Dave Ramsey's Zero Based Budget Tutorial

Before we first began our Total Money Makeover,  I used a spreadsheet to track where we spent our money every month. When the VISA bill arrived, I’d audit our purchases and assign them to the proper category. The dread of feeling we’d overspent was confirmed by seeing the charges on the bill. While my husband slept blissfully unaware of my anxiety, I would lie awake, running the numbers and trying to figure  how and when bills were going to be paid. It was a stressful way to live, and we needed relief from that anxiety.  We found the solution in a worksheet in the back of Dave Ramsey’s book, The Total Money Makeover.

Perhaps the most incredible tool in the Dave Ramsey Solution is the zero based budget. This budget tells your money where to go at the start of the month, rather than wondering where it went at the end. This budgeting strategy is a game changer to learn how to win the personal finance game. Ramsey Solutions has introduced a free budgeting tool called Every Dollar, and it’s pretty awesome. We used the original version (Gazelle Budget) for years,  switched to the  new program a few months ago, and are pleased with the software. I’d highly recommend you give this tool a try.

Every Dollar Free Budget and Ap

The first step in creating this budget is to calculate your projected income for the month. For our family this has  been a fixed amount and is fairly straightforward. The person on a variable income would start this process by listing the lowest amount ever earned in a calendar month, additional income can be added and budgeted as the month progresses. The whole idea is to assign every earned dollar a name for spending. There are several great "How to Videos" on Dave Ramsey's youtube channel that answer a ton of money questions. Here's the one describing how to do a budget.

Like using a check ledger, begin allocating money from your monthly income into categories for your budget, subtracting from the starting balance, until you reach zero. If you know your current spending goes beyond your income, start the process by inputting the necessities first. Ramsey defines these as “The Four Walls” and include Food, Shelter, Transportation and Clothing.We  pay these items first because when these items are funded, we are able to breathe a bit more easily and think more clearly. After the foundation of  monthly living is in place,  begin to plan spending in the remaining categories of the monthly plan. For fixed bills simply enter the payment; for more fluid categories, utilize the cash envelope system.

We LOVE using cash, and have found this is the most effective way for us to stay on track with our monthly spending. Currently we have envelopes for Groceries, Restaurants, Travel, Entertainment, Kid Activities, Clothing, Christmas, Yard Care, Car Repairs, His/Her Pocket Money, Date Night, Gifts, Pets and “Other Stores” for household items. At the start of the month we lay out our budgeted amount in cash  and then slide the cash into the correct envelope. In this way, we  fund a month’s worth of living. It took a while  for us to become accustomed  to carrying cash.  We had to find  a system to deal with a day of running to several different stores and  then reconciling envelopes at home, but we’ve found that this technique  allows us to stay on the financial track.

An example comes from the way we budget clothing expense.  Each month we decide how much money we intend to spend on a category such as clothing, and then we withdraw those dollars from the bank.We  place  that money into an envelope labeled “Clothing” and  purchase only clothing using that envelope’s cash. . Shopping with cash will limit the  urge to impulse shop, and allow staying  within the budgeted amount.  Roll  over into the next month’s envelope any money left over at the end of a month.

Some large purchases, like Christmas shopping, can be best prepared for with a sinking fund. The process to create a sinking fund means making a monthly payment to yourself of one twelfth the total anticipated expenditure either by filling a cash envelope or by opening a  separate savings account. Our feelings towards Christmas shopping dramatically shifted when we began saving monthly with cash. Now, each December, my husband takes a day off of work, and we get a sitter and have a wonderful time shopping together with cash in our hands. It feels great to pick out the perfect gift without dreading the arrival of the VISA bill in January.

If you add any additional cash to your income throughout the month from extra work, commission, refund, or selling something, you must assign a category to that money. People with a variable income will want to go back and fully fund categories they missed when budgeting for their smallest month. If you’ve covered your monthly expenses,  apply the added income to your Baby Step Goals.

We’ve taught over a hundred couples how to use the zero-based budget and use cash envelope system to meet their financial goals. This works only  if the budget you created is the amount you actually  live on. If you treat this concept only  as a theory, it will never help you meet your financial goals.

This  system will reach point where it feels like it’s working well in approximately three months, so make this next month your shot at starting fresh!