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Featured, Strategies to Save

Why Everyone Loves the Zero-Sum Budget

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Why Everyone Loves the Zero-Sum Budget

How would you like a budget that lets you spend literally every single dollar you have? That’s exactly how the zero-based budget operates, and it’s growing increasingly popular as a tool to help people save more and spend less.

The concept of zero-based budgeting has actually been around for several decades. It was developed in the 1970s by Peter A. Pyhrr, who worked as a manager at calculator-maker Texas Instruments in Dallas, Texas. At the time, the budgeting method caught on as a popular way for businesses to budget but eventually went out of fashion.

Today, zero-based budgeting is having something of a renaissance, not as a business accounting tool but for helping people manage their personal finances.

How Zero-based Budgeting Works

The goal of zero-based budgeting is to ensure you don’t spend any money that you don’t have to spend. The method gives you an opportunity to review each dollar in your budget and assign amounts to spending categories so that you can get a picture of where all of your money goes each month.

“There should never be any money ‘left over’ because a zero-based budget includes expenses such as ‘investments’ and ‘savings’,” says Scottsdale, Ariz.-based Certified Financial Planner Alexander Koury.

The goal is simple: income – spending = 0

How to Follow a Zero-based Budget

List all of your net monthly income

To kick off your zero-based budget, figure out exactly how many after-tax dollars you have coming in every month (you could track your earnings biweekly, as well).

If you’re a salaried worker with a steady income, it’s fairly simply to predict your earnings. If you do contract work or your income is irregular, you may want to average your income for the past three months to create a starting point, then adjust it accordingly.

List all of your sources of income to get your total income for the budgeting period. That number will be your starting point.

Track your past spending

A benefit of the zero-sum budget is that it “helps create awareness of all outflows and expenses,” says San Francisco-based financial planner Catherine Hawley.

In short, you’ve got to know where your money is disappearing to every month.

When you become fully aware of where all of your money goes, you can discover where you’ll need to control your spending.

Start by listing all of your fixed expenses for each period. Those are expenses that you know you will need to make each period. For example, in a monthly budget you may have rent, utilities, and subscription services listed as your fixed expenses.

Next figure out where you spend your flexible dollars. Try an app like Mint to easily categorize your expenses. Or do it the old-fashioned way with a spreadsheet or pen and paper. Koury recommends pulling your past 12 months of expenses to locate and categorize your purchases.

Create your budget

Once you have your income and expenses calculated, it’s time to throw it all together and zero out your budget.

“Budgeting is the foundation on which financial planning is built. Without having a budget, it is difficult if not impossible to grow and create wealth,” says Koury.

Take your income for the budgeting period and subtract your fixed expenses. Hopefully, you’ll still have money to play with, because next you’ll need to decide how much you want to “spend” on savings and long-term goals like retirement.

“When you list out your expenses, put yourself at the top of the expense list. You are the most important, and you always want to pay yourself first,” says Koury.

Fixed expenses and savings (paying yourself) should always come first on your budget. If you still have money left over, don’t let it sit in your account without a purpose. With a zero-sum budget, every dollar you earn should have a job. Otherwise, it’s easy to lose track of those dollars. Go back to the beginning, when you listed out your spending categories. A trend probably emerged, showing you where you spend the most. Maybe it’s eating out with friends, or buying toys for the kids. Designate a certain amount you’re allowed to spend out of your total budget to those categories. Once you set a limit for spending there, you’re less likely to go overboard.

If you get paid bimonthly or biweekly, you may want to create two versions of a budget — one for the first half of the month and another for the second half of the month to accommodate for bills for fixed expenses due at different times in the month.

Pros and Cons of Zero-based Budgeting

Pro: You know where your money is going.

The best part about a zero-based budget is that you’ll know exactly what you are spending you hard-earned money on. At first, your spending habits may surprise you. You may be shocked that you spent more on dining out than on groceries last night, or that your shopping habit has gone a bit overboard.

“The main reason people use zero-based budgeting is to control their spending habits in the face of impulsive behavior,” says Dr. Constantine Yannelis, an assistant professor of finance at NYU Leonard N. Stern School of Business.

When every dollar you earn is assigned to a task, you are able to visualize and rationalize your budget each period. You can see how cutting back in certain spending categories will help you to reach your financial goals.

Con: A zero balance requires a lot of discipline.

If this is your first attempt at budgeting, you may want to ease into it, as it requires you to be very disciplined.

“[The budget] may become too strict, just like a diet, and if one gets off track even for a bit, they may stray from using it and they may go back to their old ways,” warns Koury.

Unfortunately, the budget that creates a place for every dollar doesn’t leave much room for error.

“The chief pitfall of zero-sum budgeting is that it can decrease flexibility, and if adhered to strictly, it can lead to artificial constraints on what individuals may purchase,” says Hawley.

Don’t be too hard on yourself. It may take a couple of budget cycles for you to get used to your new budget and to adapt it to your lifestyle.

Pro: If you stick to it, you’ll see results.

This budget is not for the commitment-phobic. The zero-balance budget is an exercise.

“It is a very results-based approach to creating great results,” says Koury. “The more disciplined you are in your approach, the more effective the results can be. If you have specific goals, then you would want to use this approach.”

Dr. Yannelis says the zero-balance method is also good for new budgeters because “it provides a commitment device for individuals with difficulty meeting their spending and savings objectives.”

Con: This may not work well for emergencies.

The zero-balanced budget is pretty strict, so “it may not work well if people have unpredictable spending needs due to health issues, children, or other life events,” says Dr. Yannelis.

To combat this, you’ll want to make sure to contribute to an emergency fund each period and to make sure you have insurance coverage for all of the important things — health care, disability, life, home, auto, etc. You can’t predict when an emergency will cost you financially, but it’s better to have cash stashed so a small emergency with the kids won’t interrupt your budgeting goals.

Pro: You can track progress toward your goals.Using this budget — especially when you use it with a budget-tracking tool— can help you see the progress you are making toward your savings and debt repayment goals. If you can stick to the contribution you make each month, you can more easily predict when you will reach your goals.

Mark that date, and stay as close to your budget as possible to reach your goal by it. If you happen not to spend all of your money in a particular category, it has to go somewhere. You can contribute the extra funds to your savings or debt payment goals to beat your target date.

Con: You may be “overdoing” your needs.

The zero-balanced method can get very detailed since you need to track the route of each and every penny.

“It can be more detail than some people need. For some it’s enough to carve out long-term savings and live off the rest,” says Hawley.

Koury says the method works better “for those that are diligent about their finances and are analytical.”

If you make more than enough money, you might not care or feel the need to make a super-detailed budget.

“Some people just like knowing they put a certain amount of money in their savings account monthly, and they spend the rest,” says Koury.

Tools to Help You Master Your Zero Balance

EveryDollar and EveryDollar Plus

EveryDollar is the budgeting app created by personal finance guru Dave Ramsey, who popularized the zero-based budget for personal use. You can use it on your desktop or smartphone.

The app automatically creates eight spending categories that cover the basics of most budgets, but you can create budget-specific custom categories, too. It also lets you set up “funds,” which are saving accounts. This lets you set aside money for an emergency fund or other savings goal. The app also sends you tons of reminders to stay on top of your goals.

In addition to the basic version of EveryDollar, there is a premium version called EveryDollar Plus that can be connected with your bank account to pull in your transactions automatically.

You Need a Budget (YNAB)

You Need a Budget — aka YNAB — is budgeting software that’s also available for desktop and mobile devices. The company’s mantra, “Give every dollar a job,” describes its zero-balance foundation.

It prompts you to assign the money you have to a budget category. When you have one month’s worth of expenses fully funded, you can start budgeting funds for future months.

YNAB will cost some money to use. The platform offers a 34-day free trial, after which you will have to pay either $5 a month or $50 a year. Students can get 12 months of YNAB budgeting for free, after which they’ll be eligible for a 10% discount for one year.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brittney Laryea
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Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at [email protected]

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Featured, Personal Loans, Reviews

Marcus by Goldman Sachs Review: GS Bank Takes on Online Savings, CDs, and Personal Loans

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Marcus by Goldman Sachs savings account

A very high interest rate and no fees make this one of the best savings accounts out there.

APY

Minimum Balance Amount

2.00%

None

  • Minimum opening deposit: None. However, you’ll need to deposit at least $1.00 if you want to earn any interest
  • Monthly account maintenance fee: None
  • ATM fee: N/A
  • ATM fee refund: N/A
  • Overdraft fee: None

This is a great account for almost anyone. However, before you click that “Learn More” button below, there are a couple of things to know.

No ATMs. First, Marcus by Goldman Sachs doesn’t offer ATM access to your savings account. You’ll either need to deposit or withdraw money by sending in a physical check, setting up direct deposits, or by moving the money to and from your other bank accounts via ACH or wire transfer.

No checking account. Second, Marcus does’t offer a corresponding checking account. That means you can only use this account as an external place to park your cash from your everyday money flow.

Keeping a separate savings account does have its benefits. For example, it’s harder to tempt yourself to withdraw the cash if you’re a chronic over-spender. But, it also means that there might be a delay of a few days if you need to transfer the money out of your Goldman Sachs online savings account and into your other checking account.

How to open a Goldman Sachs online savings account

It’s really easy to open an online savings account with Marcus by Goldman Sachs. You can do it online or over the phone as long as you’re 18 years or older, have a physical street address, and a Social Security Number or Individual Taxpayer Identification Number.

You’ll be required to sign a form which you can do online, or by mail if you’re opening the account over the phone.

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How their online savings account compares

Marcus’ online savings account can easily be described with one word: outstanding.

You’ll get a relatively high interest rate with this account, which is among the best online savings account rates you’ll find today. In fact, these rates are currently over seven times higher than the average savings account interest rate.

Even better, this account won’t charge you any fees for the privilege of keeping your money stashed there. It’s a tall order to find another bank that offers these high interest rates with terms this good.

Marcus by Goldman Sachs CD rates

Sky-high CD rates, but watch out for early withdrawal limitations.

Term

APY

Minimum Deposit Amount

6 months

0.60%

$500

9 months

0.70%

$500

12 months

2.25%

$500

18 months

2.25%

$500

24 months

2.30%

$500

3 years

2.50%

$500

4 years

2.40%

$500

5 years

2.45%

$500

6 years

2.50%

$500

  • Minimum opening deposit: $500
  • Minimum balance amount to earn APY: $500
  • Early withdrawal penalty:
    • For CDs under 12 months, 90 days’ worth of interest
    • For CDs of 12 months to 5 years, 270 days’ worth of interest
    • For CDs of 5 years or over, 365 days’ worth of interest

Marcus’ CDs work a little differently from other CDs. Rather than having to set up and fund your account all at once, Goldman Sachs will give you 30 days to fully fund your account.

Once open, your interest will be tallied up and credited to your CD account each month. You can withdraw the interest earned at any time without paying an early withdrawal penalty, but heads up: If you withdraw the interest, your returns will be lower than the stated APY when you opened your account.

If you need to withdraw the money from your CD, you can only do so by pulling out the entire CD balance and paying the required early withdrawal penalty. There is no option for partial withdrawals of your cash.

Finally, once your CD has fully matured, you’ll have a 10-day grace period to withdraw the money, add more funds, and/or switch to a different CD term. If you don’t do anything, Marcus will automatically roll over your CD into another one of the same type, but with the current interest rate of the day.

How to open a Goldman Sachs CD

Marcus has made it super simple to open up a CD. First, you’ll need to be at least 18 years old, and have either a Social Security Number or an Individual Taxpayer Identification Number.

You can open an account easily online, or call them up by phone. You’ll need to sign an account opening form, which you can do online or via a hard-copy mailed form. Then, simply fund your CD account within 30 days, and you’re all set.

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How their CDs compare

The interest rates that Marcus offers on their CDs are top-notch. In fact, a few of their CD terms are among the current contenders for the best CD rates.

If you’re interested in pursuing a CD ladder approach, Marcus is one of our top picks because each of their CD terms offer above-average rates. This means you can rest easy that you’ll get the best rates for your CD ladder without having to complicate things by spreading out all of your CDs among a handful of different banks.

The only downside to these CDs compared with many other banks is that you can’t withdraw a portion of your cash if you need it. It’s either all-in, or all-out. However, once out, you’re still free to open a new CD with the surplus cash, as long as it’s at least the $500 minimum deposit size.

Marcus by Goldman Sachs personal loan

Personal loans offered by Marcus have low APRs, flexible terms, and no fees.

Terms

APR

Credit Required

Fees

Max Loan Amount

36 to 72 months

5.99%-28.99%

Not specified

None

$40,000

Marcus by Goldman Sachs® personal loans can be used for just about anything, from consolidating debt to financing a large home improvement project. They offer some of the best rates available, with APRs as low as 5.99%, and you’ll not only be able to choose between a range of loan terms, but you can also choose the specific day of the month when you want to make your loan payments.

While there are no specific credit requirements to get a loan through Marcus, the company does try to target those that have “prime” credit, which is usually those with a FICO score higher than 660. Even with a less than excellent credit score, you may be able to qualify for a personal loan from Marcus, though, those that have recent, negative marks on their credit report, such as missed payments, will likely be rejected.

Applicants must be over 18 (19 in Alabama and Nebraska, 21 in Mississippi and Puerto Rico) and have a valid U.S. bank account. You are also required to have a Social Security or Individual Tax I.D. Number.

No fees. Marcus charges no extra fees for their personal loans. There is No origination fee associated with getting a loan, but there are also no late fees associated with missing payments. Those missed payments simply accrue more interest and your loan will be extended.

Defer payments. Once you have made on-time payments for a full year, you will have the ability to defer a payment. This means that if an unexpected expense or lost job hurts your budget one month, you can push that payment back by a month without negatively impacting your credit report.

How to apply for a Marcus personal loan

Marcus by Goldman Sachs offers a process that is completely online, allowing you to apply, choose the loan you want, submit all of your documents, and get approved without having to leave home. Here are the steps that you will complete to get a personal loan from Marcus:

  1. Fill out the information that is required in the online application, including your basic personal and financial information, as well as how much you would like to borrow and what you will use the money for.
  2. After a soft pull on your credit, and if you qualify, you will be presented a list of different loan options that may include different rates and terms.
  3. Once you have chosen the loan you want, you will need to provide additional information to verify your identity. You may also be asked for information that can be used to verify your income and you will need to provide your bank account information so that the money can be distributed.
  4. You will receive your funds 1 – 4 business days after your loan has been approved.

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How their personal loans compare

Marcus offers low APRs and flexible terms with their personal loans, but their main feature is that they have no fees. If you are looking for a straightforward lending experience with no hidden fees or costs, Marcus will be perfect for you since you won’t even have to worry about late fees if you happen to miss a payment.

While Marcus offers some great perks, you may be able to get a lower rate if you choose to go with another lender, such as LightStream or SoFi. Both of these lenders offer lower APR ranges and they don’t charge origination fees, though, LightStream will do a hard pull on your credit to preapprove you.

LendingClub and Peerform both have lower credit requirements than Marcus, but they also charge origination fees and, being P2P lending platforms, you will need to wait for your loan to be funded and you run the risk that other users might not fund your loan.

Overall review of Marcus by Goldman Sachs‘ products

Marcus has really hit it out of the park with their personal loans, online savings, and CD accounts. Each of these accounts offers some of the best features available on the market, while shrinking the fees down to a minuscule, or even nonexistent, amount. Their website is also slick and easy to use for online-savvy people.

The only thing we can find to complain about with Marcus is that they don’t offer an equally-awesome checking account to accompany their other deposit products. Indeed, it seems like Marcus has turned their former hoity-toity image around: Today, they’re a bank that we’d recommend to anyone, even blue-collar folks.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Lindsay VanSomeren
Lindsay VanSomeren |

Lindsay VanSomeren is a writer at MagnifyMoney. You can email Lindsay here

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Featured, Health

5 Ways to Keep Medical Debt From Ruining Your Credit

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

iStock

Your physical well-being isn’t the only thing at stake when you go to the hospital. So, too, is your financial health.

According to the Consumer Financial Protection Bureau, more than half of all collection notices on consumer credit reports stem from outstanding medical debt, and roughly 43 million consumers – nearly 20% of all those in the nationwide credit reporting system – have at least one medical collection on their credit report.

Now, you might be inclined to think that, because you’re young or have both a job and health insurance, medical debt poses you no risk. Think again. According to a report from the Kaiser Family Foundation, roughly one-third of non-elderly adults report difficulty paying medical bills. Moreover, roughly 70% of people with medical debt are insured, mostly through employer-sponsored plans.

Not concerned yet? Consider that a medical collection notice on your credit report, even for a small bill, can lower your credit score 100 points or more. You can’t pay your way out of the mess after the fact, either. Medical debt notifications stay on your credit report for seven years after you’ve paid off the bill.

The good news is that you can often prevent medical debt from ruining your credit simply by being attentive and proactive. Here’s how.

Pay close attention to your bills

Certainly, a considerable portion of unpaid medical debt exists on account of bills so large and overwhelming that patients don’t have the ability to cover them. But many unpaid medical debts catch patients completely by surprise, according to Deanna Hathaway, a consumer and small business bankruptcy lawyer in Richmond, Va.

“Most people don’t routinely check their credit reports, assume everything is fine, and then a mark on their credit shows up when they go to buy a car or home,” Hathaway said.

The confusion often traces back to one of two common occurrences, according to Ron Sykstus, a consumer bankruptcy attorney in Birmingham, Ala.

“People usually get caught off guard either because they thought their insurance was supposed to pick something up and it didn’t, or because they paid the bill but it got miscoded and applied to the wrong account,” Sykstus said. “It’s a hassle, but track your payments and make sure they get where they are supposed to get.”

Stay in your network

One of the major ways insured patients wind up with unmanageable medical bills is through services rendered – often not known to the patient – by out-of-network providers, according to Kevin Haney, president of A.S.K. Benefit Solutions.

“You check into an in-network hospital and think you’re covered, but while you’re there, you’re treated by an out-of-network specialist such as an anesthesiologist, and then your coverage isn’t nearly as good,” Haney said. “The medical industry does a poor job of explaining this, and it’s where many people get hurt.”

According to Haney, if you were unknowingly treated by an out-of-network provider, it’s would not be unreasonable for you to contact the provider and ask them to bill you at their in-network rate.

“You can push back on lack of disclosure and negotiate,” Haney said. “They’re accepting much lower amounts for the same service with their in-network patients.”

Work it out with your provider BEFORE your bills are sent to collections

Even if you’re insured and are diligent about staying in-network, medical bills can still become untenable. Whether on account of a high deductible or an even higher out-of-pocket maximum, patients both insured and uninsured encounter medical bills they simply can’t afford to pay.

If you find yourself in this situation, it’s critical to understand that most health care providers turn unpaid debt over to a collection agency, and it’s the agency that in turn reports the debt to the credit bureaus should it remain unpaid.

The key then is to be proactive about working out an arrangement with your health care provider before the debt is ever sent to a collection agency. And make no mistake – most providers are more than happy to work with you, according to Howard Dvorkin, CPA and chairman of Debt.com.

“The health care providers you owe know very well how crushing medical debt is,” he said. “They want to work with you, but they also need to get paid.”

If you receive a bill you can’t afford to pay in its entirety, you should immediately call your provider and negotiate.

“Most providers, if the bill is large, will recognize there’s a good chance you don’t have the money to pay it off all at once, and most of the time, they’ll work with you,” Dvorkin said. “But you have to be proactive about it. Don’t just hope it will go away. Call them immediately, explain your situation and ask for a payment plan.”

If the bill you’re struggling with is from a hospital, you may also have the option to apply for financial aid, according to Thomas Nitzsche, a financial educator with Clearpoint Credit Counseling Solutions, a personal finance counseling firm.

“Most hospitals are required to offer financial aid,” Nitzsche said. “They’ll look at your financials to determine your need, and even if you’re denied, just the act of applying usually extends the window within which you have to pay that bill.”

Negotiate with the collection agency

In the event that your debt is passed along to a collection agency, all is not immediately lost, Sykstus said.

“You can usually negotiate with the collection agency the same as you would with the provider,” he said. “Tell them you’ll work out a payment plan and that, in return, you’re asking them to not report it.”

Most collection agencies, according to Haney, actually have little interest in reporting debt to the credit bureaus.

“The best leverage they have to get you to pay is to threaten to report the bill to the credit agencies,” he said. “That means as soon as they report it, they’ve lost their leverage. So, they’re going to want to talk to you long before they ever report it to the bureau.

“Don’t duck their calls,” he added. “Talk to them and offer to work something out.”

Take out a personal loan

Refinancing your medical debt into a personal loan is another move you can consider making, particularly if you can get a lower interest rate than you could with a credit card, and you aren’t able to secure a 0% credit card deal. Peer-to-peer lenders LendingClub and Prosper both start with APRs as low as 6.95%, and LendingClub’s origination fee starts as low as 1%.

Even better, SoFi offers personal loans at a rate as low as 5.99% and has no origination fee (although you do need a relatively high minimum credit score to get a loan, at 680).

MagnifyMoney’s parent company, LendingTree, features a handy personal loan tool where you can shop for the best loan for you.

Bottom line

Dealing with medical debt can be particularly stressful, as you have to worry about money matters along with managing health issues. However, having medical debt does not have to spell disaster. If you follow one or more of the steps above, you should be able to keep your finances healthy.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

MagnifyMoney
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Have a question to ask or a story to share? Contact the MagnifyMoney team at [email protected]