If you’re struggling to stick to a budget, the Dave Ramsey Allocated Spending Plan can help.
An allocated spending plan, which is outlined in his best-selling book The Total Money Makeover, is a type of budget based on using percentages of your income. The idea is to have a place and purpose for every dollar.
For example, on a $5,000 a month income, your allocation might be:
- Food – 15% or $750
- Medical – 10% or $500
- Housing – 25% or $1,250
- Savings – 10% or $500
- Transportation – 10% or $500
- Utilities – 5% or $250
- Total – 75% or $3,750
The idea is to cover the necessities first, then fill in the rest depending on your goals.
Using the example above, there’s $1,250 left over. How this gets allocated depends on your personal situation. For some, it may be covering debt payments, for others building their emergency fund, and for others education.
Keep in mind, what is essential will change, e.g. a family has different needs such as childcare or education than someone who is single.
Dave Ramsey Allocated Spending Plan
What’s unique about Dave Ramsey’s Allocated Spending Plan is it allocates expenses by pay period. No longer are you budgeting on a monthly basis.
If you’re paid every other Friday, your budgeting cycles would be:
- Friday, January 6th through Thursday, January 19th
- Friday, January 20th through Thursday, February 2nd
For irregular income planning, Ramsey suggests basing your income on your lowest paid month from the previous year.
The advantage of Ramsey’s approach is you get far greater insight into your budget. It works for those with an irregular income. Plus, you can adapt much quicker when “Murphy strikes” as Ramsey likes to say.
4 Steps to Implement the Dave Ramsey Allocated Spending Plan
To follow an allocated spending plan, there are four steps you’ll need to follow:
- Step # 1: Insert Pay Periods & Expenses
- Step # 2: Determine Expenses
- Step # 3: Track Expenses
- Step # 4: Rebalance to Zero
You’ll be entering these numbers into two different forms…
Dave Ramsey’s Budgeting Forms
There are two forms you’ll need to start with an allocated spending plan.
This is the form you’ll need to monitor your budget vs. actual spend.
This form is designed to help you build out your monthly cash flow plan. Ideally, you’ll use the data you collect with the monthly cash plan to created your allocated spending plan.
Step # 1 – Insert Pay Periods & Expenses
As mentioned, you’re not budgeting on a monthly basis. Instead, you’re using pay periods.
So step # 1 is to insert the dates you’re paid and how much into the monthly cash flow plan worksheet.
For many of us, pay periods are not always consistent. Within a couple, one spouse may get paid the 1st and 15th of the month and the other may get paid every other Friday. Freelancers may get paid every week, once a month or even multiple times a week.
If this is the case, you may find yourself with 6 or more pay periods per month.
A good rule of thumb for those with inconsistent pay periods is to have each pay period last at least a week. For example, a freelancer who gets paid multiple times a week would do weekly pay periods.
Step # 2 – Sample Allocated Spending Plan & Estimating Your Expenses
The next step is to insert the data you collected in the Monthly Cash Flow into the Allocated Spending Plan worksheet.
What should your allocation look like?
Here’s the recommended breakdown of each category as Ramsey recommends:
- Charity – 10%
- Savings – 10%
- Medical – 7%
- Housing – 25%
- Transportation – 10%
- Utilities – 5%
- Total = 67%
Where Ramsey’s allocations are useful is finding out where you’re overspending. For example, if your income is $5,000 a month and you’re spending $2,000 or 40% on housing, it’s difficult to fit the rest in.
One tip to remember here is you’re going from a monthly budget to a pay-period budget. So, you’ll want to break down monthly expenses accordingly.
For some expenses like food, it helps to break down the expenses into a daily estimate. Then, multiply that by the number of days in a pay period.
For example, if your monthly food budget is $600 and there are 30 days in this month, that’s $20 a day. If there are 14 days in your pay period, you’d have $280 to budget for food.
You’re done when you’ve budgeted every expected expense over the next four pay-periods.
Step # 3 – Track Your Expenses
Now it’s time to track your expenses over your pay period. You’ll want to record what you actually spent.
The goal is to have spent less than you budgeted, which you’ll add to the remaining column.
If you don’t like manual tracking, Dave Ramsey created a budgeting app called EveryDollar.
Step # 4 – Rebalance to Zero
At the end of the pay period, after tracking every dollar you spent, hopefully, you have something left over in the “remaining” column.
Your first thought might be to roll this over to the next pay period. But, that’s not what Ramsey suggests.
Instead, you’ll want to rebalance your budget so that every dollar has a home.
A good idea with what’s leftover is to place this towards your highest priority financial goal. For example, you may want to increase your principal payments on your debt. For some, you may want to increase your savings or build your emergency fund.
The idea is that you’re budgeting every dollar, so at the end of the pay-period, there’s zero remaining.
Alternative Budgeting Methods
In addition to this allocated spending plan, there are a couple different budgeting methods I’ve talked about here.
Those being the reverse budgeting method and the 50-20-30 budgeting method.
Let’s take a look at how those two budgeting methods work.
The reverse budgeting method
The reverse budgeting method is the method of paying yourself first so you can fund the most important goals you have in your life.
After that, anything that’s left over after you’ve taken care of your necessities your money can be used for whatever you please.
The 50-20-30 budgeting method
The 50-20-30 budgeting method is one that works as a percentage formula and that can be easily broken down into three different sections 50, 20, and 30.
The method recommends using 50 percent of the money you bring in toward necessary items, such as housing and transportation.
Taking 20 percent of your income and using it to gain financial traction.
And lastly, using 30 percent of your income to do whatever you want. For a complete overview of this method click here.
Related Reading on The Ways to Wealth
- How to Save $1,000 in a Month: A 30-Day Money Challenge
- 8 Insanely Useful & Free Money Management Worksheets & Tools