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An elegant math trick borrowed from the business world helps you find cash you didn’t know you had

Reuters/Vincent Kessler
Get real, people.
Published This article is more than 2 years old.

An arcane budgeting trick from the 1970s is making a comeback with big companies, and its lessons can be transferred to your personal spending.

The unifying idea of the budgeting scheme, known as zero-based budgeting, is to allocate funding for the future based on what has worked in the immediate past. That may sound pretty obvious, but traditionally, businesses create a budget based on the previous year’s expenditures and increase it by a small percentage for the following year. With zero-based budgeting, no spending is taken for granted: Every expense must be justified and accounted for in a new budgeting period. In essence, you’re starting from “zero” all the time.

The concept took hold in the 1960s thanks to Peter Pyhrr, an accounting executive at Texas Instruments who sold then-Georgia governor Jimmy Carter on the approach to fix the state budget. He then spread it as a recessionary fix for budgeting while consulting the US federal government. It lost steam in the intervening years, because it was perceived as too time consuming (pdf), but has since made a comeback at large corporations like 3G Capital Partners, Kraft Foods, and Kellogg. The number of publicly traded US companies that mentioned zero-based budgeting in their quarterly earnings calls in 2013 rose from 14 to 90 between 2013 and 2015.

That’s because corporations facing rising labor and commodity prices and economic uncertainty now have a laser focus on containing costs. “Every single thing in our budget has now been zero-based,” ConAgra Foods CEO Sean Connolly recently told analysts, adding that it was key to a “relentless” campaign to rein in unnecessary spending.

Uncertainty—be it the quick pace of the job market or stock market volatility—has been equally paralyzing for individual savers. A handful of money gurus have seized on zero-based budgeting as a solution for squeezed households.

Here’s a rundown of how it works, based on the advice of Dave Ramsey, author of Total Money Makeover and one of the US’s most popular radio personalities.

1. Identify every monthly source of income and tally up the total. Remember to include not only your paycheck, but cash that might be coming in from side jobs, child support, even items that you sell.

2. Make a list of every single monthly expense. The key is to remember that each month may be different—you’re making a car insurance payment in certain months, while others might see a large outflow for vacation. That’s why you want to focus on each budget monthly.

3. Each month, subtract what you’re spending from your income. In a perfect world, the result should be zero, but it probably won’t be at first. It may take a few months to adjust how much you’re bringing in or to reduce how much you’re spending. But the key, says Ramsey, is to never spend on anything you’re not accounting for. So if you’ve allocated $200 for school clothes, adhere to that for the month even if you blew all of it on your kid’s dress for fall formal. You may have to adjust it in the following month.

4. At the end of the month, assign a “job” to the money you (hopefully) have leftover. If after all your expenses you’re still netting $400, don’t let it just sit in your checking account, because money that’s unaccounted for is easily wasted. Instead, allocate it into a savings account for an emergency fund, invest it into a Roth IRA, or even use it for a much-needed upgrade on furniture. But whatever you do, give it a purpose.

In a recent post on the Billfold, a teacher whose circumstances changed dramatically when she quit her job said zero-based budgeting forced her “to be brutally honest” and re-examine her priorities. “You can’t just trust your memory or what you think you spend every month,” Shaunta Grimes wrote about her experience. When she and her husband totaled their monthly outgo, they found that “both of us were completely clueless,” she said. “No wonder we constantly felt poor.”

Once Grimes and her husband had cut down on monthly expenses, they started “zeroing out” their leftover cash at month’s end by diverting it to an emergency fund. Once that was funded, ”zeroing out” meant “using our extra cash to pay off debt or start saving for upcoming goals,” she said.

In another take on zero-based living, one writer advocated for regularly breaking down expenditures in terms of time (i.e. time spent on family, travel, health, well-being), and ruthlessly squaring that with how you earn.

In the age of the gig economy, how we earn our living has become incredibly complicated. Reining in our monthly spending (and saving) shouldn’t have to be.

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