-sum budget is just a regular budget but one that forces you to spend every dollar you make — just not in the way you think. The basic premise of this budgeting strategy is that you must “give each dollar a job” to prevent waste and maximize your income, with the ultimate goal of reaching zero at the end of each month. However, zero-sum budgeting works by using last month’s real income to pay this month’s expenses, so it is important to have a savings cushion equal to at least a few month’s expenses before you get started.
The point of a zero-based budget is to make your income minus your expenses equal zero. If you cover all your expenses during the month and have $500 left over, you aren’t done with your budget yet. You must tell that $500 where to go. If you don’t, you lose the chance to make it work for you in the areas of getting out of debt, saving for an emergency, investing, paying off the house, or growing wealth. So, the idea is to tell every dollar where to go. Give every dollar a job.
Basically, zero-sum budgeting forces you to allocate all of your dollars to something, whether you use the money for bills, debt repayment, or for savings. All of your dollars. Because, money “without a job” will likely get spent — often carelessly.
And that’s why a zero-sum budget is the ideal financial plan for most hard-working families; nothing is wasted and every dollar has a purpose. Every dollar has a place and every dollar is in its place. When you create a comprehensive budget that accounts for everything, you theoretically shouldn’t have any cash left over to waste.
So, here’s the key with zero based budgeting – create a budget category for everything. Creating a zero-sum budget will only work if you are willing to budget for everything – even things you wish you didn’t have to budget for to begin with. When writing out your monthly budget, make sure to include all categories where you spend money. Doing so is the only way to ensure success.
Most people create the normal budget categories of savings, mortgage, credit cards, utilities, etc.. and whatever comes out the other side is their spending money, right? Wrong! With zero-based budgeting, you create categories for things such as – investment capital, a bootstrap fund for starting your own business and a fund to buy real estate, that you direct this extra money into. You see, this makes every dollar a soldier for you. There’s no “I’ll get around to investing in stocks one day”. That day will never come if you don’t pre-fund your stock investment fund. The money will just drift way into mindless spending. That’s the daily recipe of the mediocre my friends.
But not you. You want to become wealthy and to do that, you need to think of yourself as a business. Just as you wouldn’t want idle employees sitting around doing nothing at your business, so must you want all of your dollars employed, busy and working.
The value in zero based budgeting is that you have accounted for every penny you have in your budget. The act of sitting down and setting specific numbers is tremendously valuable because you’re actively making decisions, rather than letting things happen. You’re taking control of your money situation, rather than it controlling you. Money may be tight, but your finances will not take you by surprise every month sending you into a perpetual state of panic.
Remember, dollars need to be told what to do, and every dollar in your budget needs to have a task. In the end, there is no left over money. When the money is gone, it’s gone. No excuses, no negotiations.
Every dollar needs to work for you, as hard as you work to make every dollar.
Be free. Nothing else is worth it.
P.S. Why aren’t you wealthy yet? It’s because of something you don’t know. Otherwise you’d already be rich! Isn’t it time to learn what you don’t know? Consider signing-up for my newsletter below, to help you build wealth faster.
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