Dave Ramsey is one of the most prominent voices in personal finance. Many of his fans use his budget tips to track their cash flow and get their finances back on track. But is the Dave Ramsey budget right for you?
We’ve collected his major points so you can decide if this approach to budgeting would work for you. Let’s look at the following topics:
Dave Ramsey’s zero-based budget
Ramsey’s zero-based budget is his starting point for structuring a good budget.
Zero-based means every dollar has a place, so there’s no leftover money after you budget it out. If you have any money left over, you should find it a home. This could be by paying off more debt each month or contributing extra to a retirement account.
If you can find a purpose for every dollar you have, Ramsey’s budget is a good format to follow. But if you’re not likely to assign a task to every dollar, you might want to skip it. If your income is inconsistent or your expenses are unsteady, for instance, the zero-based budget might not work for you.
Ramsey’s ‘Baby Steps’
Your budget will not be perfect in its first draft. You’ll tweak, update and fix many different iterations before you find one that fits. And it won’t fit forever. As you get older, your budget changes with your priorities.
Even if the zero-based budgeting technique doesn’t work for you, Ramsey’s “Baby Steps” are meant to be broad enough for anyone to follow. There are seven steps, but we’ve condensed them into four to help you get started:
1. Build your emergency fund
2. Pay off debt
3. Save for retirement
4. Give to your kids, home and community
1. Build your emergency fund
Having money saved up in case of an emergency is vital, but most of us don’t have that luxury. According to the Federal Reserve’s latest “Report on the Economic Well-Being of U.S. Households,” only 61% of Americans say they can cover an unexpected expense of $400.
With that, Ramsey said to get at least a $1,000 starter emergency fund as fast as you can, regardless of what it takes. If you can’t sustain an emergency, you might turn to credit cards, loans or friends and family. The long-term goal is to be as self-sustaining as possible.
If you’re having trouble making ends meet and can’t save anything, Ramsey’s first step might not be where you start. Instead, focus on earning money through a side hustle, asking for a raise at your day job and trimming expenses anywhere you can, even by consolidating your debt.
Ramsey’s third step is to put three to six months of expenses into savings to create a healthy emergency fund. Saving “just in case” is one of Ramsey’s major points, and he sees it as so important that two of his seven steps include it.
2. Pay off debt
Budgeting is one of the best ways to make sure you can put more money into the things that matter most to you, such as getting out of debt. Regardless of the debt, these setbacks are making you lose out on your own money.
Ramsey suggests using the debt snowball method. The idea is to pay off the smallest debt first with as much discretionary income as you can use. Once that is paid off, you take all the money you were using to pay that first debt and put it toward the next-smallest debt. The goal is to do this until all your debt is paid off.
It’s a good idea if you’re into celebrating small victories as you finish paying off a debt. Ramsey believes tiny achievements will help you stay motivated.
But if you have high-interest debt that’s adding up, the debt snowball method might not be best for you. You might want to try the debt avalanche instead – paying off debt with the highest interest first, rather than the lowest amount.
3. Save for retirement
If you think you’ll start saving for retirement “when you’re older,” you’re joining a big club. Two-thirds of working millennials don’t have anything saved for retirement, with 95% of them not saving enough, according to a report from the National Institute on Retirement Security.
Ramsey’s retirement step urges you to put 15% of your household income toward retirement.
How much money you’ll need to retire comes from your lifestyle and cost of living, so aim for 80% of your current income. This might work best if you have an employer-sponsored 401(k) that matches your contributions.
But saving for retirement can be difficult if you’re already having trouble making ends meet.
If you’re trying to lower monthly bills or pay off debt, consider taking out a personal loan if you can get a lower interest rate than what you currently pay. The faster your high-interest debt is paid off, the faster you can start putting money into a retirement account.
Stashing money away for your future self might not be as enjoyable as spending money now, but you’ll appreciate the ability to retire and still support yourself comfortably when you get older.
4. Give to your kids, home and community
If you’ve made it to the part of your life where your emergency fund is stacked, your debt is paid off and you’re set up for retirement – congratulations! You’ve worked hard on yourself, and now you can think of others.
Steps five, six and seven of Ramsey’s Baby Steps all talk about helping others – your family, household and community. You’ll contribute to your child’s education fund, put more money toward home payments and donate whatever you can to organizations that matter to you.
If you don’t have the means to give to others, that’s OK. You might want to set up a college fund for your child where other family members and friends can contribute to help ease costs. If you’re looking for extra money to put toward your home payments or other bills, use your tax refund.
Giving to your community doesn’t have to come with monetary donations. Try to volunteer your time and services any way you can. While money is important, any help you can provide will also go a long way.
Deciding if the Dave Ramsey budget is for you
If you’re having trouble imagining extra income going toward anything but your bills and possible emergency savings, you might not be able to handle the Ramsey budget.
But using his Baby Steps as broader goals is doable. Having goals in mind for where your money needs to go is important to financial freedom.
You can use the Ramsey budget as a helpful guideline, even if you don’t think you need to follow it step by step.
The important thing is that you create a spending plan so you have greater control over your budget and cash flow.
Rebecca Safier contributed to this article.
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