Yep, Dave Ramsey's Budget Principles Jibe with YNAB
If you're pursuing financial peace, Dave Ramsey's programs often provide the "why," while YNAB can show the "how."
I’m a fan of what Dave Ramsey has brought to the personal finance world. He’s one of the few ‘gurus’ that actually puts a lot of emphasis on budgeting (though he could still do it more and it certainly wouldn’t hurt!). We get a lot of crossover between the two brands, and we often get questions about how the two systems fit together (Dave Ramsey's Baby Steps and YNAB's Four Rules). Do the two jibe?
More than you think. They thrive on each other.
The Zero-Based Budget is Essential
Dave Ramsey is certainly intense when he goes on about the importance of a budget. A budget, to Dave Ramsey, is your master for the month. He states again and again that you are the boss of what goes on with the budget, but that once it is set, it is your master. You look to the budget for what you can and cannot do. This principle is key. A budget is a completely useless exercise if you only look at it at the start of each month and then pay it no heed throughout the other 30 days. It should serve as a reminder of what you can and cannot do. Hey, you said it first!
The Budget is a Tool for Couples
Dave Ramsey also stresses the importance of the budget being a mutual agreement between spouses. You cannot have an effective budget where one spouse doesn’t really think it has any validity. It needs to be binding on both parties. Both agree, and as Dave says, “spit shake” on what they will spend in each budgeting category for the month. If a revision needs to be made mid-month (which is quite normal, and totally okay) it must be unanimously agreed upon by both spouses. They key word here is unanimously.
Where does the YNAB Budget and Dave Ramsey’s advice differ? Only in a few places.
Saving: $1,000 vs. Getting a Month Ahead
Dave focuses on saving a "Baby" emergency fund of $1,000 before attacking debt with "gazelle-like intensity." Here at YNAB, we focus on getting a month ahead and embracing your true expenses each month rather than saving a singular amount.
Focus: Debt Payoff vs. Gaining Control of Your Money
Dave Ramsey's baby steps have helped countless people get out of debt. They're incredibly practical, and the end game is getting out of debt fast.
Here at YNAB, we hate debt just as much as the next guy (or gal), but our focus is on helping you gain total control of your money by making your spending, saving, and debt payoff speed line up with your life's priorities.
For those who are familiar with Financial Peace University (or even if you're not), here's how the seven baby steps line up with YNAB's system.
Financial Peace University Baby Steps
- Make only minimum payments. Squeeze your budget until you have $1000 cash. This is the start of your emergency fund.
- Snowball your debts, smallest to largest.
- Save a full emergency fund of 3-6 months’ expenses.
- Fully fund 15% of your gross pay into pre-tax retirement plans and a Roth IRA (if you’re eligible).
- Fund your kids’ college.
- Pay your home off early.
- Build wealth, and give it away!
Baby Step 1: Build an Emergency Fund
Baby step 1 goes right along with the second of YNAB's Four Rules (see this page). In both instances, you're protecting against the unexpected. While Dave Ramsey puts out a blanket $1000, I simply advise you to embrace your true expenses (which means accounting for the inevitable car repair, doctor visit, vet bill that is bound to happen) and to aim to live on last month's income. That way, you’re on your way to your emergency fund. However, I don’t suggest you put that money into an emergency fund account. It’s to be left in your checking account. Getting a month ahead in your budget allows you to budget and spend money earned in January, in February.
This one-month lag creates an optimal situation for budgeting. Financial peace comes when you aren’t caught by surprises. When you’re a month ahead of your bills, you will experience financial peace. You then only budget what you know you make – because you already made it.
Baby Step 2: Pay Off Your Debt
Baby step 2 makes perfect sense also. The fewer payments you have to make to someone else, the more financial peace you will experience. When your money belongs to you, that is a very, very nice feeling. We wholeheartedly encourage debt payoff with YNAB, but the pace is up to you.
Baby Step 3: Save 3-6 Months' Expenses
Baby step 3 brings you further on up the road to current financial peace. You don’t need to graduate from any university to realize just how great it would feel to have 3-6 months’ expenses sitting in a liquid fund that were there only for emergencies. I can tell you from experience – it’s nice.
With YNAB's Rule Two (Embrace Your True Expenses), you continue to build in extra cushion with your budget and eventually, those surprises won't be surprises anymore. Ahhh, budgeting zen.
Baby Step 4: Fund 15% of Gross Pay into Retirement
Baby step 4 deals with your future financial peace and should not – cannot be ignored until later in life. Seeing your nest egg grow over time will give you more financial peace than just about anything.
What this looks like in YNAB's system is Rule #4: Age Your Money. As you build your financial muscles, your money gets older and older. I'm totally aligned with saving as much as you can toward retirement (and try this incremental increase trick).
Keep in mind that you will want to diversify your retirement savings. Don’t put it all in stocks, don’t put it all in bonds, don’t put it all in real estate. Diversity brings even more financial peace. Dave Ramsey hammers this home day in and day out on the radio – you must diversify.
Baby Steps 5-7
Baby steps 5-7 are all pretty self-explanatory. They all promote deeper financial health by using your excess money for good (getting out of debt, helping your kids get an education, building wealth and leaving a legacy). When you have a budget lined up with your priorities, these things tend to happen almost naturally.
The Secret Behind the Baby Steps: A Budget
I want to emphasize one point here. Dave Ramsey does mention budgeting throughout his books – even though it’s not a baby step. These baby steps are really only possible if you have a solid grasp of your money. You must know where your money came from and where it’s headed. Don’t be deceived into thinking this will be an easy task – reaching baby step 7 where you are building enough wealth that you can give away a ton of it and still live the way you want to live. Reaching that type of lifestyle takes hard, focused work.
And I know just the tool for a job like that: the humble budget.
If you’re a Dave Ramsey fan and want to learn more about YNAB, give our free 34-day trial a try. The YNAB budgeting app offers bank syncing with every subscription, robust reporting, and your budget "remembers" your stores and purchases to autofill transactions whenever possible.