Financial Planning Methods: Traditional vs. Zero-Based
A budget is a fundamental tool for managing finances, whether in a business or at home. Two popular budgeting methods are traditional budgeting and zero-based budgeting. Both have different approaches, and choosing the right one will depend on your goals and needs.
What is a traditional budget?
Traditional budgeting involves using the previous period's expenses and income as a basis to project them into the future. This method is often used because it's simple and quick, especially if you already have records of your previous finances.
For example, if you spent $200,000 on food last month, you can allocate a similar amount for the next month, adjusted for inflation or specific changes. For businesses, this means using last year's budget as a reference, adding estimated increases in costs or revenue.
Although practical, this method has some limitations. It is based on the idea that what happened before will continue to be relevant, which is not always true. Furthermore, it can perpetuate unnecessary or inefficient spending because the necessity of each item is not questioned.
What is zero-based budgeting?
The zero-based budgeting method takes a completely different approach. Instead of assuming that past expenses are the norm, this method forces you to justify each expense from scratch, as if it had no prior history.
Imagine you have to create your monthly budget without looking at the previous month's figures. In this case, you would consider how much you actually need for each category, such as food, transportation, or entertainment. Each expense should be analyzed and approved based on its importance and alignment with your financial goals.
In business, this means evaluating each activity or project for its added value. If a budget line item isn't justified, it's simply not funded. This approach may be more demanding in terms of time and effort, but it offers greater control and efficiency.
Main differences between both methods
The biggest difference lies in the approach to budgeting. The traditional method relies on continuity and incremental adjustments, while the zero-based method requires starting from scratch each time.
The traditional method is ideal if you're looking for simplicity and stability, as you don't need to constantly justify every expense. However, it may not be suitable if you're trying to optimize or reduce costs.
On the other hand, a zero-based budget is perfect if you want complete control over your finances and avoid unnecessary expenses. However, it requires more time and commitment, so it's not always practical for situations where speed is key.
Which one should you choose?
Choosing between a traditional budget and a zero-based budget will depend on your needs and resources. If you're an individual or business looking to maintain financial stability with minimal changes, the traditional method may be more appropriate. On the other hand, if you're undergoing financial restructuring or looking to maximize every penny, the zero-based approach will be your best ally.
Both methods have their place in the world of finance, and there's no one-size-fits-all solution. The key is to understand your goals and choose the approach that best suits your situation. Ultimately, the important thing is that your budget is a tool that works for you, not the other way around.
What are variable income and expenses?
In our personal finances, there are two main things we need to understand: the income (the money that comes in) and the expenses (the money that comes out). Within these categories, there are types of income and expenses that change constantly: we call them variables.
A variable income It's the money you earn, but it's not always the same. For example, if you sell things, you might sell a lot one month and make a lot of money, but another month your sales might be lower. Another example is commission-based jobs, where your income depends on how many things you manage to sell.
A variable expense It's an expense that isn't always the same every month. For example, the money you spend on outings, clothes, or treats. One month you might spend a lot on fast food, but the next you might spend less because you decided to cook more at home.
Why is it important to identify them?
If you don't know how much money is coming in and how much is going out, it's hard to stay organized. It's like trying to fill a bucket with water when it has holes in it: no matter how hard you work, something always slips through the net.
Identifying your variable income and expenses helps you:
- Know how much money you really have available.
- Avoid surprises. For example, not spending more on things you don't need.
- Save better. You can use the extra money from good months to cover unexpected expenses or invest in something important.
How to identify variable income
First, let's make a list. If you have a job where you always earn the same amount (like a fixed salary), that income isn't variable. But if you have income that fluctuates, for example:
- Sales commissions.
- Overtime you work some weeks.
- Small businesses or second-hand sales.
Write down how much you earn each month from these activities. This way, you'll begin to notice if there are months where you earn more and months where you earn less.
For example:
- January: I sold $20,000 worth of clothes.
- February: I sold $15,000.
- March: I sold $25,000.
This shows you that your income goes up and down. The trick is to save some of what you earn during the good months to use during the slower months.
How to identify variable expenses
Doing this is easier than it seems. Follow these steps:
- Write down everything you spend. It can be in a notebook, an app, or on your cell phone.
- I divided the expenses into two groups:
- Fixed expenses: What you pay every month no matter what, like rent or electricity.
- Variable expenses: Things that change each month, such as outings, food, or clothing.
An example could be like this:
- January: I spent $10,000 on going out and $5,000 on clothes.
- February: I spent $8,000 on outings and $2,000 on clothes.
You'll see that the numbers change because these are things that don't always cost the same.
What to do with this information?
Once you've identified your variable income and expenses, you can create a clearer budget. This allows you to decide:
- How much money to use to have fun without overspending.
- How much you can save.
- How much do you need to cover difficult months?
For example, if you know you average $$20,000 in variable income per month and your variable expenses are $$10,000, you can save $$10,000. But if one month your income drops to $$15,000, you know you need to adjust your expenses or use what you saved.
Practical advice
- Use an app to track your finances. There are many that are free and help you organize your income and expenses.
- Look at the patterns. If you spend a lot on gifts every December, you can prepare by saving a little money throughout the year.
- Create an emergency fund. This is money you set aside to cover unforeseen events, such as when your variable income is lower than expected.
Conclusion
Understanding and managing variable income and expenses isn't complicated. You just need a little time to observe how your money comes in and goes out. Once you understand this, you'll be able to organize yourself better, avoid debt, and, above all, achieve financial peace of mind.
Strategies to achieve financial goals
Have you ever set a goal, like saving for a trip, buying something important, or paying off your debt, but felt like you didn't know where to start? Don't worry, you're not alone. Achieving financial goals can seem complicated, but with a little organization and a few simple steps, it's entirely possible. Mario Cape explains.
Why is it important to have financial goals?
Having financial goals gives you a clear purpose. Instead of mindless spending, you know exactly why you're saving or investing. This not only helps you manage your money better, but it also motivates you because you know you're working toward something important to you.
For example, if your goal is to save for a car, every time you save money, you'll feel one step closer to achieving it. It's like putting together a puzzle: every piece counts, and when you're done, the feeling of accomplishment is incredible.
Step 1: Define your financial goals
Before you start, you need to know what you want to achieve. And no, it's not just about saying "I want more money." Financial goals need to be specific and realistic. Here are some examples:
- Save $50,000 for a vacation in six months.
- Pay off all your debts in one year.
- Save for a 10% down payment on a house in three years.
The clearer your goal is, the easier it will be to achieve it.
Step 2: Divide the goals into short, medium and long term
Not all goals are created equal. Some can be achieved quickly, while others may take years. To better organize yourself, break them down like this:
- Short term: Goals you can achieve in less than a year, like saving for a cell phone or paying off a small debt.
- Medium term: Goals that take between one and five years, such as saving up for a car or a wedding.
- Long term: Big goals that may take more than five years, such as saving for retirement or buying a home.
By breaking them down, you'll be able to focus on what's most urgent without forgetting what's important in the long term.
Step 3: Create an action plan
A dream without a plan is just a wish. To make your goals a reality, you need a clear plan. Follow these steps:
- Calculate how much you need.
If you want to save for a vacation, research how much everything costs: tickets, accommodations, food, etc. This gives you an exact number to work with. - I divided the amount into small steps.
For example, if you need $50,000 in six months, that means you need to save about $8,300 per month. This number is easier to manage than thinking about $50,000 all at once. - Find ways to cut expenses.
Look at your daily expenses for things you can cut back on. Do you spend a lot on delivery? Cooking at home can help you save. Have you subscribed to services you don't use? Cancel them and save that money for your goal. - Automate your savings.
If you can, set up an automatic transfer to a savings account every time you get paid. This way, you'll make sure you don't spend that money.
Step 4: Use tools to help you
Today, there are many apps and tools you can use to manage your financial goals. Some apps allow you to create savings categories, track your expenses, or even receive reminders about your goals. If you're someone who forgets easily, these tools can be your best friend.
Step 5: Measure your progress
It's not enough to make a plan; you also have to review how you're doing. Once a month, check how much you've saved or paid toward your goals. If you see progress, you'll feel motivated to keep going.
If you're not sticking to your plan, don't beat yourself up. It's normal to have months where it's harder to save. The important thing is to adjust your plan and keep moving forward.
Step 6: Reward yourself for achievements
Achieving financial goals can be difficult, so it's important to celebrate accomplishments, even the smallest ones. For example, if you saved half of what you need for a vacation, treat yourself to something small like a trip to the movies. This will give you energy to keep working toward your goal.
Tips to stay on track
- Avoid temptations. If you know you like to spend money on things you don't need, try to avoid them. For example, if you spend a lot on clothes, don't spend so much time looking at sales online.
- Surround yourself with people with similar goals. Talking to friends or family who are also saving or paying off debt can motivate you to keep going.
- Don't give up. Some goals take time and effort, but the feeling of achieving something important is worth it.
Conclusion
Achieving financial goals isn't a matter of luck, but rather of organization and discipline. With a clear plan, the right tools, and a little patience, you can achieve any goal you set for yourself. And remember, every step you take brings you a little closer to your dreams.
Summary of the most important ideas
1. Budgeting methods: traditional vs. zero-based
He traditional method Budgeting is based on adjusting previous year's expenses and projecting a budget for the next year. This approach considers previous expenses as a basis for defining the future budget, which is simpler but can lead to repeating past mistakes.
He zero-based budgeting method It starts from scratch each year, meaning no previous expenses are assumed. Each budget line item must be justified from scratch, which allows for a more thorough evaluation of each expense, but it can be more laborious and requires more time and effort to implement. It's more efficient for identifying and eliminating unnecessary expenses, but it can be difficult to maintain in large organizations.
2. Identification of variable income and expenses
The identification of variable income and expenses is key to understanding personal and business finances. variable income are those that can change from month to month, such as sales commissions, investment income, or bonuses. variable expenses These are expenses that fluctuate based on usage, such as food, transportation, entertainment, or utilities. These expenses aren't fixed and can vary from month to month. It's important to identify these items so you can adapt to changes in income and make adjustments to your expenses, thus maintaining proper control over your available funds.
3. Strategies to achieve financial goals
The strategies to achieve financial goals They involve planning and executing specific actions to meet short-, medium-, or long-term economic objectives. Some of the most common strategies include:
- Set clear and achievable goals, which are based on realistic planning.
- Create an emergency fund for unforeseen events, which provides financial security.
- Systematic savings: set aside a portion of income regularly to achieve goals.
- Smart investment, so that money grows and takes advantage of the power of compound interest.
- Expense control: Analyze and reduce unnecessary expenses to increase savings.
By implementing these strategies, individuals can work effectively toward achieving their long-term financial goals.
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Questions for you to reflect on
What are the steps to set your financial goals?
How can you record your income and expenses?
How to create a budget and what methods are available? Which one do you prefer?
As a bonus, you can download an Excel spreadsheet to use as a template. Use it or modify it as you prefer.
A brief overview of The Pocket Investor
The Pocket Investor is a project that combines experience and passion for financial education to help you transform your relationship with money. Through personalized mentoringWe help you design investment strategies tailored to your goals and needs, optimizing your portfolio to address challenges like inflation and the dollar.
The books on finance and investment, including the popular The Argentine Pocket Investor - El Inversor de Bolsillo argentino, are practical tools that explain complex concepts in a simple way, bringing the world of investments closer to anyone interested in financial growth.
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