Dave Ramsey’s Budget: Is it Realistic?

Dave Ramsey, the silky voiced straight-arrow with 13 million radio listeners built an eight-figure media empire on the gospel of financial modesty rooted in self-reliance.

He preaches daily against the devil known as debt and says one of the best ways to rid yourself of this demon is to live on the Dave Ramsey budget, which he calls “zero-based.”

What is a Zero-Based Budget?

The formula is really simple: Monthly income minus monthly expenses = zero. If your monthly income is $5,000, you list $5,000 in expenses.

If there is $200 left after listing expenses, find a place for it so your bottom line reads zero.

But what happens if your expenses exceed income? That’s where two surveys say nearly half of America’s working adults find themselves.

The first was done by the Center for Financial Services Innovation, a nonprofit organization that found only 51% of consumers said they had manageable debt. Their survey also said 25% of respondents said they had a little too much debt or far too much debt.

And then there was a SunTrust Bank survey released in April of 2018 that said 62% of full-time employed consumers said they lived at least “somewhat” paycheck-to-paycheck and 20%  said they lived “completely” paycheck-to-paycheck.

Not to worry, says Ramsey and his zero-based budget. Stop wasting money on eating out; car payments; groceries; utilities and clothing and you’ll get back to zero in no time.

That advice might seem a little severe for a family that turns off the lights in their rental home before getting in their used-car to buy groceries so they can eat every meal at home, but details are not part of the Ramsey program.

He wants us to do it his way, and he has plenty of believers. Why not? His rise from bankruptcy to multi-multi-millionaire is plainly an impressive feat … even if Ramsey’s chief contribution to the curing of every personal fiscal ailment comes straight from Poor Richard’s Almanac written by Ben Franklin.

That’s right. Ben Franklin. Founding Father, inventor, publisher, ambassador, lady’s man, turner of clever, enduring phrases. The Poor Richard quote that inspires Ramsey? “A place for everything, and everything in its place.”

Change “place” to “wallet” and “everything” to “every dollar” and you’ve pretty much got Ramsey’s time-tested strategy for a winning budget: “A wallet for every dollar, and every dollar in its wallet.”

How the Dave Ramsey Budget Works

Ramsey’s reliance on 18th Century wisdom does not mean it is unwise, or even dated. In fact, there’s a lot to like about the Ramsey system. It’s simple. It’s straightforward. It’s four easily understood steps.

Step 1: Write down your total income. That is, your take-home pay. From every source, and every household member who is contributing to making your budget.

Step 2: List your expenses. Every last one of them, from regular bills (mortgage/rent, electricity) to those that sock it to you irregularly (insurance, HOA). Now, break out your other costs, such as groceries, gas, subscriptions, clothing, entertainment, 401(k) contributions. Account for every dollar that’s spent.

Step 3: Subtract expenses (including, in this scenario, savings and giving) from income to equal zero. This is what Ramsey calls the “EveryDollar” budget. At this point on his website, Ramsey offers a handy tip: “If you’re over or under, check your math or simply return to the previous step and try again.”

Step 4: Track your spending. A perfectly reasonable idea. Ramsey recommends, not unexpectedly, some tools you can pick up on his website for a few of the spare dollars that must be in your budget.

If you can make the numbers work — and have the discipline to stick with it (not to mention good fortune in your relationships, health and career path) — it will serve you brilliantly. You can leap aboard Ramsey’s Good Ship Baby Steps, which includes establishing a small initial emergency fund, paying down debt with the debt snowball method, investing modestly, and — gulp — paying off your house.

When Zero Is the Hardest Number

You can follow your progress literally, by purchasing color-coded wallets into which the observant Ramseyan places that month’s precisely allotted cash. If you prefer to run your system out of your checking account(s), Ramsey offers budgeting software for $99 per year.

However, competitors offer apps and budgeting software that accomplish much the same thing, even if the nomenclature is slightly different. Envelopes instead of wallets, for instance.

Suppose, however, you simply cannot get to zero. Ramsey has some thoughts on that, often expressed on his daily three-hour radio show.

Some seem reasonable: Sell a too-expensive vehicle, because “it owns you,” and get a cheap, reliable used car or truck to get to work. Others are breathtakingly radical: If your house payment is the budget-breaker, stop cutting the check for the mortgage.

“We’re not even giving any of it to the house payment,” Ramsey told caller Suzette from Michigan, whose husband recently lost his job. “You can get five months behind on your house payment before they foreclose. I don’t want you to, but if I have to choose between losing the house and feeding the kids, I’ll feed the kids.”

Ramsey recommends many of the usual treatments in circumstances such as Suzette’s: Jobs must be found. Two or three if need be. Skills must be utilized to maximize income. All frivolities must be cut out.

Alternatives to Zero-Based Budgeting

However, for people crushed by unsecured debt — usually credit cards bearing painful interest rates — Ramsey resolutely avoids ready remedies like consulting a nonprofit credit counseling service, enrolling in a debt management program or seeking a lower-interest debt consolidation loan.

Nonprofit credit counseling agencies are staffed by experts in crafting personalized recovery plans. Ramsey, who doesn’t distinguish between profit and nonprofit organizations, considers them credit wreckers.

But stiffing the mortgage holder for five months is a better plan? Doesn’t that do enormous damage to your credit?

Dave’s Recommended Budget Ranges

Ramsey has fixed ideas about how much, in percentages, you ought to be devoting to assorted categories:
  • Health – 5-10%
  • Recreation/entertainment – 5-10%
  • Utilities – 5-10%
  • Food -10-15%
  • Charity – 10-15%
  • Savings – 10-15%
  • Personal -10-15%
  • Transportation: 10-15%
  • Insurance: 10-25%
  • Housing: 25-35%

Obviously, the higher your income, the more you’ll be able to spend or invest in each of these categories. Suppose you’re earning exactly the nation’s median income, which was $59,039, when last reported by the U.S. Census Department in 2016.

Mr. and Mrs. Median Household Income are netting about $48,000 after federal income and payroll taxes, and have somewhat less than that if they live where there are state and local income taxes. California, at 13.3%, has the highest state income tax. At 2.9 percent, North Dakota has the lowest rate of states that impose income taxes.

For purposes of this exercise, however, we’ll assume an additional state and local top marginal bite of 5%, or about $2,000. (Your results may vary.)

So, our typical median income folks are netting $46,000, or roughly $3,834 a month. The top end of Ramsey’s monthly housing allowance (35%) comes in at $1,342, the bottom (25%) at $959.

According to a Business Insider study published in September, some places — Detroit, Phoenix, Atlanta, Houston — you’d be sitting pretty. But Dallas, Chicago, Miami, Washington D.C., New York — not so much.

Plainly, if your income is less than the national median, especially if it’s substantially less, maintaining a place of your own on 35% of your take-home or lower is going to be a severe challenge, even in less-expensive regions. And if you’re having to devote a larger percentage of your income to housing, the Ramsey pie chart begins to crumble quickly.

Also: Do not lose your job. Or get into a fight (over money or anything else) that splits a two-earner household.

Again, Ramsey has plenty of wise, uncomplicated advice for controlling debt and charting a path to fiscal bliss. And it has worked for countless numbers of Ramseyan disciples.

But it seems foolish to “hate debt” while willfully avoiding valuable tools that could help the overwhelmed consumer get a good, swift hold on a life preserver.

After all, the man who gave us “everything in its place” also gave us “Man [is a] tool-making animal.”

Why would we make tools, and then fail to use them?

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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