Zero-sum budgeting and the envelope system

Financial Wellness Feb 27, 2018

5 min read


In our previous post we outlined the 50/20/30 budget and the 60/20/20 budget, in this post we look at two slightly more hands on ways of budgeting: zero-sum budgeting and the envelope system.


Zero-Sum Budgeting

Zero-sum budgeting is one of the stricter ways of budgeting, and the basis of it is that at the beginning of the month you allocate every dollar a purpose. When written out it looks a bit like this:

Your income mi­nus savings minus expenses = $0

You will definitely have a written budget (whether it be in a spreadsheet or on paper), tracking your zero-sum budgeting in your head is just not possible.

  • First you need to write down what your income is each month.
  • Next you list what your savings are going to be (10% is a good starting place if you are starting from nothing). Treat your savings as an expense, you are paying your future self.
  • Then you list out your fixed expenses for the month – this could be mortgage/rent, insurance, phone bills, internet, loans – these aren’t all essential, but they are fixed. Categorise these expenses as needs vs wants.
  • Then you list out your variable expenses like food/groceries, utilities, entertainment, clothing, miscellaneous. Also categorise these expenses as needs vs wants.
  • Now you take your total income, less savings and expenses and see where you end up.

If the end number is negative then you have overspent and will need to make some adjustments (reduce spending, reduce savings or increase income). If you’re in the negative, then you can go back to your list and see whether there are any expenses you’ve classified as “wants” and perhaps look at getting these out of your life until you’re on top of your money. If you end up with a positive number, then the rest goes into your savings or pays extra off any debt you have.

Zero-sum budgeting is pretty strict but by monitoring every dollar you might find yourself getting ahead because you are on top of every single dollar of income and expense.


The envelope system

This one is a similar to the above, but instead of leaving money in the bank, you take out what you need for the month and pop it into envelopes. Once the envelope is empty you’ve reached your limit for the month. Money guru Dave Ramsay is a big fan of the envelope system.

You’ll still need to calculate your income and expenses as per the above process, and then take out the cash you’ll need to cover the month.

This works if you are paying paper bills up at the post office, but many places require a direct debit now (or you get charged extra fees for receiving a paper bill) so it can be a little tricky. You could use this idea for your ‘wants’ or discretionary spending and perhaps groceries so you don’t go over your budget, take out the cash you have allocated at the beginning of the month and pop it into your wallet and once it’s gone it’s gone.

Alternatively, you could set up multiple bank accounts as your “envelopes” and apply the same principle.


There’s definitely no one-size-fits all approach when it comes to budgeting, and you’re going to know for yourself whether or not any of the models outlined above are going to work for you. Or you could give a few a try and see how they work out.