If you have a problem sticking to your budget, the Dave Ramsey (author of the baby steps method to eliminate debt) allocated spending plan offers a way out.
If you’ve read his book titled the Total Money Makeover or you’ve attended his paid course; Financial Peace University , then I’m pretty sure you’re acquainted with this spending plan.
What does it mean to give every dollar a name per Dave Ramsey?
Dave Ramsey is an advocate of zero-based budgeting. This entails giving every dollar a name, such that income minus outgo would equal zero. He believes that if you’ve covered your expenses for the year and you have an extra $700 left, then you’re not done yet. You must have a plan of what to use the $700 for.
Dave believes that if you don’t, then you’re losing the opportunity to make your money work for you in helping you exit debt, investing, growing your wealth, and building an emergency fund. For him, not budgeting for a dollar is ignoring the chance to do one or all of these.
Dave sees the practice of telling every dollar where to go as something that can make a huge difference. In a survey carried out by Financial Peace University classes. They discovered that individuals and households that do a zero-based budget save 18% more money and pay 19% more debt. And that’s just because they have the plan.
Dave Ramsey assures that the sooner you make giving every dollar a name a priority. The faster your savings will increase and the sooner your debt will reduce.
How does an allocated spending plan work with regular income?
The allocated spending plan works great for individuals with a steady income as it’s easy to consistently stick to the plan. With a regular income, you can make an annual allocated plan that can be automated. Those with variable income on the other hand are not certain of their next paycheck. This restricts them to only short term budgets.
What are the steps to implement Dave Ramsey’s allocated spending plan?
To follow Dave Ramsey’s allocated spending plan, he recommends following these four steps:
1. Insert expenses and pay period into the allocated spending plan
You’ll need two forms to start-out an allocated spending plan. The first form is the monthly cash flow plan, while the second is the allocated spending plan.
You need the first form to enter all necessary data into your allocated spending plan. You need this form to help you build out your monthly cash flow plan.
For a lot of people, they do not get a consistent pay period. And for most couples, the pay-time differs. For example, a partner may be paid on the 1st, while another may be paid on the 15th. A freelancer may be paid daily, weekly, bi-weekly, or monthly. As such, Dave Ramsey believes that it’s best to have a pay period that lasts at least a week.
2. Determine your expenses in your allocated spending plan
The next step you should take is to enter the data you’ve gathered via form 1 and enter them into the second form. The aim here is to budget to zero. Dave Ramsey recommends that you make a daily estimate for some expenses.
For your food, Dave Ramsey believes that it helps to break your food budget down to daily estimates. You can now multiply your daily budget by the number of days between paydays. For example, if your feeding budget is $600 monthly, and there are 30 days in a month. That’ll break down to $20 daily. If there are 14 days in your pay period, that means you have a $280 food budget. You’re through with this step after budgeting your expected expenses across a four pay period.
3. Track your expenses
Dave Ramsey recommends tracking the budget you’ve made. He advised that you record what you spent in the allocated spending plan after each period as he believes it simplifies things. You can tally things up by going through your bank statement or using a budgeting app.
4. Rebalance to zero
After each pay period and you’ve tracked every cent. You may have something left in the remaining column. The first thought that will pop into your mind is to roll this over. But Dave Ramsey is of a different opinion. Rather than doing that, Dave says you should rebalance your budget and allocate every dollar.
What are alternative budgeting methods?
If you’re not keen on Dave Ramsey’s allocated spending plan, there are other budgeting alternatives that you can try. Let’s take a look at some alternatives you can try:
1. The 50/30/20 budgeting method
The 50/30/20 budgeting method is also a popular method. It involves using 50% of your income to pay the necessary bills. Then you’ll use 20% of your income to gain financial traction through investing and saving. And the remaining 30% can be used for anything you desire.
2. The cash envelope system
Dave Ramsey’s cash envelope system is another budgeting system that was popularized by Dave Ramsey. This system involves having budget categories, naming an envelope after each budget category, and putting the cash for each budget category into the envelope named after the category.
3. The Reverse Budgeting Method
The reverse budget method focuses primarily on paying yourself first—this way, you can focus on the life-changing dreams you have. After paying yourself, you can use the leftover to pay for your necessities. This method is ideal for individuals that prioritize their goals above other things.