Last week, Finance Minister Tito Mboweni delivered an emergency budget which comes as a result of the economic impact caused by the Covid-19 pandemic. Some of the highlights which came from the speech include: our economy being on course to experience its biggest contraction in 90 years, tax revenue collection being behind target by R35 billion and expected tax increases in future to help reduce our country’s debt burden.
One slightly unexpected proposal which was mentioned was that of implementing zero-based budgeting within government. It’s a method which was started in a US-based company some fifty years ago and one which many multinational companies still practice today. Various government departments will now need to justify their expenditure which can be a time-consuming and complex process.
However, this method isn’t only limited to big companies and governments – you can also implement it at home with your personal budget.
What is zero-based budgeting?
It is a type of budgeting process which sees all of your money allocated to expenses, savings and debt repayments. This means that you should have no money left over after the allocation process.
Although it makes you use every rand of your income, it doesn’t mean that you should go on a shopping spree each time! The idea is for every rand spent to have a specific purpose.
What are the benefits?
You will always be aware of how much money flows in and out of your budget. It helps you to ignore any of your previous spending habits and makes you think hard about what you are going to allocate your money to in future.
It’s also a great way to prevent you from spending what you don’t have to reduce the credit burden. It can bring you financial stability if you are struggling to control your expenditure or don’t know where all of your money is going to each month!
And the downsides?
One of the biggest challenges is the time it takes to set up a zero-based budget for each budget period – usually monthly for individuals. The time taken to carefully analyse and justify each expenditure may not be ideal for those with busy schedules.
This type of budget also doesn’t take into account any variable, unexpected expenses – these include things like insurance excess or replacing a broken phone screen. There is also a degree of subjectivity involved – you can convince yourself to put money towards that new watch, but do you really need it?
It also isn’t suitable for those with irregular income like freelancers and contractors as it works best when you have predictable monthly income levels.
So, if you’ve been struggling to keep up with your budget or are looking for a different approach, why not give zero-based budgeting a try?