Zero Based Budgeting 101

Posted by on May 28, 2008 in Budgeting, Saving | 2 comments

987790_pie_chart.jpgThe phrase “zero based budgeting” is used in both business and personal finance budgets. However, I’m going to discuss how it applies to personal finance rather than business.

So what is a zero based budget?

A zero based budget, simply put, is a budget where your income minus your expenses = zero.

Income – Expenses = 0

What this means is that you’ve assigned every single peso of your income to some kind of expense, which includes your utilities, miscellaneous expenses, living expenses, and savings.

What are the benefits of this kind of system?

  • Every peso is accounted for.
  • You’ve already ‘spent’ your money on paper, before you actually spend it. So there’s less temptation to re-allocate money that was intended for bills into something frivolous (like a new, but unnecessary cell phone). For me, at least.
  • If you get some extra income you didn’t expect (such as winning the lottery, a cash gift – not from Malacanang, I hope), it’s easier to spend that money on where you really want/need it (savings, retirement, travel, or entertainment), instead of watching the money fade away with unfocused spending.
  • The problem with traditional budgets is that you often don’t account for the “fun” things. Since you have to spend all your money in zero based budgeting, you can set aside money for fun things – which hopefully makes you enjoy the budgeting process more.

How do you start with the zero based budget?

1) Write down and total all your income sources. This includes your paycheck, remittances from relatives (if any), and all the other places where you get your money from. I often don’t include interest from investments and accounts, because I spend the interest in the same place where they came from – such as my emergency fund or retirement savings.

If you’re a freelancer like me, your income probably varies month to month – so every time you budget you’ll be facing completely different figures.

You can use either net or gross income. Personally, I use my net income (after taxes, transaction fees, etc have been deducted – also known as ‘take home pay’).

So, basically, your list should look something like this:

  • Paycheck 1 – P12,000
  • Paycheck 2 -P8,000
  • Garage Sale – P1,500

And so on. Since there are numbers involved, I highly recommend using a spreadsheet so that it’s easy to add and subtract numbers.

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