In a zero-based budget, your income minus your expenses should be equal to zero.
Zero-based budgeting approach encourages accounting for every penny of your monthly income.
The zero-based budget, also known as the zero-sum budget, is founded on the principle that every shilling should have a specific purpose. This is how it goes.
What is zero-based budgeting?
With zero-based budgeting, you allocate 100% of your income to costs, savings, and debt repayment. By the end of the month, you want your income minus your expenses to equal zero.
Every month, you can use the same spending categories and amounts, or you can vary them. The remaining money can be added to the budget for the next month or transferred to another area, such as your emergency fund or savings, if you come in under budget in a particular category at the end of the month. It is the same idea as the envelope system, which includes putting money into envelopes for various spending categories.
Suppose you earn KES 3000 each month. Your spending plan may resemble this:
How to start a zero-based budget
Before creating this budget, take the following actions to make sure you are realistically planning your budget :
- Know what you make. To determine how much money you have to work with, add up your salary, benefits, and other monthly income streams.
- For a few months, keep track of your expenses. A framework for your future spending can be created by understanding how much money you regularly spend and on what. You’ll see where you can spend less and where you should put more money.
- Categorize your expenditures. Determine every expense and priority you have, such as your needs, wants, debt, emergency fund, and other savings targets. Want a vacation? Make a category for “trip fund.” Investing in a new car? Add another to that.
Which category should receive how much money? We advise you use the 50/30/20 guideline. This strategy allocates 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment.
The advantages and disadvantages of a zero-based budget
With a zero-based budget, you can always see how much money is coming in and going out. By doing this, you can avoid spending money that you don’t have.
Additionally, this technique is customizable, which may be particularly helpful if you have little experience with money management.
A zero-based budget takes a lot of time to follow. You’ll need to consistently and closely track your expenditures if you want to hold yourself accountable. And that’s not the only difficulty you can run into.
There are a lot of unpredictable expenses, which can be troublesome. The zero based budget may not, on average, provide you with adequate money if you don’t account for your unpredictable spending.”
These erratic costs could include buying presents for the holidays, going to a friend’s wedding, or getting a new phone.
However, there is a solution to this: Put money aside just for these expenses. Make a savings fund that is distinct from your emergency fund and other funds for saving objectives, and put money into it every month.
The zero-based budgeting approach could also be problematic if your income is sporadic or unpredictable, such as if you work as a freelancer or an hourly employee with variable hours. If you don’t always know how much money you’ll need to set aside, think about basing your budget on the previous month’s earnings. Keep in mind that you must first set aside a buffer equal to one month’s worth of income.
Now that you know what the zero-based budgeting system is all about, you’re ready to give it a shot. If it doesn’t work for you, try another budgeting method. If you are looking to save your money. K-unity is a SACCO that has been in operation since 1974, and has been helping people all over Kenya with financial services. We have many savings and loans products. To create an account with us, CLICK HERE or visit any of our 17 branches and you will be assisted.