Frugal Pinoy

The 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.

2) Write down and total all of your expenses. This means everything, side by side with the amounts. For me it would be something like this (I didn’t write all the amounts, as it would be irrelevant, but youg et the point):

• Meralco - P 1,750.00 (or whatever figure is on my bill that month)
• PLDT - P 1,600.00 (again, it depends on the figure)
• Water Bill - P 400.00
• Retirement Savings
• Emergency Fund
• Palengke
• Groceries
• Dining Out
• Entertainment (movies, theater tickets, etc.)
• Medical
• Savings for the Laptop I Want to Buy
• Savings for Travel
• Expenses for my Scooter (includes gas, accessories, and add-ons)
• Real Estate Taxes
• Hobbies
• Miscellaneous

Here are some other categories you might need, just take what applies to you:

• Taxes (if you used gross income and didn’t deduct them already)
• Mortgage Payments
• Car Payments
• Savings for gadgets/things you want to buy in the future
• House repairs/maintenance
• Donations to charity
• Subscriptions
• Car maintenance
• Debt Payment

Of course, you have to set your fixed expenses first (the ones that are the same amount every month). After that, you allocate money to your variable expenses (the ones that vary from month to month).

3) See if Income - Expenses = 0. If this is the case, celebrate. You’re lucky to get your first attempt at zero budgeting right. If not, here’s what you can do:

• If your income is more than your expenses, find other ways to spend the money. You can either allocate more money to an existing expense (such as savings or debt payment), or to find some new way to spend it such as:
  • a new investment you want to try
  • a gift for a loved one you’ve been neglecting
  • a gift for yourself

  If you don’t have any debt and you’ve got a well-padded emergency fund and savings, I think it’s safe to say you can do whatever you like with your extra income.

• If your income is less than your expenses, identify which of your expenses aren’t necessities or which of the amounts are self-imposed. If you have a spouse or family, it’s best to discuss what the ‘non-necessities’ are, because these tend to vary from person to person. Once you’ve identified the non-necessities, subtract some of the money alloted for them until your total income equals your total expenses.

My Experience With Zero Based Budgeting

Personally, it’s the only budgeting system that has stuck with me for a long time. It might not be the most accurate in the sense that every peso that goes out of your pocket is accounted for, but knowing that I have some ’sure’ money for all my expenses makes me feel financially secure. I like this system because it compares expenses with your income, rather than just listing all your expenses.

Have you tried this budgeting system before? How do you budget? Do you think this type of system will work for you?

Bookmark to:

This entry was posted on Wednesday, May 28th, 2008 at 11:06 pm and is filed under Budgeting, Saving. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.