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!

Every Day Savings on Food

For a lot of families who take the nine week course Financial Peace University, finding frugal ways to feed yourself and family seem the quickest route to make immediate progress in savings. If you fail to plan with grocery shopping, you will bust your budget every month. Here’s a few steps to get started with saving on food purchases.

Step One - Pay with Cash. Each month decide how much money you intend to spend at the grocery store, and then withdraw it from your bank. Put that money in an envelope labeled “Food” and only purchase food from that money. Shopping with cash will limit your urge to impulse shop at the grocery store, and allow you to stay within your budgeted amount. The first month or two you may find that you have significantly over or underestimated how much to spend on food. Look through your pantry to see if you can get through the month to stay on track or subtract from another place in your zero based budget. It takes a few months to get a budget right, but making this single change with your food purchases will make a huge difference.

Step Two - Create a Weekly Meal Plan. I am not very good at wandering through a store and throwing things in the cart and figuring out what to prepare based on what I bring home. Instead,  my husband or I sit down and write out the weekly plan for our meals and what ingredients we need before we go shopping. We are nerdy enough that we even put the items in the order of the way we will walk though the store. When our kids were little, they knew that if it wasn’t on the list, we weren’t buying it and this 10 minute exercise saved us a bunch by curbing our impulse purchases. I use this meal plan/grocery list. I love that it has both the menu and the grocery list on the same page.

Step Three - Shop from Your Pantry. As you creating weekly menu, keep in mind what you already have on hand and be sure to use it up before it expires or spoils. Check if you already have the spices and herbs on hand so you don’t buy another container. This is a simple step that is often missed when you shop without a plan.

Step Four - Try Aldi. We LOVE this store and when we first made the change saw our monthly grocery bill go down by a third. That’s a lot of savings in a short period of time. If you’ve never shopped there before, know that you’ll need a quarter deposit for a cart (which you get back when you return it), and bring your own grocery bags or purchase them from the store at 7 cents each. It is a small store and you will not have as many options for products and there won’t be as many name brands as in a typical grocery store. For our family, less is more, and we can get our weekly shopping done in less then 30 minutes.  Aldi also has a guarantee on their products and if you are unsatisfied, they will refund you the full price AND replace if you wish. Their staff works hard and is empowered to make managerial decisions. I love shopping at Aldi and hope you’ll give it a try.

Step Five - Stick to your menu. You made the plan, now stick to it. Resist going out when you don’t want to cook and instead make eating out a special occasion. When I was a kid, going to McDonald’s was a big deal and eating out at a sit down restaurant was an event. Getting back to this mentality will go a long way in saving money.

Step Six - Freeze from your Excess. When you only need to use three stalks of celery for a recipe, but purchased a whole bag, wash, cut, bag, label and freeze the remaining for a future meal (when you only need three stalks again). Food that is thrown away is money wasted. Get into the habits of making use of your entire purchase.

Step Seven - Eat Your Leftovers. With all the guys in our house, there is not a lot left at each of our meals, but if there is, we make an effort to turn those leftovers into lunch the next day. Creating a new meal from leftover is also a great way to consume that purchased food. For our family, it’s easiest to make stir fry or fried rice with the vegetables and meat and smoothies with the fruit. 

When people first begin Financial Peace University or their Total Money Makeover, they usually are living without a plan that translates to eating with out one as well. Being thoughtful and intentional about how you spend your money on food is a great tool to managing your money well. 

What are your tricks and tips for saving money with your grocery bill?

Why You Don't Want a Tax Refund

Call me a fool, but I actually really enjoy completing our taxes. The nerd in me lights up when we can lay out the accounts for the year, tally our giving, gather our W-2s and also see what kind of refund is coming our way.

Wait a minute ... that's why I used to love tax season.

We used to get an awesome refund. Like $6,000 awesome. We used that money for vacations, savings, home repairs and all sorts of other things. It felt like we were getting a bonus every April. It felt like free money.

The Total Money Makeover changed our understanding of this pretty quickly. As we started to pay more attention to our money, we realized that this wasn’t a bonus, but rather an interest free repayment on a loan we’d given to the government. We learned that there are actually ways we can limit the amount we lend to the government,  and our goal should be eliminating our refund all together, and determining how to manage our vacations, savings and home repairs in our monthly budgets. 

We could leverage this “free money” towards paying off our debt more quickly on a monthly basis by increasing our withholdings through Ryan’s employer. At this point I think we’ve maxed out at nine allowances. 

We typically have to pay in on our state taxes and earn a refund from the federal government. We still get about $1,000 each year, but it feels less like a bonus, and we don’t count on that money as we did before understanding our finances. We apply the money where it fits our overall game plan.

Here’s a few calculators and forms you can use to see if adjusting your W-4 withholdings would help you reduce your refund.

HR Block W-4 Withholding Calculator

Turbo Tax W-4 Withholding Calculator

IRS W4 Worksheet

If you receive a tax refund as a part of an Earned Income Credit, this post probably won't apply to your situation.

Dave Ramsey’s Baby Steps Tutorial

One of the theories that attracted our family to applying Dave Ramsey’s approach to finances in is his plan called “The Baby Steps.” Rather than trying to fix all areas of your finances immediately, you work on a specific step, with focused intensity, solve the problem, and then advance to the next goal. Before we began the program we felt like we were attacking our financial issues in fifteen different directions, not one was effective, and long term success seemed nearly impossible. This new, single-minded strategy led us to a great point in our financial lives. Let’s look at each of the Baby Steps as defined by Dave Ramsey’s website.

Step One - $1,000 to Start an Emergency Fund. To start the process, scrape together $1,000 to use in case of an emergency while you are working your next steps. Begin a shopping freeze; eat only food from your pantry; sell extra household items; pick up short-term extra work to accomplish this goal as fast as you can. This emergency fund will help prevent you from accruing additional debt while you are working on Baby Step Two. For our family, this involved actually reducing our savings and applying the surplus to our Debt Snowball. While this step was scary at first, we were able to live with this level of savings for 30 months, rebuilding it a few times when life happened.

Baby Step Two - Pay Off all Debt but the House. List all debts but your house in ascending order. Pay off the smallest balance with focused intensity and make minimum payments on the rest. When you retire the first debt, apply the same focus to the next smallest debt, and so on and so on. Like a snowball rolling downhill,  your payment will become larger as it absorbs the extra money from the paid-off debt.  As an example, our family dealt with $55,000 worth of loans that took the shape of personal loans, medical bills, 401K loans, student loans and a second mortgage on our house. We spent 30 months cutting down our debt by following this plan, and we were so excited to make the last payment on our second mortgage in December 2010. At this point in the Baby Steps, many people find ways to make extra money through work and selling some of their personal property. The degree to which you are willing to sacrifice will reflect how much time you spend paying off your non-mortgage debt.

Baby Step Three - Build Your Savings to Three to Six  Months of Expenses. Now that all your debt is out of the way, calculate what it would cost to run your household for three to six months, accounting for  risk factors in your life such as illness, job stability or a growing family. Having several thousand dollars in the bank will add a feeling of peace that you may never have experienced.   You can  accomplish this in a short period of time on the heels of a successful debt snowball victory. This step took us approximately six months to accomplish,  and we were so excited to begin applying our knowledge towards creating a brighter future for our family.

Baby Steps Four through Six can be worked on at the same time.

Baby Step Four - Invest 15% of Household Income into Retirement. It’s time to plug back into investing after taking a break to complete the first three steps in the process. Between your Roth IRA, 401K, and  traditional IRA are several  options to build wealth for your long term use. The money you were using to attack debt can now go towards the future. We have found a wonderful financial advisor through Dave Ramsey’s Endorsed Local Provider (ELP) program that has taught us more about investing and work towards our long term goals.

Baby Step Five - College Funding for Children. Use 529s and ESAs (Educational Savings Accounts) to invest money for your children’s future. Ramsey doesn’t give a specific percentage or amount families should aim for, and leaves this to the discretion of parents. We personally want our children to pay for part of their college experience, but are still saving so that their contribution won’t have to cover the whole degree. 

Baby Step Six - Pay Off Your Home Early. In Financial Peace University, the video based class that we have taught for five years, Dave Ramsey shares that families who participate fully in the Baby Step Program with their spouse tend to pay off their homes in seven to ten years. When we began this process, we were trying to get out from debt that was causing us to lose sleep. Dreaming about a paid for house down the road wasn’t even  on the radar. Now, having applied these principles for nine years, we are a couple years out from paying off our mortgage. 

Baby Step Seven - Build Wealth and Give. At this point in the process you have zero debt, a paid for home, are investing 15% of your income for retirement, and have funded your children’s college account accordingly. Out of your income, you are called to live, give and grow wealth. With our target entry to this step quickly approaching, we have have a list of ways that we plan to live that are more extravagant than our life today. We want to take our children on a trip out of the country to solidify the connection between zero debt and amazing opportunities. We currently give 10% of our take home pay, and are looking to grow to a full tithe on our gross earnings. Growing wealth through additional investing in mutual funds and real estate is also on the table. We look forward with hopeful anticipation for how God might use us in new and exciting ways when we pay off our home and free up that monthly mortgage payment.

The nine week course Financial Peace University and Dave Ramsey’s book The Total Money Makeover delve deeper into each of these steps with detail and more actionable steps. This program did not feel sophisticated or heady enough to actually work when we first started. After living this system for almost ten years and teaching it for five, it’s clear that financial freedom is more about personal behavior than math. Building a plan, believing that it will work, and then following through is a sound way to make your financial dreams a reality. 

Saving on Everyday Purchases

One of the most profound and basic lessons that I have learned from teaching Dave Ramsey’s Financial Peace University is that money is finite. This concept sounds simple  to understand but is a difficult lifestyle to live. To reach our financial goals we’ve found that we must follow two steps: spend less and earn more. Here are a few ways to save money on everyday items.

Cash is King. When hiring services, negotiate a price and then always ask if there is a cash discount. We regularly save 3%  ON projects done around our house. We’ve found that most companies are happy to give us a discount, and if they are not, we can look at another bid or rest in the comfort that at least we checked before making the purchase. We have saved money on house painting, a stove from Lowe’s, window installation, landscaping, vehicle repair, and even our new mattress and box spring.

Work to purchase everything used. It is amazing what you can pick up at a thrift shop that will stretch your dollar further and further. Last week I made the following purchases (pictured above):

• Double Bottle of Contact Solution - $3 (Neighbor’s Inc.)
• Two Pairs of Children’s Shorts - $2 (Neighbor’s Inc.)
• Old Navy Women’s Jeans - $2
• Women’s American Eagle Jeans - $2 (DD’s Place - Thrift Shop)
• Lighting for our Porch - $10 (DD’s Thrift Shop)
• Two Pairs of Men’s Shoes for our growing son - $15 (Goodwill with 25% off coupon for donating)

We also try to look at Craigslist and online garage sales before making household purchases. Our money stretches so much further by taking a little more time and being mindful that second hand items can often be just as good as new purchases. With garage sale season coming up, there are plenty of deals to be had!

Shop with a list. Always. For every store. Impulse buying adds up quickly, and taking the time to write what we plan to purchase allows us to stay on track and not make frivolous purchases that detract from our financial goals. It is also helpful to be able to show our kids, if it’s not on the list, we’re not buying it.

Take advantage of lifetime warranties. This fall I went to zip up my Cabela’s Winter Jacket, and the zipper just fell off. I did a quick search and found, that without a receipt, Cabela’s will issue a gift card at the lowest price of the warranted item. For me, this was a $60 gift card for a jacket I wore for four years. I was then able to use that money towards a replacement. Jansport also offers a lifetime warranty on their products, and I’ll be looking into this at the end of the school year for two backpacks that have zippers that aren’t working properly.  Discount Tires has replaced tires that couldn’t be repaired but still had plenty of wear left. When something has broken, or you have been disappointed as a consumer, it doesn’t hurt to look into the company warranties.

Fix rather than replace. A few years back Ryan replaced the motor on our aging dryer, and it worked great. A couple months ago, he replaced the belt. Last summer we paved a beautiful patio with some DIY ingenuity at a fraction of the cost of hiring professionals. Between Google and Youtube,  you can learn an awful lot about fixing yourself  to save a few bucks.  

Find ways to discount the cost of items that are seemingly fixed. Sometimes we get into a rut of believing  that monthly bills are fixed prices. Negotiating on insurance rates, phone and internet service and even preschool is a legitimate way to save money. We receive a monthly discount on preschool because I pickup an extra couple kids. Opt for a more simplified cable option, or cancel it all together. Purchase modems, antennas or other supplies to bypass the monthly rental fee. There was a time when we even skipped our garbage pick up every other week because we weren’t filling our can. 

Take advantage of Ebates for online purchases. It’s a site that links to 100s of online stores (Target, Kohl’s, Amazon, Orbitz, Living Social), and offers a quarterly cash back rebate when you start your shopping experience with ebates.com and then make a purchase at an affiliated store. You can use coupons, discounts, in-store rewards and gift cards when making a purchase. After a few years of doing this, I’ve received about $175 cash back. There’s also a referral program, so if you decide to give this a shot, could you please use my referral link in the side bar?

For our family, we save the most money on all goods and services when we are intentional about looking for a deal and steering clear of impulse purchases. What are some of your money saving ideas?

Favorite Reward Programs

Many stores and businesses offer rewards programs to encourage consumers to continue shopping with their brand. Here are a few of rewards programs that our family utilizes, and I would love to hear about the programs you have found valuable.

Kassa Cash Back on Debit Purchases - A trend that started with credit cards is quickly becoming an industry standard with debit cards as well. Our credit union began offering cash back on purchases. This seems like a no-brainer to take advantage of for those monthly bills you use your debit to purchase. We earn 2% with a max return of $12 a month. Certainly not an amount to retire on, but it adds up to $144 a year.

ebates.com It may seem like I’m beating a dead horse with referencing this site, but it’s really a simple way to get cash back for purchases you’ll be making online anyway. You simply set up an account at ebates and search their site for participating stores. If you can use their cash back offer, you’ll follow the link which will lead you to the retailers store front. You make all purchases directly with the retailer and ebates will generate a ticket after the purchase is completed and apply it to your account. Quarterly they will send a check to your house. I’ve received $172 using this site for the past couple years. There are also incentives for referrals so if you’re going to check it out I’d appreciate you following this link on the side of the page.

Grocery and Gas Partnerships - This is another great rewards program for things that we need to purchase anyway. We don’t take full advantage of these programs because we primarily shop at Aldi which doesn’t partner with any gas stations, however, our local Knowlan’s has partnership with Kaposia Convenience. We get 5 cents off a gallon for every $50 we spend. Many Financial Peace University families have shared that this is a great way to save a few bucks each month.

Fantastic Sam’s - I was really disappointed when Fantastic Sam’s moved away from their punch card system. With a family of 5 someone was getting a free haircut every other month. Their current rewards program keeps track of all purchased haircuts and issues a $10 off coupon after spending $250 on cuts and products. In addition to building towards a reward, participants also receive regular coupons for discounts on products and services. Our family isn’t too picky about our hairstyles or seeing the same stylist and have been really pleased with the local service. 

Walgreen’s - It seems like someone is always in need of a prescription at our house, and picking up the medicine at Walgreen’s allows us to take advantage of their rewards program. After signing up, purchases build until reaching a “goal” and then a cash discount is applied on the next purchase. We are all about finding simple ways to discount purchases we need to make and this is a great fit for us.

Thrift Stores - Our local thrift store Neighbor’s Inc offers a punch card that provides a $10 discount after it is filled. Since prices are cheap, it takes awhile to fill the card but when I get a $10 shopping spree the money can be stretched awfully far. To my knowledge, Goodwill doesn’t offer a rewards program, but you can get a 25% discount coupon for a donation. Again, that type of savings can be a real workhorse when buying second hand items.

Kohl’s - This list would not be complete without giving a nod to the mother of all rewards programs. Kohl’s seems to be the holy grail of getting people to spend more to rack up their rewards points in the form of Kohl’s Cash. Their rewards programs offers $5 Kohl’s cash for every $100 spent. They also periodically offer Kohl’s cash in store or online, on top of their rewards program. Combine with coupons ranging from 10%- 30% and checking the ebates offer (today it is 6% cash back) there are plenty of ways to save at this store. We certainly take advantage of all of these rewards program but skip using a charge account.

None of these rewards programs will make you a millionaire, but there are plenty of simple ways to discount products that are going to be purchased anyway. I can’t wait to hear about the rewards programs that you love. Please add them in the comment section below.

Making Peace with my Kohl's Breakup

I loved Kohl’s. Everything is always on sale, and it’s a rush to head up to the register and earn Kohl’s cash and discounts on the pile of stuff that I place on the counter. And I loved my Kohl’s card back in the day. I mean 30% off!!! Who wouldn’t love that kind of discount on everything you need. I’d stock pile my lists, await my coupon and strut into the store prepared to do major damage with a tiny piece of plastic. 

Then I read The Total Money Makeover, and worse, so did my husband.

In the summer of 2007, we drew a line in the sand and decided that we were going to stop using credit. We weaned ourselves off of our Amazon sponsored Visa Credit Card that offered $25 gift cards for every $2,500 we spent. We cancelled all the random charge accounts we had opened to get an immediate discount or t-shirt. And then, we turned to that maroon card that was left. Ugh. It was so hard. In the end, my Kohl’s card was cut and closed as well, and I mourned.

When people begin cutting credit cards in Financial Peace, there is ALWAYS someone, usually a woman, who can’t wrap her heart around closing this account. I’ve heard, (and long ago presented) all the arguments. The 30% off coupon is too good to pass up. Kohl’s cash is amazing and you can’t give away free money. Right?

The answer that has made me most confident in my breakup my Kohl’s charge is the phrase, “It’s not you, it’s me.” As in, my thinking, behavior, and values have changed and this relationship just doesn’t fit anymore. 

When I am thoughtful about my spending at Kohl’s, I’ve come to see that we aren’t really talking about giving up a 30% discount, but more like a 10% one. I can logon to kohls.com any day and find the coupon on the front page offering me 10-15% off my purchase, WITHOUT using a Kohl’s charge. I can also sign up for their rewards program and emails that will offer me 20-25% discounts a couple times a year. Today I got a free $10 coupon just for Mother’s Day! I am also still able to earn Kohl’s cash at the same pace as those carrying a card. If I choose to make a purchase from home, I always start with ebates.com to earn an additional 1-10% cash back. Today the offer is 6% of each dollar spent! Of course I could save a bit more using a Kohl’s charge, but we’re talking about 10% of the purchase. 

Changing my behavior and shopping with cash and a budget saves me much more then 10% at Kohl’s with each shopping trip. Cash has allowed me to feel money in a way that the maroon card never allowed. I don’t overspend or pick up another few items outside of my budget to reach a certain dollar amount for more Kohl’s cash. When the money is gone, I’m done shopping. We are able to work towards our financial goals without getting derailed by a sale or coupon.

My values have shifted so dramatically since starting our total money makeover that I have a lot of peace with my breakup with the Kohl’s charge card. My husband and I are so focused at reaching our financial goals that chasing a discount feels more like a distraction than a tool. Truth be told, my Kohl’s cash often expires now because I don’t want to get sucked into buying something extra just to use the “free money.” 

The marketing department at Kohl’s knows exactly what they are doing, and they are excellent in that manner. I’d rather not chase money in that manor, and focus on having my budget reflect the bigger picture in my personal finance story.

Have you broke up with Kohl’s? What are your thoughts looking back on the relationship?