Personal Zero-Based Budgeting

You need some help to sort out some money stuff.

  • You just graduated college with a lot of debt. How are you going to clear it?
  • Your wife and yourself made a comfortable amount of money. Problem is, the two of you can’t seem to squeeze out much cash to save
  • You are basically an overachiever who wants us to recommend the best plan to make sense of what you earn

Whether you are in a money fix, or in a good situation but wants to get better, having a plan how to managed your money better enables you to successfully meet your wealth goals.

But before that there are some rules in life you need to know WHY you need to budget

#1: Money is Scarce, you need to make Hard Choices

Unless your grandfather or parents are extremely rich, you would not have a good money cushion in life.

You have many wants in life. They could be movies every month, cable TV every month, 2 hand phone subscription plans. Buy shoes and clothes every month. Have 4 babies. Live in a big house.

As you have limited amount of money, you do not have a choice. YOU NEED TO MAKE HARD DECISIONS. You need to decide which of your wants are more important than the others.

You only have that monetary boundary to work with. If you take home $2,500, you cannot satisfy all those wants at once. You have to earn more money or you need to make HARD choices.

#2: Being in debt is taking away spending in the future

Building on #1, if you are willing or able to earn more, and you don’t want to make HARD decisions. The way to fund all your wants is to use credit card or take a loan, basically being in debt.

Credit is not free. You need to pay them back.

The problem most do not see is that, you are enjoying an experience currently BUT delaying the payment, taking away an experience unknown in the future.

What is this unknown experience in the future? You would not know.  It could be your retirement, it could be your children’s education, it could be your future medical fund.

And you cannot control it. The moment you owe money and don’t pay it off end of the month, you are taking away a future experience, or part of it.

And that is a very blind and un-organize way to live

What is Zero-based Budgeting

Budgets are plans big and small companies used to plan out how to spend their money. For these companies, the success of their strategic projects or general projects hinges on good budget management after the monetary funding have been secured. Business projects live and die by it.

Zero-based budgeting is one such kind of budgeting that helps companies plan small and big project budgets.

The pleasantly surprising thing is that, zero-based budgets works really well on a personal finance level as well.

What it means is to make sure that you spend every single dollar of what you are given.

So imagine Joe earns $3,000 after tax per month as disposable income. When Joe allocates his money using zero-based budgeting, he will allocate his $3,000 to the point where he is left with $0.

Wait… Aren’t Zero-based Budgeting suppose to help me save money?

The misconception is that budgeting is going to help us save money. That is not wrong. However, there is a better way to look at things.

Budgeting will help us to eventually build up our wealth.

Zero-based budgeting asks us to allocate all our money wisely. The difference here is to replace the word ‘spend’ with ‘allocate’.

Give every dollar a job

Money itself is worthless. What money is good for is to satisfy what your family and yourself desire. Certain stuff or service that you value.

Therefore its not that hard to frame your money as a hard worker to meet the different things you desire and value.

Suppose in Joe’s world, his life revolves around the following things (and only these things):

  • Gifts
  • Mortgage
  • Utilities
  • Groceries
  • Insurance
  • Gasoline
  • Credit Card Debt
  • Emergency Fund Saving
  • Education Saving
  • Retirement Saving

Joe’s $3,000 needs to put to work to satisfy ALL these wants:

  • Gifts: $100
  • Mortgage: $600
  • Utilities: $200
  • Groceries: $400
  • Insurance: $200
  • Gasoline: $200
  • Credit Card Debt: $300
  • Emergency Fund Saving: $200
  • Education Saving: $200
  • Retirement Saving: $600
  • Total: $3000

Framing it as ‘allocating’ instead of ‘spending’ changes how we look at Joe’s $3,000 as not always an outflow immediately, but 10 separate ‘bank accounts’ that Joe draws upon for specific purpose.

Let’s unpack how you can start zero-based budgeting.

Here is how we do Zero-based Budgeting

Step 1. Use a piece of paper or a spread sheet

You need some simple tools  to work out your sums.

To make things simple, and more hands on exercise, you can use a piece of paper and a pen. If you have rather bad handwriting, perhaps you can do it in a spread sheet like Google Spreadsheet.

Step 2. List out all your Income and Existing Savings

List out all the income that you earn last month, that you will need to manage. They can be:

  • Your monthly income from your job
  • Any investment dividend, interest from your investments
  • Income from your side job
  • Gifts from your friends and family just for this month
  • Performance bonus from your job just for this month

Also tally your total networth in all the current savings, checking accounts. Remember to deduct the total income last month.

At the end of Step 2, you arrive at 2 amount:

  1. Your total income earned last month
  2. Your total savings and checking account amount less income last month

If Joe, has a total income of $3,000 last month and $8,000 in all his saving, checking accounts, then his

  • Total Income Last Month: $3,000
  • Total Savings and Checking Amount Less Income Last Month: $5,000

You may ask, why last month’s income? Why do you need to minus this off your existing total networth? I will explain later.

Step 3. List out all your Expenses to work out your Spending Categories

Next, list out all your expenses. It might be a bit difficult to gather them for starters.

Don’t let it overwhelmed you. The trick is to start somewhere, and tweak along the way.

A couple of ways:

  1. Collect your receipts for 2 months plus note down in a note book every time you spend
  2. Use a trigger list of expenses common to most people. This will help for a few annual expenses that you may not have thought about like annual insurance premiums, annual vehicle road tax, general taxes

At the end of this step, you will probably come up with a list of categories like the one Joe has.

Note: Include a Buffer category among the spending categories you come up with. I will explain why you need this later.

Step 4. Allocate your Income to your Expenses

How much income you have accounted in step 2 for the month, divide them among your spending categories.

If Joe’s total income is $3,000, make sure they all have a job and went some where.

For the initial planning, channel the total savings and checking amount less income last month into your Buffer category.

In Joe’s case, all the $5,000 will go into his Buffer category.

Step 5. Spend, Review and Adjust

In Step 1 to 4, you will review these steps on a monthly basis, but step 5 is done every time you need to do something with your money.

  1. You want to purchase something or some service
  2. You review how much you have in each category, if you have enough left you purchase or spend
  3. If you don not have enough, think through if you can hold back the purchase. If you cannot, make an adjustment. Deduct from another category to fund this category

Step 6. Review your Budget and your result

At the end of every month, before the start of every month, or, at the day when your major pay check is in, review your budget

  • Have you successfully reduce spending on certain categories you want to reduce?
  • Are there any categories missing from your spending categories?
  • Are you being over-optimistic or under for certain categories

Review and tweak accordingly. Budgets is a process and system not a create and forget thing.

Why use Last month’s Total Income and Your Current Networth to budget THIS Month’s Allocation

Every one starts budgeting from somewhere. Your question will be when should you start?

  • At the start or end of the month?
  • When you get your next pay?

In truth, you can start on any day you want, provided you have build up the following before budgeting:

  1. Saved an amount equivalent of your last month income
  2. A buffer amount

In zero-based budgeting, it makes sense that we plan with last month’s income and a little bit of buffer. In budgeting, you always always work with what you have, NOT what you THINK you are going to get.

We strongly discouraged forecasting how much you are going to have. What if you didn’t get that amount of income? What if for some reason you have an emergency car breakdown?

These kind of situation create a mismatch in income and spending. The more mismatches, the more frustrations you will have with your budget, and the more you will stay away from budget. Your budget will fail.

Suppose Joe starts his planning on 30th April for the month of May. It doesn’t make sense for him to project forward how much he is going to earn and how how he should allocate to each category.

He doesn’t have the money in the first place.

It only make sense if he starts his planning on 15th of the month, which is the day he got his pay. This means that he is always dictated by his current month’s pay. As you can see, it makes more sense to plan with last month’s pay. This means that you can start on ANY day provided you meet the two criteria.

Timing bills to when you get Paid

Before budgeting this way, you might get a situation where you have 3 telecom bills, 5 credit card bills.

You have to make an effort to call up these companies and plead with them to change their due date to follow when you get paid.

This is very taxing, if you keep shifting work and when you get paid changes. Without the income, you cannot pay for the bills.

Working with last month’s income solves this problem in that, you do no worry about when you get paid as you are always paying these bills with an existing pool of money you have (last month’s income). If there are overestimation, temporary tap from the Buffer.

How to build up 1 month worth of Disposable Income

To have one month worth of income to start planning, you would need to make sure you have that much before you can start planning:

  • If you have greater than 1 month worth of income in your savings, you can make use of that
  • Scrimp and save for 2-4 months, to build up at least 1 month worth of income, so that you can start planning. Its not easy, but you need to persevere to make it work

Explaining the need for a little Buffer

Suppose Joe allocated $200 per month for a medical category and suddenly nine days into the planning, Joe is hit with $1,500 medical expense. He doesn’t have that much. What happens then?  This will throw Joe’s budget into disarray. If Joe does not know how to handle this, he will lose confidence in his budget and go off it.

We have said that, had Joe allocated his savings and checking net worth less last month’s income, which amounts to $5,000 into his Buffer Category, he can take care of un-foreseen emergency like this.

How would Joe Adjust and Input his spending?

He starts off with the following spending categories at 9th May:

  • Medical: $200
  • Buffer: $5000

As the medical expense of $1,500 is more than his current medical allocation, Joe has to “borrow” from the Buffer category. Since there is $200 left in the medical account, Joe will have to borrow $1,300 from Buffer category to supplement the shortfall in the medical account.

Joe will

  1. Transfer $1,300 from Buffer to Medical
  2. Record $1,500 medical expense from Medical

His spending categories after this will be:

  • Medical: $0
  • Buffer: $3,700

As a learning point, Joe needs a way to remember that he just spent down his buffer, and that in order to continuously make use of this buffer in a similar way,  he needs to replenish it. If he doesn’t replenish it, another emergency like such comes a long, and he might not have the Buffer to save him next time.

In his next budgeting, Joe can choose to add $200 to the Buffer category instead of Medical category. His two category next month will look like this:

  • Medical: $0
  • Buffer: $3,900

What if you are just starting off and do no have enough to form your buffer?

There will be many in that situation. In this case you are left with:

  • Building up the buffer slowly.  Have a Emergency category and allocate $X to it monthly
  • When you overspend, adjust and transfer from other categories to this
  • Watch your spending carefully so that you don’t overspend!
  • A combination of all the above

The Magic is in the System

I see a lot of people asking whether we should use paper, this spreadsheet is better or that software is better.

The paper/spreadsheet or software is just a medium or facilitator. It is definitely important to use one that is good.

However, the most important thing is the system or process.

You can get the best running shoes, but if you struggle to get out of the house to run, or that if you have the best pots and pans but you can’t find the time to use it to cook, what good is it to have the best things around?

The key here is to understand Step 1 to 6, struggle with them, get comfortable with them and do them over and over again.

Zero-based Budgeting & Wealth Building

Zero-based budgeting is an allocation of money rather than framing it as spending. As such, you can compartmentalize your money, and not spend it. You can have all of them reside in one savings account, yet not worry that you are going to touch it.

In Joe’s example, he has 2 categories dealing with ensuring his future financial independence and current safety, Retirement Saving and Emergency Saving respectively.

When Joe budget using zero-based budgeting, he compartmentalize his Retirement and Emergency category away from other spending goals. When you compartmentalize, you create a virtual barrier around these categories.  It tells Joe, “You can spend the rest of the other categories, but you can never spend this, unless you need to spend it for retirement and emergency purpose”. It prevents you from raiding it.

Every month, Joe allocates $400 to retirement, and $100 to emergency. As Joe has created a barrier around this 2 category, he doesn’t spend it. This amount gets brought over to the next month, where another $400 is added to retirement and $100 to emergency.

In 6 months, Joe’s retirement would have accumulated  $2,400 and emergency $600.

Joe can then think of how to best allocate these amount built up into higher yielding instruments.

He could:

  1. Open a brokerage account to purchase stocks and bonds managing them actively
  2. The brokerage account can be used to purchase exchange traded funds (ETF) and passively manage a group of index stocks and bonds
  3. Open fixed deposits, time deposits
  4. Open an investment account to invest in unit trust/ mutual funds
  5. Down payment for rental properties

Does Joe transfer this $2,400 accumulated in retirement to the brokerage / savings or investment account? It all depends on Joe. He might not want to do transfer out.

What Joe wants to do is to track how much he has channel to retirement/wealth building.

This way, he will know:

  1. How much he is funnelling to Wealth Building
  2. Give him a piece of mind he is acting responsibly
  3. Gaining small wins month by month, as he watch the reward of acting responsibly. This will make him stick to channelling this amount to wealth building (or even increase more!)

He could also create a separate account and transfer out what he puts into wealth building, then transfer back the gains, dividends, interests reaped from these wealth building assets.

Adjust! A red figure does not mean you are a Failure

When you start out budgeting, you will not be able to know everything

  1. You over-estimate or under-estimate your sensible spending
  2. You overspend a few categories
  3. Your bank account have less money than the budget. They do not tally
  4. You realize there are large bills that you did not think of

And you get worked up over it, or demoralize or both. You have to learn to understand that all these are part of the process.

You have to be a clairvoyant to be able to predict how much you will spend in all categories. No one can be that accurate, unless you have done some form of data collection previously.

Even then, life changes.New events happen. A new baby. You bought a new house. You need more medical help.

Your budget is a system not an end result. That is why Step 6 is important. You learn to adjust with it.

You are not perfect and you don’t have to be. Every step takes you closer to somewhere nearer to that.

Aligning your Spending to your Value System

Your evaluation of how much to allocate, whether you should spend it, depends largely on your value system.

Giving every dollar a job needs to match to a particular value

A lot of overspending is due to a person not understanding there is a value gauge to everyone, and always wanting the best for all.

When your spending does not match your value, you don’t feel satisfied even though you spend so much on it. That can be such a waste.

The Benefits of Zero-based Budgeting

The main benefit of the full Zero-based budgeting is that you as the planner and implementer are very hands on. Because of that, you confront the way you save and spend in its entirely.

You do not escape from the reality that your spending is in chaos. If you stick long enough to make this process a habit, you develop a level of self awareness of how much things cost, that money is scarce and you have to allocate it well.

You shift from being a casual spender to a deliberate spender. Instead of waiting for the problem to appear, you anticipate, match your values to your money, and maximize fully what you get out of it.

The Problems with Zero-based Budgeting

There are many who cannot see the benefit of such a budgeting system. And a lot of it centers on that budgeting itself is such a chore.

Before they get to know it more, they already detest it. They visualize that a budget will stop them from visiting their favorite food or use their favorite service. They visualize that they would have to sort through mountains of receipts.

Because zero-based budgeting makes a family confront how they spend their money, it may result in a real hard to hard talk about money with your spouse. And that might not always be a good thing if it is not handled well.

Most of all, majority of the folks find that its not worth it to spend ‘so much’ of their time doing budgeting. Why not use a personal finance platform that automatically downloads the transaction from the bank? Saves you a lot of the trouble.

To all the problems, they are not really problems. They are in fact some of its strengths.

  1. A budget doesn’t stop you from spending what you like, it merely helps you to focus on what you value the most. If you value Ice-cream a lot, having a category for it focus your love for it. It merely tells you the reality is that you have X amount to work with, and if you want a lot of ice-cream, you have to have less of those things you value less
  2. Budgeting can be really boring. That is when you learn the ropes. Your monthly review takes at most 1.5 hours in 1 month. Once you get into the habit of recording down daily transactions, you wouldn’t even notice it
  3. Family usually crumble because of money problems, and a budget brings all these things to light, instead of avoiding it. It would be best if budgeting is discussed before marriage, as a fruitful relationship starts with open communication
  4. Your money problems don’t magically disappear. You have to learn where the problems are. Most of the time the problems is due to your habits and addiction. Merely making money tracking automated doesn’t help, it distance you away from making the hard actions that improves your situation and postpone the inevitable collapse

ROAD RUNNER DIARY: Passing 2.4km at age 34


I was quite an active runner from the age of 17 years old. Back then, I decide during one physical education class in school that I don’t want to keep escaping the classes and feeling shitty about it. I ran for the next 11 years consistently. Then in 2009, upon the advise of a Chinese Sinseh, who said that I am likely to collapse eventually from heart attack, I stopped running. For 4 years I did not run, until the beginning of 2014, I decide to see If I can still run.

I was horrified how much I struggled, now 4-5 years older. This diary chronicles my discovery into whether I can still hit my old 2.4 km timing of 11 mins.

Running history

I wasn’t a really fast runner ever. I was really into it. I was one of the crazy ones in the army. You ask me to run and I would. But perhaps I wasn’t bless with good genes, I wasn’t the best.

The fastest in army I recorded was probably 10.15 min. That is hardly enough to hit gold.

After I got out of the army, I can consistently hit 11 mins. And this is the soft target that I aim for.

I walked for 3 weeks

Bearing in mind what the previous sinseh said, I don’t want to take things too fast but one step at a time. I started off just wanting to get out of the house. That was the habit I want to build up.

I did it and was able to walk for 2.2 km every day after dinner.

It is also good to get the body accustom to some cardiovascular workout.

My first run

To be honest I am not sure what condition I will be in. I do not know whether I was able to run in the first place. Fortunately I was able to.

The timing: 2.29 km in 13.11 mins. And this is a run and talk timing.

I haven’t always been running non stop for 2.4 km. And this timing was encouraging.

But the run was hard. I have never felt so drain since that first full run when I was 17 years old.

2 days later I attempted again. This time I tried to run non stop.

The timing: 14.46 min for 2.34km

It was a disaster. Wasn’t walking suppose to be slower? Wasn’t we suppose to complete the run?

Creating the game plan

Being able to run since 17, you forget a lot of things. You forget your initial struggles. This time, I want to see if I can do better every day.

In my dictionary, success is not stumbled upon. There is a method to it.

  1. Decision and Determination. If you don’t want it bad enough you wouldn’t last the long run. You have to understand implicitly why you are doing this. Your actions shows that you are determine about this. I want this journey of seeing if I can get back to that old conditioning. So much so I am willing to commit my spare time to this. To research on how to run faster or longer. And take notes on what works and what not.
  2. Knowledge. Running for 12 years doesn’t make you a sports scientist equipped to figure out how to run faster and longer when your body condition is entirely different. I commit to finding out game plans and sciences to improve my conditioning.
  3. Habits and Systems. Knowing is one thing. How do you translate into action? I always believe that small improvements aggregates to big changes. And running is rather repetitive. It pays to invest in good habits.
  4. Environment. A main reason folks gave up is because  they don’t gear up a good environment for running. Not enough socks, No running shoes. Where is a good route to run with minimal disruption, only one set of running clothes. If you want to succeed get ready all these so that you don’t fall off and give yourself reasons to fail.

I fixed 2 days to run per week due to a hectic working life. I understand that I might miss the mid week run, but I have to have it. But I know the weekend run becomes high priority. I won’t miss it for weddings, gatherings, meet-up. that is my commitment to it.

If I can run twice during the weekends, Saturday will be test day where I go all out.

Sunday will be used to run 2.4km with small steps with the aim of speeding up my transitions.

The midweek run will be interval training.

The main aim is not  completion but to

  • increase my VO2 intake
  • work on being accustom to bursting
  • increase and prolong big strides

I learn that if my run is short at 2.4km, it might not be fruitful to keep consistent pace. So I will aim to start off speeding up.

Everyone gets tired or hit the stage where you will feel like dying. I prepared  the mental psyche for that stage. It is important then to ensure I can still maintain large strides and that I push myself for longer than  normal.

I will take notes on my timing on Endomondo.

It will be interesting to see if a body just degenerates as it gets older or that well plan systems can return a person to his original condition.