Last Updated on June 9, 2021
Contents
How Can The Allocated Spending Plan Help You?
Financial planning is one of the most important concepts behind family planning, and yet often is one of the most botched practices between spouses. From lack of prioritization to abusive spending habits, and not considering all the expenses that come in life, many families find themselves deep in debt and no clear way to get themselves out and live sustainably, all while saving for the ultimate golden dream of retirement.
It is no secret that this is a common issue and there have been many published books, articles, and videos that explain what families should be doing with their finances. But oftentimes a lot of these plans fall short because they cover up the root of the problem with fancy percentages and conflicting views on what a consumer should do.
Attempts to get financial plans back in line have fallen off the track and gotten worse, while others get stuck in neutral, never getting out of their dangerous habits.
However, through all this noise of financial how-to’s, there has been one individual who has preached the gospel (sometimes literally) on how to get out of debt. This man is Dave Ramsey, and he has almost scientifically mapped out a proven way to get out of debt, through a combination of thorough research on millionaire habits, as well as his own experiences of being stuck in debt and getting out of it.
Dave has created a program founded on the principle of baby steps which is a series of 7 steps that must be done in order that outlines a hard, strict blueprint to get out of debt, control cash flow, and spending, and build wealth. It has been proven to completely eliminate the use of credit cards or other debt-based financial instruments and get people in control of their money.
While there are many arguments regarding what the most important part of the baby steps are, the core piece of it is called the Dave Ramsey Allocated Spending Plan. Though much of the framework revolves around saving and avoiding debt, those who use his program can only truly build their wealth by controlling their spending, particularly their recurring household expenses. In fact, quite often, Dave recommends extreme (and I mean EXTREME) changes to a person’s lifestyle if he finds that their income level does not support their existing lifestyle.
The Dave Ramsey Allocated Spending Plan is strictly about putting every dollar you make to work in a way that keeps you out of debt and builds your wealth over time.
It’s about telling your dollars what to do and not the other way around. It’s about matching your income level to your lifestyle and make appropriate changes so that you are not living beyond your means, and ensuring that you are assisting your future self as well as putting yourself in position to give back to others over time.
It requires peering into your spending at an incredibly granular level to make sure you are on track and making changes in your spending habits if you are not living sustainably.
Who is Dave Ramsey?
Dave Ramsey is a native of Nashville, Tennessee, and is best known for running his own American radio show the Dave Ramsey show. His net worth today is well over 200 million dollars and lives by what he preaches and has no debt on his balance sheet. He runs a family-owned business with his children and spouse and has partnered with many other American radio celebrities to bring about his gospel of personal finance.
Dave reminds his viewers quite often of his youth, where he actually became a millionaire by his late twenties by investing heavily in real estate, particularly flipping houses. But like many consumers, debt became too easy to obtain and over-leveraged himself by owning too many homes with risky short-term mortgages.
When a bank came along and took over his loans and wanted him to call his notes, he could not provide enough capital, and he had to quickly sell all his property, taking on significant losses and bankrupting his family.
Dave uses this point to identify rock bottom and how being irresponsible with debt and spending put him in a really dark situation and his family at risk.
He preaches how he had to start all over with nothing and rewire in himself the importance of never taking on debt, working hard to bring income, and always living within your means while planning for the future.
It is a really incredible story that he not only got himself financially back on track but became a source of inspiration for others to do the same. Starting locally in Nashville, he built himself a following that many others have tried and also won at.
Despite his wealth, he is still very active and gives back a lot to his community. Many have followed his steps, and have mirrored similar success albeit on a smaller scale, first declaring themselves debt-free, and then being able to claim millionaire status in a relatively short time frame.
The Dave Ramsey plan has often been criticized by some as not being realistic and not the quickest path to wealth, as he preaches the snowball method vs the snow avalanche method when it comes to reducing debt. The Snowball method disregards interest rates and focuses on tackling loans from smallest balance to largest.
But the Avalanche method is considered the math-friendly method because it involves tackling loans that have the largest interest rate first, then moving on to the smallest interest rate.
His denouncement of using debt has often received backlash from many in the financial community because debt is regarded as a useful tool to create leverage allowing regular people to leapfrog their wealth-building timelines when used responsibly.
While his plan has been proven effective and helped millions, it’s also been proven that not everyone necessarily needs to use the Dave Ramsey plan, especially if they are good at using debt responsibly and don’t have aggressive or reckless consumer spending habits. Some financial experts have equated Dave’s program as an equivalent version of Alcoholics Anonymous, but for those who can’t control their money spending habit.
How Does the Allocated Spending Plan Work?
The allocated spending plan is commonly referred to as the Every Dollar program, in which a family must take into account all the income they make and assign it to a bucket or category every month. This would encompass everything from groceries and gas, to utilities, and other recurring expenses.
It could also encompass any outstanding debts, which would require payment buckets until the debts are paid off. More importantly, Dave teaches people to use cash whenever possible and never use credit cards. He finds the best way to satisfy this request is to restrict transactions to cash and debit cards.
How to Create a Spending Plan?
Creating a spending plan will vary based on where a family is in their financial journey, but it really centers around a key order of operations. First, prioritize all discretionary income towards eliminating debt, secondly ensure you have three to six months of household expenses saved in cash, and three put away enough money towards retirement and children’s college.
Dave also says ideally that until the mortgage is paid off, that there should be a priority towards ultimate debt-free status, but that intensity does not have to exist once you are debt-free outside of a mortgage and have met your emergency savings and investment obligations.
There are really no hard and fast rules for creating a spending plan for your household expenses, other than a need to make cuts early on when trying to get out of debt. In some extreme cases, Dave has even recommended people live on beans and rice since food is regarded as the one category that people tend to abuse, whether it’s eating out, or eating beyond their means.
He recommends the envelope method for some of these volatile expenses by setting aside cash once a month for an expense category so that people can easily stay on track. This teaches people to be mindful of their budget and not indulge often, a key principle towards getting people to live fiscally responsible.
Determine Your Housing Needs
Dave has often overlooked mortgages in his debt-free spending plans. But the reality is that for some families it may take a long time with their incomes and minimum lifestyles to obtain a house for cash. Therefore Dave does not necessarily recommend a maximum home purchase but does say that household expenses should not exceed 25 percent of your take-home pay. He also strongly recommends a twenty percent down payment at a minimum and ensures that if you must take out a mortgage that you do a 15 year fixed.
People often ask at what point in his spending plan should they save for a house and whether it should be done in a savings account or in the form of investments to potentially achieve savings faster. Dave’s response has always been that saving for a house is a step 3A in his baby steps and that after saving 3-6 months of emergency expenses, you could hold off on putting money towards retirement until you reach your down payment goal.
Determining Your Needs for Transportation
Dave often looks at car loans as one of the worst forms of debt and has often said that if you can’t afford cash for your car, you own too much car, to begin with. This is especially true when a family is currently trying to eliminate their personal debts and has often recommended people own beater cars while they navigate out of debt.
Dave also recommends that if people were to buy a car with cash, that it should never exceed half their annual income when they purchase it.
How Much Does the Allocated Spending Plan Cost?
The question some may ask is how much the allocated spending plan costs. While Ramsey+ is a subscription, EveryDollar is actually free regardless of whether you are enrolled in Ramsey+ or not. If you do decide to go a step further and purchase Ramsey+, the costs start at 12 months for $129.99, 6 months at $99.99, or 3 months at $59.99. There are many other applications you can use in addition to Ramsey+, including financial peace university, and tailored education for schools, businesses, and churches.
How Can I get The Dave Ramsey Model to Work for Me?
The Ramsey Allocated Spending Plan as mentioned is not necessarily for everyone, but can work for anyone who chooses to go down this path. It’s important that the foundation of the plan, is not about numbers and finding money, it’s about behavior and responsibility. Many of those who have used the Ramsey allocated spending plan as mentioned are looking for advice on how to rid of stupid behaviors and unsustainable spending habits.
Dave often mentions that the easiest baby step in his 7 baby steps on paper which is step 1, can often be the hardest for many. Many times people come to Dave so deep in the hole, that even saving $1000 is a difficult endeavor swimming in debt. Dave has recommended declaring bankruptcy for some, but often tells people they can swim out of this if they stay focused and stay the course.
People have long seen debt as a key to freedom and have abused the value of money, but Dave gets people to realize that credit is not free money, but rather a key to becoming a slave to the lender, and takes away your freedom to let your money do what you want it to you because a previous of yourself took away that freedom.
How Do I get Started with the Dave Ramsey Allocated Spending Plan?
The best way to get started is to visit Dave Ramsey’s website www.ramsey.com. From there you can sign up instantly with Ramsey+ and the EveryDollar app.
But as mentioned you can look over the numerous amount of literature and video’s that Dave has uploaded to his page. You can also listen in on the Ramsey show podcast, to listen to real-life stories and questions from callers to learn more about what Dave preaches, and how you can make the next step in your financial journey.