How to Pay Off Your Debt with a Zero-Sum Budget

Credit cards, student loans, car payments, mortgage — the average American now owes $137,063, including mortgage debt. Younger people are more likely to carry higher credit card and student loan balances, but even though you’re more likely to owe much more on your mortgage as you grow older, retired Americans still carry an average of $2,500 on credit cards.

What financial goals could you achieve if you didn’t have to pay on credit cards, student loans, and car payments every month? You could pay off your mortgage earlier, put more away for retirement, or save more for a house downpayment. Even if it’s not your goal to become completely debt-free, paying off high-interest credit card debt and difficult-to-discharge student loans can only improve your finances. Zero-sum budgeting — a budgeting method by which every dollar you make is accounted for in some way — can help you get there.

Zero-Sum Budgeting Explained

The goal of zero-sum budgeting is to use every single dollar you make, either by spending it, saving it, investing it, or using it to repay debt. You can use a spreadsheet or a pen and paper to add up your income and expenses, then allocate each dollar to a purpose. At the end of each month, your budget should balance out to zero. At the very least, you should have a small amount of cash left over at the end of the month, but you should never overspend and go into the red.

Applying the Zero-Sum Method to Your Finances

Zero-sum budgeting is a fairly straightforward method to put into practice. Use your previous month’s income and expenses to get a realistic picture of how much you’re making and how much you spend. If you’re completely new to budgeting and haven’t been using any budgeting software to track your expenses and spending so far, you’ll need to carefully go over your previous month’s bank statements and credit card statements. Figure out how much you took home last month after taxes (remembering to add back in any amounts deducted from your paycheck for retirement, health insurance, and other benefits).

Next, add up all your spending for the month and divide it into categories: housing, utilities, groceries and eating out, insurance, car payments, phone bills, and so forth. Remember to include minimum payments on credit cards, student loans, mortgage debt, and car payments, even though you may pay more than the minimum on those debts in months to come. For the first month, at least, leave yourself wiggle room — add another 15 percent to the amount to cover expenses you may have forgotten.

Once you’ve brainstormed all your essential expenses — things you can’t live without, including clothes, gas, personal care items, and grooming — don’t forget to leave yourself from room for fun. While you might well be able to cut back on frivolous spending like eating out, going out drinking or to other entertainment, and miscellaneous shopping for nonessentials, you still need to give yourself some money to enjoy the things you enjoy. Otherwise, you’ll start to feel deprived and struggle to maintain your budget and reach your financial goals.

As you go over your spending for the previous month and put it into categories, you’ll begin to see areas where you can cut back. Maybe you have more streaming subscriptions than you need, or you’re still making monthly Patreon donations to that podcast you lost interest in months ago. Maybe you’re spending hundreds a month on restaurant meals or buying stuff you don’t need. By taking a look at your spending and setting some achievable goals, you can free up lots of money for debt repayment, and you can start an emergency fund that can keep you out of debt in the future.

Pay Yourself — and Your Creditors — First

It’s all-too-easy to sabotage a zero-sum budget by deciding to “wait and see” how the month pans out and pay “what you have left” towards debt. If you do that, you’re already setting yourself up to fail. Instead, commit to the budget and use the pay yourself first method to save and pay off debt.

Figure out how much you have to pay toward debt and pay it right away from each paycheck. Set up an automatic transfer to send funds to your emergency fund in your savings account. Then you don’t have to run the risk of spending it when you go over budget in one of your other categories.

Are you living paycheck to paycheck and racking up credit card debt, despite having a healthy income? A zero-sum budget can help you find the extra funds to knock out debt, fast, so you can focus on achieving your financial goals.

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