You will be able to write a zero-based budget where income minus planned spending and saving equals zero.
When you plan a month, part of your pay often has no plan attached to it. That money sits in your account and looks spare, so it gets used on whatever comes along. At the end of the month you can't say where it went.
A zero-based budget is built to close that gap. Before the month starts, you assign every dollar of your take-home pay to a category, a principle often put as "every dollar gets a job". The budget is complete when your take-home pay minus all your planned lines equals zero. Zero means no money is left without a purpose. It does not mean spending everything, because savings, extra debt payments and money for next year's costs all count as categories. In this method, leftover money is not allowed to stay blank.
Start with your take-home pay for the month. Before the month begins, give an amount to every category: needs, wants, savings, extra debt payments and money for future costs.
Then run the zero test, which is take-home pay minus every line in the plan. If the result is above zero, some money has no job yet and you need to give it one. If it is below zero, you've planned more than you earn, and something has to come down before the month begins. Keep adjusting until the result is exactly zero.
Wei Ling's spending picture from lesson 1.4 showed S$290 a month that her plan never mentioned. It wasn't spent on anything she chose. It sat in her account, looked spare, and got used up.
Below is her last month rewritten as a zero-based budget. Her take-home pay is S$3,800, and all of her figures are examples.
Needs, S$2,160: rent S$950, bills and premiums S$150, transport S$110, groceries S$260, her parents S$300, debt minimums S$390 Wants, S$1,250: eating out S$520, delivery S$240, rides S$150, shopping S$280, subscriptions S$60 Savings, S$100
Her total planned is S$2,160 + S$1,250 + S$100 = S$3,510. S$3,800 minus S$3,510 leaves S$290 with no job, and she has to decide where it goes. If she adds it to savings, which you can call "future you", her savings rise from S$100 to S$390 and the budget comes to exactly zero. When she reaches module 3, a line for yearly costs will want some of that S$290, so she may move part of it there then. For now every dollar has a name.
Of all the methods in this module, zero-based budgeting gives you the most control and asks the most effort. Planning the first month takes about an hour, going category by category. During the month you track spending often enough to know where each category stands, usually every few days or at least weekly.
Planning gets quicker. By the third month most people copy last month's plan and change three or four lines, which takes fifteen or twenty minutes. Tracking takes the same effort as before, because the method only works if you know what is left in a category before you spend from it.
It suits people who like detail and feel calmer seeing every number. It also suits people whose spending has many moving parts, such as several cards, family costs, debt payments, irregular bills, or a partner to coordinate with. Giving each part a fixed amount stops the parts crowding each other out. It suits you less well if you hate spreadsheets or your spending is simple. If you only pay rent, buy food and save, and you already save enough, a lighter method from lesson 2.3 may do the same job with less effort.
Every zero-based budget will meet a category that runs over. The core rule is that the total stays at zero, so extra money for an overspent category comes from another category in the same month. Don't let the total slip and promise yourself you'll make it up next month.
You're allowed to move money between categories, and you should expect to. The plan is a set of decisions, and you can change a decision. What you can't do is spend money the plan has already given to something else. Under this rule, overspending shows up straight away as a choice between two things, such as this dinner or that shopping. Without the rule, it shows up at the end of the month and you can't explain it.
In a later month, Wei Ling plans S$420 for eating out. By the 20th she has spent S$390, and a friend's birthday dinner is still ahead. If eating out needs another S$80, she takes S$80 from another category that month, such as shopping or rides, and the total stays at zero.
Moving money also tells you something about the plan. If she has to take from shopping to cover eating out every month, her eating-out figure is wrong. Lesson 7.2, "Read the gap between plan and actual", shows how to fix it.
To try this yourself, open your spending picture from lesson 1.4 and use last month's take-home pay as your starting figure. Give every dollar a category, run the zero test, and adjust until the result is exactly zero.
Take your spending picture and write a zero-based version of last month, assigning every dollar of take-home pay to a category.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).