Dave Ramey’s Zero- Based Budget Explained
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This is a Dave Ramsey guest post from Annelies…so over to you!
My name is Annelies, coming over from The Frugal Frenchie blog, to talk to you today about Dave Ramsey. I’m thrilled to be here and hope you will enjoy this blog post and come and say hi on my twitter afterwards; I’d love to know your thoughts!
What is it?
Dave Ramsey promotes the idea of a zero- based budget to help get rid of debt. To understand what this is, you first need to understand the formula:
Monthly income – monthly expenses = zero.
This means that if you earn £2000 a month, you should list £2000 a month in expenses. Even if you have less than this, Ramsey says to find a place or a role for it, so that your formula still equates to zero.
What happens if you have more expenses than income?
For a lot of low income or high debt families, this is likely to be a worry, but Ramsey has an answer.
It’s a great excuse to look into the expenses you’ve listed and see if you can cut out anything that is not a “need.”
Although these figures may vary slightly per household and potentially per culture (he’s from the US), Ramsey believes that these percentages are a good guide to allocate to these expenses:
Health: 5-10% This, for example, may be a lot less in the UK as we do have the privilege of having the NHS
Charity: 10-15% Personally, I believe this is a good place to save on expenses. There are lots of ways to donate to charity without giving money (something to consider…)
Personal: 10-15% Another easy place to save money. If these are not “need” purchases, add more of this budget into savings or utilities.
Ramsey does not consider the specific details of every case or wage though. Please be aware that you must decide what is best for you and not do anything that’ll get you financially in trouble, such as purposefully not paying the mortgage to prioritise other expenses etc.
4 Steps for the Zero- Based Budget
Step 1: Write down the total income you will be using in this budget. Whether it’s solely your contribution or the accumulation of several household members. Make sure it’s also your “take-home pay,” and doesn’t include what will be taxed.
Step 2: List all your expenses to see what the total is. Even if they are expenses that may potentially not occur, list them anyway because if your total is in the minus, you can then take them out, so your bottom line remains zero. Don’t forget things that are paid automatically or monthly; it all needs to be written out.
Step 3: Write out the formula so that income – expenses/savings/giving = zero. He calls this the “EveryDollar” budget. If there are any results other than 0, he says you should go over step 2 and experiment with your numbers.
Step 4: Track your spending. This can be done in many ways and he does have some payable resources on his website if you’re interested. Free ways include creating a spreadsheet, keeping receipts and deducing from your income as you go or restricting your debit card allowance to the amount of income you have accounted for in step 1.
I hope the Dave Ramsey Zero-Based Budget is now clearer for you. If you are interested in more money saving or money making blog posts, feel free to check out my blog The Frugal Frenchie.