Dave Ramsey Cash Flow Planning (Class 3 of 13)

“It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes. Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline.”
Stanley and Danko

Before I start an engineering project at work, my management and our customer have come to an agreement on three issues, schedule, deliverables, and a budget. Corporations and governments project revenues and plan expenditures, usually on an annual basis. This is called the budget. If the corporate financial officer is competent and fortunate, expectations will closely match the developments of the fiscal year as it unfolds. If they do not know what they are doing or are overwhelmed by a disaster (think British Petroleum and the Gulf oil spill of 2010) the market price of their shares fall and executives are fired.

Dave Ramsey insists that this same formal discipline must be extended to the family. He observes that money is active, always on the move, flowing from point to point. If you do not accurately plan and manage this flow, your family will suffer. Dave rails against sloppy, lazy money habits. He is astonished at how many people are unable to balance a checkbook. He has seen that bounced checks and overdraft fees cause a great deal of pain and suffering in the families he has counseled.

Generally, people are resistant to the idea of developing a formal budget. It is difficult, time consuming, and unpleasant to sit down with a spouse or accountability partner to develop a budget. There is a great deal of fear that you will not be able to afford something you really want. There is the guilt associated with learning you spent money you didn’t have on something you didn’t need. In a relationship, the use of money is a source of power and freedom. By our natures, anything that we perceive as limiting our power or freedom is to be avoided. Finally, people frequently claim budgets don’t work.

Dave Ramsey observes there are 4 major reasons budgets do not work.
1)They leave things out
2)An overly complicated plan
3)You don’t actually develop a plan
4)You don’t actually live on the plan

Dave Ramsey suggests developing a formal, written, and complete budget at start of the month. Then make certain that expenditures follow the plan. This will greatly limit the number of financial disasters, resulting in less effort at crisis management. Certainly, managed money will go farther than unmanaged money. Also, since developing a budget and strictly following that budget is a jointly agreed upon process involving both husband and wife, it will reduce the number of money fights in a marriage. As in 12 step programs, sunlight is the best antiseptic. Once expenses are out in the open, guilt, fear and shame disappear. Planning for necessities first, what Dave Ramsey terms the four walls, food, shelter, clothing, and transportation will eliminate overdrafts or growing credit card balances.

Specifically, Dave Ramsey recommends what is termed a zero based budget. That is, every month every dollar coming into a household is given a name before the month begins. The money is to be spent as planned or the budget must be renegotiated. At the end of the month salaries and other inflow minus expenditures and saving must exactly equal zero. Then the process begins again. The simplest version of the zero based budget is called the envelope system. At one time, this system literally used envelopes. For example when a paycheck came into a house a certain amount of cash would be placed in an envelope marked “food.” Any time anyone bought any food, the money had to come out of that envelope. When the envelope was empty, no more food was purchased until the next paycheck.

As far as I know, all of Dave Ramsey’s courses and books contain the same budgeting forms.

Form 1) Major Components of a Healthy Financial Plan - This is a checklist of necessary components or activities found in an orderly financial plan.

Form 2) Consumer Equity Sheet – This is a calculation of net worth, a calculation that should be performed on a monthly basis.

Form 3) Income Source – A sheet for projecting expected income for that month.

Form 4) Lump Sum Payment Planning – This sheet lists infrequent expenses, such as property taxes. This expense is divided by 12 to calculate a monthly amount that is then factored into the monthly cash flow plan.

Form 5) Monthly Cash Flow Plan – This is the big long plan that actually predicts all of your monthly expenses. Projected income minus projected expenses and savings must equal zero—always!

Form 6) Recommended Percentages – This form allows you to compare what percentage of your income is actual spent against “normal” recommended percentages on any given category.

Form 7) Allocated Spending Plan – This form tracks actual expenditures so they might be compared against projections. If they do not match, then something, planned expenditures or behavior, must be changed. At the end of the month, income minus expenses and savings must equal zero—always!

Form 8) Irregular Income Planning – This is a additional form for commission sales people and the self employed.

Form 9) Breakdown of Savings – This form allows the user to place a name on every dollar in savings. This allows one to track a separate “sinking fund” for major infrequent expenses, such as paying cash for a new car.

Normally, I do the homework at the same time as the class. This time, for the Cash Flow Planning lesson, I did the homework before the class. I wanted to see just how time consuming and difficult the budgeting process would be before speaking to the group. Since I do not have any debt, my forms are simple. It still took me more than an hour of time expended over a two day period. It isn’t easy, but living on a budget may change your life.

Dave Ramsey adds that your first attempt at developing a budget will not be completely successful. His experience indicates it takes the average couple about three months to learn how to develop a proper formal budget.