During the 3rd session of FPU, Dave Ramsey talks about budgeting and cash flow. Like the previous session, on the topic of Relationships and Money, this is a foundational pillar to the following Baby Steps that Ramsey will eventually lay out. Ramsey teaches that budgeting needs to be a way of life, that it is your road map for your financial plan. Your budget tells you how to get to the destination you set for yourself (for Ramsey, that’s initially debt reduction, for others, it may be other goals). According to Ramsey, there is no one that doesn’t need a budget and there is no one that can’t do a budget. He even has a modification for people with inconsistent incomes. He says that he and his wife still do one each month. These are his guiding principles for budgeting:
The Why, in a Nutshell
- Budgets keep you in control – Your money is going to go somewhere. By planning out your savings and expenses, you stay in control of your finances, avoid fees (overdraft, low balance, ATM, etc.), and can have peace about where your money is going each month.
- There’s no excuse – There are lots of reasons people don’t use or stick to their budgets, and all of them are just excuses: budgets have a bad connotation, they feel restrictive, they are used by one spouse to control another, they are incomplete (things are left out), or they aren’t actually followed. All of these are reasons people fail to budget properly and all of these problems are fixable.
- Budgets improve your life – A well done budget removes uncertainty, crisis, and worry from your life. It can reduce money fights and the guilt or fear associated with spending. Your budget shows you where you can “trim the fat” on your spending.
The How, in a Nutshell
- Zero-based – Ramsey calls for a “zero-based” budget, meaning every single dollar is accounted for. Before the month begins, you should know where all of your money is going to go once it comes in. There is no fluff – every dollar has a purpose – it is either going to an expense or a savings account.
- Envelopes, anyone? – There are several categories in your budget that should utilize “the envelope,” where you put your budgeted amount of cash into the envelope, marked “Groceries” for example, and you only spend out of that envelope for that category. When your “Clothing” envelope runs dry, you’re done shopping for the month.
- Write it down – The materials that come with the course fee include several very thorough budget forms, including access to more forms online, such as forms for a biweekly plan, irregular incomes, and allocated spending. Everything from Gas/Oil to Pet Supplies to Cosmetics/Hair Care is included to help you plan your spending. Ramsey is clear: If you don’t write down your plan, you won’t follow it, which is largely true. Only after it becomes routine and you’ve ironed out the kinks (which Ramsey says will take about 3 months) should you switch to a digital or online budgeting tool.
The Take Away, in a Nutshell
- Disclaimer – Although I have used many different budgeting tools in my life: Excel spreadsheet complete with pie charts and bar graphs, Quicken, and Mint.com, I have never used the “envelope system,” so I can only speculate as to its effectiveness and efficiency.
- Who has time for this!? – From reading other articles and resources, it seems like there are as many ways to budget as there are people. I came across an article by the Cash Cow Couple just the other day that made this point. Ramsey’s system requires you to take out a wad of cash from the bank each month and divvy it up among several envelopes, go through and adjust each category, plan for irregular bills (car insurance, house repairs) by using tons of “sinking funds,” and keep track of the running tally of the bill while you shop for groceries to make sure you have enough cash in the envelope. Plus, you have to keep track and catch when you’re going to get a random 3rd paycheck in a month. This all sounds like a ton of work and not very practical. Ramsey would argue that it is for the first few months before it becomes like second nature.
- Good for some, maybe not all – My wife and I have had a recurring thought regarding many aspects of Dave Ramsey’s system: “This is a great system for some people, but maybe not everyone.” For people living paycheck to paycheck, or for people that don’t even have a paycheck, or for people who are feeling crushed by the weight of credit card and other debts, this is a great system. It makes you watch every penny and cuts you off when you spend too much. For the woman who is making $60,000 per year with only $40,000 of expenses, including funding savings and retirement accounts, does it really matter if she overshoots her normal grocery bill by $100? Probably not.