Put yourself at ease by protecting those you love
16 December 2022
Achieving financial wellness seems like a long shot if your income is not at an ideal level. However, you don’t need to be rich to be financially sound. With the right financial management strategy, you can keep track of your spending, work towards your long-term goals, and be in a position wherein you can better absorb financial shocks.
It’s difficult to save up when there are always recurring and unforeseen expenses creeping up on you. Avoid mismanaging your money and keep your finances in order with detailed financial planning. There are multiple ways for you to save money, but if you’re looking for a new budgeting method, this article will guide you through everything you need to know about zero-based budgeting (ZBB).
What is Zero-Based Budgeting?
Zero-based budgeting (ZBB) is a financial management technique in which all expenses are justified. Every period, the budget starts from a “zero base.” It means that there should be no previous balances or expenses carried over to the next period.
This method is similar to how the envelope system works. At the start of the month, you create a zero-based budget by allocating your money toward all of your needs (savings, debt payments, utilities) for that month. ZBB allows you to anticipate expenditures and subtract them from your income until it equals zero.
How to Create a Zero-Based Budget
1. Establish your income.
Before creating a budget, find out how much money you’re working with. Total your monthly paycheck and your other sources of income, if any.
2. Track expenses for a few months.
Even though ZBB works with a “zero-base,” it’s important to know your monthly expenses and how much you typically spend on them. By doing this, you can concentrate on the areas you want to allocate more budget on and know where to cut back.
3. Create categories.
Identify your financial priorities and expenses, then categorize them into needs, wants, emergencies, debt, and other saving goals. You can even go as specific as “travel fund” or “savings for a new car.”
4. Apply ZBB.
Once you have your categories laid down, allocate your monthly earnings into your expense categories. Evaluate your budget for each category. By doing this and budgeting down to zero, you can justify how you spend your money.
ZBB vs. Traditional Budgeting
With traditional budgeting, you only analyze your new expenditures and use your previous budget as the standard for your next budgeting period. For example, if your family spends ₱5,000 on monthly groceries, you use that number as a base for the next month’s grocery budget. If there’s a case of inflation, you allocate more money into your grocery budget on top of the ₱5,000 base budget.
On the other hand, with ZBB, you work on your budget in more detail and with proper scrutiny. Firstly, you start fresh with a “zero-base.” You list down every item or service you plan on buying and make sure it fits within your set budget. With this method, you get to justify each purchase and scrutinize where your money is going. If you’re on a limited budget, this strategy can help cut unnecessary expenses.
Advantages of Zero-Based Budgeting
Drawbacks of Zero-Based Budgeting
Is Zero-Based Budgeting Right for You?
ZBB isn’t for everyone. As mentioned above, it may be complicated to apply the zero-based method if you’re a freelancer or a worker who has irregular income. However, if you know how much you earn on average for a certain period, you can apply this method. You don’t have to cover the whole month. Maybe you can start with budgeting for the first two weeks.
If you’re an organized person or just want your finances organized, the ZBB model is perfect for you. You’ll get to track all of your expenses, making sure you’re not overspending on a particular category. It keeps you focused on saving and paying off your debts. As long as you have the time and enjoy handling your finances, ZBB can be a great fit for you.
Reach Your Financial Goals
A zero-based budget allows you to stay on top of your expenses by re-evaluating your cash flows and justifying all your expenditures. It can help you restore control over your finances, save up on the things that matter most, and achieve your dream financial life.
Part of smart financial planning is making the right investments. It’s just as important as following a budget plan. Life will always bring unexpected financial changes that can throw your budget off track, none more so than medical emergencies. It’s best to be prepared and invest in comprehensive health insurance plans in the Philippines to ensure that you and your loved ones are well taken care of in case of difficulties. Get in touch with one of our Bancassurance Sales Executives today to learn more.
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