This is a series of posts about what you will find in Dave Ramsey’s Financial Peace University course. This is week three (week one and week two)
The lesson for this week was cash flow planning, also known as budgeting. You could see everybody approaching this lesson with trepidation. Not only does it mean more work, but it means finally revealing the true depth of their financial problems. Many people have avoided this because they just don’t want to know how bad it is. I sympathize. When we were first getting serious about money, we sat down to make out our budget and had one of the least fun evenings of our lives. We weren’t in bad shape, but it was a pain to dig out the bills, receipts, and ledgers for everything related to our household. You don’t realize how much is going on until you lay it all out and try to make some sort of order out of the chaos. I can honestly say I wasn’t looking forward to doing it again as part of this class. However, I vowed to suck it up and do the activities as if I’d never budgeted before.
The main idea is that we are to create a zero based budget. This means that every dollar is accounted for and “spent,” even if that “spending” is really putting money into savings. At the end of the month, my take home pay should all be allocated to categories and spent. Nothing should be left floating in the ether. Any extra money that you find in the budget is to be applied to the baby step that you are working on, whether it’s paying down debt, building an emergency fund, or saving for retirement. The point is to make sure that every penny of your money is working for you in the best way.
When I flip to the back of the workbook, I am pleased to see that the budget forms are comprehensive. There’s not much left out and everything gets broken down into monthly expenses to keep you from being surprised by big, irregular expenses like taxes, insurance, and Christmas. My big gripe with the budget sheets is that Dave wants us to put giving first. Giving it the first line item on the budget sheet. That should be the first thing you “pay” each month and then everything else gets paid after the giving is taken out.
I understand his point, from a Christian perspective, but I simply cannot get my head around someone in deep financial crisis giving away ten percent of their income when they are having trouble paying the mortgage or utilities. I think ten percent off the top is a fine and wonderful goal to aim for once your finances are under control, but I don’t think it should be part of a beginning budget for people in crisis.
Dave wants us to give off the top, but then turns around in the lecture and contradicts himself when he talks about the “four walls of the home.” These are the things he says we need to pay (in order) when living in crisis mode: Food, shelter, utilities, and clothing and transportation. There’s no mention here of giving off the top. I find the four walls theory to be more appropriate for someone in danger of losing it all. Too many people these days are confused and paying credit cards or giving to charity before paying their mortgages. If you’re in crisis, you need to sustain yourself first. Everyone else can take a number and get paid later, including the charities.
Dave does a good job of showing why budgets often don’t work: You don’t actually live the plan, you leave out important things (whether intentionally or unintentionally), or you use it to control another person. He then points out that budgets are not as restrictive as they seem at first. A budget is less about telling you what you can’t do and more about telling you what you can do. There is no rule that you can’t spend on eating out, as long as you have the money to do so. A budget shows you where your money is going and tells you if there is any (and how much) left over to eat out (or buy a DVD, or travel, or whatever else you want to do). If you have the money, you can do whatever you want. There are no absolute “cant’s” in a budget, which is what most people believe. You can save for and prioritize anything you want, once your basic needs are met and your debt is under control.
Near the end of the class, Dave hits upon the most important reason to budget. We all work too hard to end up with nothing in our golden years. By creating and sticking to a budget, we can direct our money to the places where it will do us the most good, both short and long term. Without some sort of plan (budget), you’re likely to end up at retirement age with nothing saved, too much debt, and no idea what to do next. This is advice I can get behind. I don’t want to work for forty years and end up with nothing. I found this class to be the best and most practical, so far. This is the reason why so many people are here: To get control of their money so they have more freedom. A realistic budget is the first step and, for the most part, Dave’s budget system is a good one.
Dave also wants us to start using the envelope system. This is not for bills that are automatically drafted or normally paid by check, like utility bills and the mortgage. Envelopes are for things that you typically pay cash (or use the debit card) for like groceries, clothes, and dining out. The idea is that you set aside the budgeted amount of money for each category in cash in a separate envelope each month. When the cash is gone, the spending in that category is over for the month. If you’ve budgeted $300 for groceries, you pay cash from that envelope each time you go to the store. When you reach $300, you’re going to have to live off of what’s already in your pantry.
I get the idea of this. Envelopes keep you from overspending and they force you to budget a realistic amount for your purchases. It’s one thing to say, “I only spend $200 on groceries each month,” and another to discover that the $200 is only one trip. A couple of months of eating weird meals you’ve scraped together from the pantry will force you to budget a more honest amount for food.
I will try this system because we’re supposed to, but I confess it makes me uneasy. For one thing, I’m not thrilled about keeping that kind of money, in cash, in the house every month. I don’t live in a high crime area, but anything can happen and I’d hate to lose $1,000 in monthly expenses in cash. For another, I use my credit cards for many of my expenses to get the rewards points, then pay them off every month. This totally goes against all of Dave’s advice, but I find those rewards programs to be valuable to me. I understand that those with credit card problems should not live this way, but for me it makes sense. I’m not thrilled about giving up my rewards for a couple of months while I try this system. But, who knows? I could love it, so I’ll figure out my expenses and give it a try.
When we got to small group, most people were looking shell-shocked. They were thumbing through the workbook and looking at the forms we have to fill out this week. I heard some grumbling that they didn’t have the time for this. I’ll admit it: The forms seem intimidating at first, but really they’re easy to use; much easier than some forms and software I’ve seen. Once everyone settled down, they expressed their fear of budgets. Some have tried and failed in the past (like diets). Some have found it too restrictive. One man said that the one time he tried a budget it ended up in disaster because he allowed himself no fun whatsoever, which ended up in an unplanned binge trip to Vegas with his buddies that set him back about $3,000 in credit card debt. After that he never tried budgeting again.
Others took the opposing view and said that they’ve found budgets empowering, but they’ve just not been able to stay on one because of weak willpower or an uncooperative spouse. The wife of the man I mentioned last week (who was proud of his financial mess), looked significantly at her husband when this was mentioned and I chuckled. Many people just didn’t want to talk about it at all. It will be interesting to see, next week, once the forms are all filled out, if anyone feels any differently.
Homework roundup: I met my goal of the $1000 emergency fund when my tax refund came in this week. The $800 put me over the top. I’m not the only one in my group who used their tax refund to make the baby emergency fund. Several people reported using their refunds to make the fund, and several more will do so when the returns come in. I will say this: Had it not been tax season, that $1,000 would have taken me a lot longer to come up with. Last week I was only up to $135. This week I got $100 from some side work that I did and a rebate check for $50 from the insurance company, plus the refund. Since I was pretending that I had no extra money in my budget, the emergency fund money was going to have to come from “found” money or other outside sources. Without the tax refund, I think it would have taken me about six weeks of side work and selling things to come up with the money. It’s definitely not as easy as it seems to scrape $1,000 together if you have nothing in your budget to work with. You’re definitely going to have to make some hard choices about what to sell, whether to get a part time job, or which services to drop.
We were also instructed to fill out our complete budgets and spending plans. As expected, this wasn’t fun. It was time consuming, too, even though I’ve done it before. I did not consult the budget that we use now, instead opting to do Dave’s zero based budget from scratch. After I got everything entered, I found that I had about $1,000 per month unaccounted for in my favor. About $100 of that went away after I realized that Dave’s plan makes no provision for pets, which we have. I still have about $900 per month that I can’t explain. No matter what I do, I cannot get my budget to zero. There is $900 somewhere that we are not spending or saving. If this is true, then I need to be transferring another $900 per month into savings. Either that or I need to be having a whole lot more fun each month.
I’ve got to do some more research to find out if this is true, or a math error on my part. I’ll pull my old budget and compare and see where I’ve gone wrong. Hopefully it’s true that things have changed somehow and I have a spare $900 each month, but I suspect math error or there’s something I’m not thinking of. If I can’t find the error, I’ll try moving $900 a month into savings and see if I run out of money. Cross your fingers and I’ll keep you posted.