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  • How to Determine if Zero-Based Budgeting Is Right for You

    16 December 2022


    How to Determine if Zero-Based Budgeting Is Right for You

    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.

    Rent P6,000
    Groceries P2,000
    Eating out P700
    Bills P1,200
    Insurance P800
    Transportation P1,200
    Emergency fund P1,100
    Retirement P1,000
    Travel fund P500
    Other P500
    Amount Left P0

    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

    • Financial awareness and control - When you don’t know where your money goes, you feel like you don’t control your finances. With ZBB, you’re more conscious of your cash flow so that you don’t spend the money you don’t have.

    • Budget flexibility - The ZBB system is customizable. Since you start with a “zero base,” you can adjust your budget and modify categories every month.

    • Cost-effective - By putting your expenses under a microscope, you can think twice about your spending and find ways to save more, like searching for more affordable alternatives on costs you think you can trim down.

    Drawbacks of Zero-Based Budgeting

    • Time-consuming - Working with ZBB eats up a lot of your time since you need to prepare a budget thoroughly and monitor your spendings closely.
       
    • Challenging for irregular income workers - If you’re a freelancer with no set monthly income, planning your budget with ZBB may be challenging. Since your earnings fluctuate, you don’t always know how much money you’ll have to budget down to zero. 

     

    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.      

    Did you know?

    You can buy a life insurance at any BPI branch nationwide! Talk to a bancassurance sales executive now!

    RECOMMENDED PRODUCTS

    Life Ready Plus

    Protection

    Get the power to protect yourself and your family with an affordable life insurance plan. Life Ready Plus is easy on the budget, but offers coverage of up to 30 times your yearly payment to support the financial needs of your loved ones.

    The plan gives you fast access to coverage and benefits and can match your long-term financial goals when maintained within an appropriate term.

    Philam Life Vitality

    Critical Care Max

    Health

    Critical Care Max will help you make more memories by providing financial aid during the early stages of a critical illness. This unit-linked life and health insurance plan offers assistance on your recovery. You can build a health fund that grows over time, depending on your chosen investment, to pay for other medical costs.

     

    In addition, it comes with a hospital confinement benefit that will replace lost income due to hospitalization. This daily cash benefit may also come with optional benefits like cash payout for surgery-related expenses, allowance for consultation fees, and many others.

    Philam Life Vitality

    Build Estate Plus

    Life Protection

    Let your loved ones enjoy the fruits of your labor even when you’re no longer around. Build Estate Plus is a unit-linked protection plan that will cover your estate taxes after your passing so that you can ease your family’s burden.

    It doubles as an investment savings fund that builds Account Value as you pay. It is also integrated with AIA Vitality that provides additional upfront coverage of 20% to your policy and add-ons.

    Philam Life Vitality

    CRITICAL CARE PLUS

    Health

    Be in good hands in times of sickness. Let Critical Care Plus, a unit-linked health and life insurance plan, take care of you with financial aid in case of a major illness, so you can focus on getting better and spending more time with your loved ones.

     

    It even gives you more benefits for having good health through the AIA Vitality program that adds 20% upfront coverage and supplemental benefits on your policy. 

     

     

    Philam Life Vitality
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    CONTACT BPI AIA

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