Dave Ramsey’s zero dollar budget method. Is this possible using Emma?

I have property rental income, so I get paid at random times in the month.

Not sure Emma can handle payment dates for the self employed though? Only fixed date payments every week every month etc?

I know the total of my income each month.

And I can look back at what I have been spending on, where I can/should cut back.

And then would like to make a plan moving forward for the next 3 months.

Ideally set my budget for all the essentials then know how much spare I have/will have so I can pay off the maximum amount per week/month of my debt:

Or maybe forget budgeting altogether, just be frugal and whatever I have left the day before my next rental income payment, pay it all of my debt.

It does seem though budgeting may have its benefits.

So far I have only used Emma for keep an eye of the balances of my various accounts and customising personal and business transactions so I can submit my HMRC Self Assessment easily at the end of the year with all my expenses and income fully customised. And keep an eye on how I am spending my money.

I want to focus on the future now though, moving forward and budget I think.

Any and all opinions welcome

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Hey @myEMMA!

Good work on paying off a load of debt :raised_hands:

Can you tell us a bit more about the Dave Ramsey zero dollar budget method? How does that work?

so if you make £2k a month for example. You account for every single £ to your monthly budget. All £2k of it. So maybe for example all your expenses and essentials take up £1400 a month, then you have leftover £600 a month you can allocate to savings, whether it’s savings for paying off debt or savings for building an emergency fund or saving for retirement etc it does not matter.

This category, if I ‘go over’. For example if at the end of the month I spent less on groceries than I thought I would, I can put more into savings than planned.

How can you do this though without Emma saying ‘I spent too much on savings’ haha.

I have just started using the budget method on emma so I can do the allocation of all my expenses, for some reason though it does not knock this off my remaining monthly money, maybe it will do this as I go along the month and spend the money I assume.

It would be nice to see two different totals on this section, actual remaining monthly amount and remaining monthly amount leftover after I have set the budget. I can subtract this myself if I click on budget it says total at the top. But it would be nice for Emma to do it for me.

The main thing is does Emma actually know the difference between expenses and savings and can you allocate savings and debt repayments into the budget somehow so it does not think ‘overspending’ in this category is a bad thing with warnings that I am spending too much on ‘debt repayments’ (my own personalised category) etc

It’s not a huge deal I guess but I have just started using the budget feature and would be good to set it up properly.

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Oh awesome, that’s pretty much how I budget each month. And yes I see what you mean, it would look like you’ve gone over budget, even though that’s actually a good thing in this case!

Agree that this would be a nice feature.

At the moment I never have any money left from my budget to add to savings so can’t think of any workarounds haha :see_no_evil:

@Joel don’t know if you can help more?

Hey @myEMMA :surfing_man:

Not currently :frowning_face:

You’ll either need to use the monthly budgeting option which will start your budgeting period on the 1st of each month or you’ll need to select payday-to-payday where you can choose what date you want your budgeting period to start on.

Emma doesn’t understand the difference (yet!) between ‘desirable’ and ‘non desirable’ spending

If you’re using the zero budgeting method, you’ll need to make some adjustments for it work with Emma.

If your savings/investment accounts are connected in Emma, transfers to these accounts should not be included in your budget.

Also, if there is a difference between the ‘category budget total’ and the ‘total budget’, you’ll need to reduce your total budget to match it.

For example, you have a total income each month of 2k and you know that you want to save £200 per month. Set your budget to £1800.

After setting up your category budgets for all your expenses, you discover that your Category Budget Total only comes to £1600. You’ll then need to change your total budget to match it (£1600).

This means you’ll have £400 in savings. Read our guides on handling savings and credit card/loan repayments in Emma .

If you underspend in your category budgets, for example, you only end up spending a total of £1400, Emma can’t currently detect this and assign money to your savings - this is something I’ll suggest to the team.

Does that help or have I just confused? :laughing:

Another Dave Ramsey fan here. Definitely budget and stick to it. You’ll spend less if you set and stick to a budget. (I’m a new Emma user, do I don’t have answers yet on the specifics of how to do so in Emma. - but I’m definitely watching this post as I want to learn).

Side note: giving every dollar a purpose and a ton of discipline, we were able to save 6 months of expenses (Dave Ramsey’s “Baby Step 3”) in just 9 months.

This is incredible! Good work! :partying_face:

I’ve just been looking into the “baby steps”… so is the idea that you start at baby step 1 and when you have completed that you move onto the next step? Which step are you currently on?

For BS1 - BS3, the step is completed and then move on to the next step (exceptions noted below, where one might have to restart BS1 or BS3). For BS4 - BS6 it is at the same time, with the priority toward BS4 first, then BS5, then BS6 as funds allow.

Quick recap of the first steps:
BS1 - Save $1,000 for a starter Emergency Fund
BS2 - Pay off all non-mortgage debt.
BS3 - Save 3 - 6 months’ worth of expenses for a Fully Funded Emergency Fund

The next 3 steps are meant to be done at the same time, but in a priority order:
BS4 - Invest up to 15% of income
BS5 - Save for children’s college fund(s)
BS6 - Pay off the home mortgage

When BS4 is being done with each paycheck, and the BS5 savings are either taken care of (or no kids, or kids done with college) and the BS6 mortgage paid off, then:
BS7 - Build wealth and give

We are racing to get BS4 met. We’re actually investing more like 50% of our income right now since starting BS4 in July after we completed BS3 in June. The reasoning behind this is that there are annual caps and deadlines for US IRS tax-advantaged investment accounts (401k, IRA, etc.). Once those deadlines pass, we cannot invest in “past years”.

The 457b deadline for my employer (and perhaps all 401k-type accounts) is Dec 31st. We’ll max that account with my last paycheck on Dec 24.

The IRA deadline is the US IRS tax filing deadline. For 2019 this deadline was extended to July 15, 2020 and we were able to slip a few thousand into the 2019 tax year in the first two weeks of July. We’ll max out the 2020 IRA accounts by March 2021 (IRS deadline is April 15, 2021).

Next year BS4 goals will be easier. Instead of trying to do it in 6 months, we’ll have the full 12 for the 457b employer account, and 9 months for the 2021 IRA accounts (as Jan - March will be spent finishing up maxing out the 2020 IRAs). 2022 will be even easier as well have a full 12 months to do both the 457b and IRA and we won’t be playing catch-up to max out those accounts.

So, technically we’re completing BS4 already as we’re exceeding 15%/paycheck, but we’re doing a non-Dave Ramsey thing maxing out all of our available tax-advantaged accounts for 2020 before starting the other Baby Steps.

We have adult children beyond college, so we skip BS5. In April 2021 we’ll start BS6 and starting to pay extra towards our mortgage. I’ve already run the amortization numbers, and it’ll take 9 years 2 months to complete, saving us 14 years off of the current loan.

Extra notes and way more detail for those who are curious:
BS1 - BS3 are meant to be done “Gazelle Intense” - like a gazelle outrunning a lion, fighting for its life. Take on extra overtime or side work, sell off anything you don’t need, etc. Live on beans and rice - very frugal meals (but don’t starve or anything), no or minimal eating out, no entertainment expenses, etc. Cancel any and every subscription or membership not part of your “four walls” (basic necessities of life). All investing is paused during this time - this is also a motivator to get through BS1 - BS3 as fast as possible.

BS1 - This is a small amount, but meant to motivate one to get quickly to BS3

BS2 - All non-investment savings beyond $1,000 are put toward debt. Debts are ordered smallest to largest (not based on interest rates) and all available money goes to the smallest debt, while the rest get the minimum payment. This helps psychologically to get faster wins as debt accounts are paid and closed out, and then those parents keep “snowballing” to the next smallest debt.

If one has an emergency that needs BS1 money, then BS2 is paused to help pay for that emergency and then restart BS1.

BS3 - The amount of money needed for expenses of 3 months, 6 months or somewhere in-between depends on job stability, single or dual income family.

There is an optional BS3b step, to save up for a house. This can be saving whatever amount one wants/needs, but of course this depends on many factors. A young single person is encouraged to save up 100%, while the minimum recommended to save is 20%. The home mortgage and related mandatory expenses (Home Owner Association fees, property taxes, home owner’s insurance, etc.) shouldn’t exceed 25% of one’s net take home - actually, that 25% rule applied to renting as well. “Housing” (renting or owning) should be under 30% at the very highest, otherwise move down in housing costs and/or increase the income. Any new mortgage should be a 15 year (or shorter) note with a fixed internet rate.

When BS3 monies are needed for an emergency, then BS4 - BS6 are paused until BS3 is rebuilt.

BS4 - This step is done until retirement and should be done in the most tax-advantaged order until 15% is reached. Not sure what the rules are in the UK, but for the US tax code the optimized tax-advantaged investing order is:

  • 401k up to the employer match
  • Roth IRA*
  • Roth 401k/403b/457b**
  • 401k/403b/457b**
  • non-tax advantaged investing

*up to $6K/year/person in Individual Retirement Accounts (IRA) (married can do $6K per person, even for a non-earning spouse, so $12K)
**up to $19,500/year maximum

BS5 is influenced by the age and number of children. The big picture idea is that neither parent nor child will take out any student loans. That may mean that a student needs to work full-time while going to only a local “junior college” or “community college” or trade school while living at home. On the opposite side of the spectrum, perhaps if the parents start right away when a child is born and they are higher earner parents such that the child can go to any college they can be accepted to. But for many it is more than likely some mix in-between. BS5 is “completed” when there are no more children needing adult education.

It should be noted that parents aren’t obligated to fund their children’s college if they cannot afford it (say they are still not done with BS1 - BS3 and don’t have enough to fund 15% toward BS4). But, if they can afford it over BS4, and the children are diligent students not squandering their studies, a good parent should do this. College or trade schools are an optional adult-level education, and as adult children, they can earn merit-based scholarships or internships or work outside of college to fund their education, but this is their personal responsibility, not that of the parents.

BS6 paying off the mortgage is where any monies go beyond BS4 investing 15% and whatever the parents decide is needed to be saved for BS5 adult education. Baby Steps 6 is completed when the mortgage is paid off. Note that for some, re-evaluating their budget may mean they downsize in home. A recent guest on Dave’s show doing their “debt-free scream” live on the air had downsized from a $500K+ house to a $300K house and paid off the remaining $150K they owed on their mortgage in the last few years. The point being that they shaved off $200K of mortgage debt by downsizing.

Hah, that’s a really long reply, but that is a pretty thorough explanation of Dave Ramsey’s Baby Steps. He believes very much in trying to educate everyone on how to become and live debt-free and become “every day millionaires”. Second generation Ramsey households will never have debt and start out well ahead of their peers, and can become multi-millionaires.

Then there are other financial schools of thought, like the FIRE movement (Financial Independence Retire Early), but I’ll save that for another post :slight_smile:

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Wow, thanks for this explanation! :raised_hands:

It’s all really fascinating, and it’s obviously working as it sounds like you really have your finances in order!!

I bet you can’t wait for this day - such an achievement! Have you worked out how much money this will be saving you too?

Sounds like I would fail at the very first step haha - I’m all for saving money, (and I’m definitely a saver over a spender) but I do think while I’m young(ish) I need to allow some room in my budget for eating nice food, going out for nice meals, and holidays, etc! Although I can see that this kind of discipline and motivation really helps other people!

What do you mean here? Save up 100% of their salary? How haha?

Am I right in thinking that you have to pay your student fees upfront?

In the UK it’s normal for students to take out a student loan and then basically spend the rest of their working life paying it back - we almost think of it as a tax, instead of a loan.

Interesting to hear different points of views though, I don’t think my mum would be very impressed if I asked her to pay my student loan for me hahah

Hey man,

Can I ask. If you have a mortgage on interest only like I do (I rent properties for the income but plan someday to own at least one in full) at which stage does making normal mortgage repayments fit into the baby steps?

Also I no longer have non-mortgage debt as of last week. And so my choice now is save for a car or start building up the Emergency Fund up to 3-6 months. Kinda need a new car but don’t want to take any loan out for it but kinda swaying to saving for that before extending my EF to 3-6 months.

Thanks for your comment it’s good to know deeper into the other baby steps now I have paid all my non-mortgage debt off

Hah, not as much as I’d like, but yes, $42K. But still, every penny not spent on interest is a penny that can be invested.

Ah, I wasn’t clear. Save up to 100% of the purchase price of the home. So when they go to buy, they buy with cash, and never have a mortgage. Most folks won’t get to that point, but even if they saved say 50% or 75% of what they needed for a mortgage, they’ll be a huge reduction in interest they would have paid toward their mortgage. But obviously there is an opportunity cost here as well as that money could have been invested, which is why BS3b is optional (and at today’s mortgage interest rates, really doesn’t make sense). Most just save to 20% of the value of the home purchase price to avoid Private Mortgage Insurance (PMI) / Mortgage Insurance Premiums (MIP).

Yes, pay the fees up front, and during each semester work to cash flow the next semester’s fees.

Yes, this student loan mentality is how many Americans think as well - but then they whine and complain that their student loans are too much and taking all of their income - and that their income isn’t what they’d thought they’d earn (if they thought about it at all) vs. the loans they’d be paying for a long time. Dave Ramsey’s point is that one shouldn’t educate that way. The financial math is broken. It’s better to earn less and have no student debt and be able to invest at age 24 for 40 years, or perhaps take longer to get an education, but again, do it with no debt.

But, yes, the thought in America is that both parents and student should take out huge loans to pay for the student’s education. This costs the parents dearly as they have an opportunity cost with money that should be going to investing.

That sort of restricted spending is only for BS1 - BS3. For many that should only take 1-3 years. After BS3 is done, one leaves “Gazelle Intense” mode and go back to doing the sorts of things you talk about, just within budget, and while trying to meet BS4 - BS6 goals.

As an example, when we’re still planning to do vacations 3-4 times a year. The vacations are just typically spending half as what we used to spend (but the same amount of time - we’re just more frugal about where the money goes during vacation). In fact, as part of our celebration for completing BS3 in June, we celebrated with an Independence Day holiday (4th of July) and used money saved up and earmarked for vacation. We enjoyed a Labor Day weekend as well (1st Monday of September), but stayed at a friend’s cabin for free with our only cost being fuel to get there as we brought our own groceries. We did go out to eat twice, but that was just using our regular “dining out” money. We were planning another mini-vacation for Christmas, but COVID-19 has cancelled where we were planning to stay, so we’ll probably just travel to my brother’s house in San Diego instead and enjoy the sights down there.

Once folks complete BS3 & BS6, most become much more flexible when they have 6 months of expenses saved up and no longer have a mortgage. This flexibility means they can find a job they enjoy more, and not just one they “have to do” to pay the bills. They can also work closer to home - depending on their cost of living and commuting situation.

As an example, I could earn another 50% more if I commuted to the San Francisco Bay Area but continued to live where I live - but is that 50% worth commuting 4-6 hours a day just to get to work and work another 8 hours? I don’t think so, so I stopped doing commuting about 10 years ago and worked closer to home for about 20% less pay to avoid 1-3 hour commutes as a consultant. Now my work is 15 minutes away by car, or 20 minutes away by ebike (which is great, as ebiking means I get 40 minutes of exercise just by going to/from work).

Closing thoughts: If you think that’s extreme, you should see what the FIRE folks are doing, many looking to “retire”* in their 40s. You can’t do that if you’re paying student loans off into your 30s.

*retire often means move away from a 9-5, five-day work week, and take up a “hobby job” and/or part-time income and living off the 4% or so of their investments - but for some, it can mean to completely stop working for any sort of income and live completely off of investments.

That doesn’t sound like it fits personal finance, so not a Baby Step. That’s investment finance and/or your business. However, Dave Ramsey would be very opposed to this. He believes real estate investment should be done exclusively with cash, and no loans and no leveraging. Doing this sort of thing is how Dave went bankrupt, and then how he changed the way he approached finances. The short answer is: what happens if those properties lose value and the banks call the loans (want repayment in full)? Not sure how things work in the UK, but in the US, you’d have to declare bankruptcy and be in a world of financial hurt.

I’m not sure if there is a way to structure this as a business such that your personal finances are sheltered, but here in the US that would be very difficult as a Sole Proprietor. Even with an LLC as the sole owner, they’d probably “pierce the corporate veil” and come after your personal assets. But, again laws in the UK are probably different.

Dave would probably end the call something like this: “But you’re an adult, so do what you’re going to do.” (Somewhat rude, but basically, if you’re asking for Dave Ramsey advice and calling his talk show, he’s going to give it).

Dave’s approach to finance is very financially conservative. It also has near-zero risk (but of course nothing is risk-free) as it never relies on debt (with the exception of the home mortgage for yourself). Basically, it’s a formula to win nearly 100% of the time, but just not as big a win as other riskier approaches. Other approaches have more risk, and if you succeed, a greater return.

Congrats on completing Baby Step 2!

Dave’s advice would be to complete BS3 first, then start saving for a car. To which you may ask, “What if my current car dies!” If your current car has a problem and needs work, or dies completely, that’d be an emergency, no? So then you’d be able to use some or all of your BS3 money to solve that problem. Dave would basically be saying you should run the wheels off what you have before you’d get something to replace it. Then he’d say just get a $2,000 car until you get done with BS3 and can start to save for a car of the cost/value you’d prefer.

One other recommendation Dave has is that your total combined vehicles’ values should not exceed half of your annual income (“anything with motors” as he puts it). So if you earn $50K/year, your combined vehicles’ values should be no more than $25K. This has nothing to do with loans, as he’s opposed to any sort of car loan or “flease” as he called leases. This recommendation is basically just helping folks have a guideline for the amount of “car lifestyle” their income can afford to maintain. Too many times someone is calling in with a $50K loan on a truck worth $40K and they’re only making $40K/year… basically, they shouldn’t own a vehicle more than $20K (or they need to increase their income).

I don’t think they can just call the mortgage until you hit the agreed 25 year period even if the value went down. We bought one of them cheap and renovated it so enough capital in that one to sell it and pay off the other one in full. Currently though renting two brings a larger income and my tenants wish to continue renting the place so don’t plan kicking them out but someday I may sell that one to pay off the other. I plan to live in one of them someday maybe once it’s fully paid off. Been renting them for nearly 15 years but like you say it’s less risky just buying in cash, leveraging property has allowed me to live a comfortable life though all through my 20s.

If I could go back in time though I would have probably set up repayments so rather than owning one place in full I could have owned two or 3 in full.

Yeah I also like the car advice in terms of value how expensive of a car you can afford which should be no more than half your income.

That would be such an achievement! I wonder what the average age of people doing this is? And if they actually managed to save up for it all themselves, or whether they had help from family?

This is an interesting viewpoint. Some of my most successful friends didn’t go to University and were able to start earning/ saving 3 or 4 years before everyone else.

Ah yeah, I’ve heard about this too. It must take so much planning and dedication, but retiring at 40 does sound pretty nice!