The Prioritized Spending Plan

I don't often get to listen to Dave Ramsey's radio program. For one thing, I don't know when it's on. For another, the only radio stations I usually listen to are my satellite radio channels. (Those would be dance music on xm81, chillout music on xm84, classic country on xm10, and 1940s music on xm4. And oh, how I miss Fred, which was replaced by the execrable 1st Wave on xm44.) About once a year, though, I stumble across Ramsey's show while I'm driving around town.

I found the show last week, on my way to pick up Kris from the airport. I was in the mood to listen to the cadence of Ramsey's smooth southern drawl as he dished out financial advice, so I got to hear his opinions on:

  • Lending money to friends (don't do it!)
  • Buying a home before repaying student loans (don't do it!)
  • Long-term care insurance (do it!)

But the segment I really remember was his response to an e-mail from some sort of salesman. The salesman — a car salesman, maybe? — was finding it tough to budget because he was paid on commission, which meant his income fluctuated from month to month. For him, it was basically famine or feast. He wanted to know how to cope with this.

Budgeting for an irregular income
Last year at Get Rich Slowly, I shared my own method for dealing with variable income. Because blogging produces money in fits and starts, I've developed a system that helps to smooth things out. To summarize:

I base [my budget] on my minimum monthly income from the past twelve months. Using my minimum monthly income instead of my average monthly income gives me a safety buffer. And when you have an irregular income, a safety buffer is vital.

I developed this method over several years of trial and error. I like it. It works for me. (And, I hear, for others.) But I think Ramsey's method is interesting, too. If my method doesn't work for you, try his.

The prioritized spending plan
If you have an irregular income, Ramsey says, you should create a prioritized budget. I'd never heard of this before, and I think it's kind of clever. Here's how it works.

  1. List your monthly expenses. On his show, Ramsey suggested brainstorming them onto a piece of paper. If you track your spending, it's probably much more effective to build a list from your existing data.
  2. Rank each expense in order of importance. On your list of expenses, put a “1” next to the most important item. (“That's food,” Ramsey says.) Put a “2” next to the second-most important item. (“Those are your utilities,” Ramsey says.) Put a “3” next to the third. (“That's housing,” Ramsey says, which confuses me. How are utilities more important than housing?) And so on.
  3. On payday, work your way down the list. Set money aside for the most important item (food) first. Then the second. Then the third. When you run out of money, you just stop.
  4. At the end of each month, re-order the list. Your new list will probably be similar to the old one, but there could be changes.

While I find this an intriguing idea, I feel like Ramsey didn't provide enough info. For example, he totally glossed over the issue of surpluses and deficits. I can make some guesses about his advice (“Bank a surplus to protect against deficit months…”), but I'd like to hear what he thinks on this.

Also, I think this sort of prioritized spending plan assumes that every expense is “all or nothing”, but many aren't. If I'm budgeting $100/month for restaurant meals, $25/month for clothing, and $50/month for comic books, for instance, I don't necessarily need to put all $100 toward dining out before allocating even a penny to clothes or comics. What's Ramsey's advice for dealing with categories like these?

Update: Some GRS readers who are much more familiar with Ramsey than I am pointed out that he usually recommends the prioritized spending plan for folks who are in a different financial situation than I am. I can make ends meet, but my income fluctuates. Ramsey's plan is for people with variable incomes who can't make ends meet. It's for folks who have to make choices about where they're going to put their money because they can't fund everything. That makes sense. Thanks for the clarification!

And where does Ramsey suggest debt fall on the list? Saving? Tithing and/or charity? Is it all subjective?

I suspect I'm over-thinking it, but that's okay. I just like hearing new money-management ideas, and I especially like thinking about them and how they might be applied to my own life.

Do you have a variable income? How do you budget? Have you tried a method like Ramsey's prioritized spending plan? How did it work for you?

More about...Budgeting

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
66 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Antti-Juhani Kaijanaho
Antti-Juhani Kaijanaho
9 years ago

My income is fairly stable, but I do have priorities. Rent first, then utilities (which I don’t have, them being included in the rent), then maturing obligations (bills and debts that are due now, their minimum amount), then food, then emergency fund, then a limited amount of luxury (which varies; books are the most common items here), then extra repayments of debt. I put food fourth, because it’s the first one in this list that is elastic, that is, the minimum I can survive on is much less than what I generally feel comfortable with, and so it can adapt… Read more »

CB
CB
9 years ago

@JD, I’ve read some of Ramsey’s literature and heard some of his lectures. I’m fairly confident that the reason utilities come before housing is that the utilities will get shut off before your house is foreclosed on. Also, the foreclosure process will probably take longer if you are at least making part of your monthly payment each month. One other thing to consider: Ramsey is typically speaking from a “get out of debt” context. So surplus likely goes to debt unless you’re sure you’ll have a slow month (ie you work construction and during the winter you know you’ll probably… Read more »

Sam
Sam
9 years ago

Our income doesn’t really fluctuate, but I do use a priority system in our spending plan.

Things like the mortgage, insurance, utilities, retirement savings, general savings are musts while lots of other items are wants. When we think about our spending we take care of the musts before the wants and then we go through the wants for the year or on a monthly basis and figure out what we can and cannot do they we prioritize those wants and put aside money for them.

jim coffey
jim coffey
9 years ago

Echoing what CB said… you need to protect your ability to create income. Thus, a minimum budget for food is first priority. You can’t work if you can’t sleep – so you need to pay your utilities (but not cable TV). Your ability to work my require a car and a phone – so you can’t afford to let them be taken away, etc. Which puts housing in 3rd place.
Fancy food is elastic – basic calories are not.

Vic
Vic
9 years ago

The prioritized spending plan is all about having insufficient income to meet your expenses. It’s to help those who are making poor decisions about allocating their limited income (e.g. making sure a credit card doesn’t go late instead of making sure the lights stay on and food is in the pantry). Savings and charity/tithe don’t enter the picture until you can pay your bills.

Shelley
Shelley
9 years ago

My money comes from rental property and is quite variable. First, when I worked, I saved all the rent income after paying off my mortgages, so I have an emergency fund. Then, like you, I try to keep my spending within the lowest of the income range for the past few years. I will do this until I’m 60 and will draw a pension from one of my jobs. I do allow myself an occasional treat, but I also try to keep saving money in tax-free accounts.

Jesse
Jesse
9 years ago

I work freelance and I have an incredibly variable income. Right now I am working on an experiment to take feast and famine out of the equation. I deposit all of my checks into a seperate checking account that I use for my freelance work and then set up a direct transfer to my personal checking account every friday to give myself a paycheck. It has helped me to not overspend after a windfall that isn’t really a windfall. I see the same amount of money in my account if I am working on a large project as when I… Read more »

Nicole
Nicole
9 years ago

Remember under the Dave Ramsey plan you’ve ALREADY banked a surplus– 6 months expenses if you have irregular income. 3 months if your income is secure.

He talks about paying debts when you have irregular income in The Total Money Makeover. All I can remember from that is that it’s also on the list, and before any of your spending wants (after putting rice and beans on the table).

Andrea
Andrea
9 years ago

My husband works in sales, and receives base pay, commission, and bonuses (usually in the form of TVs or prepaid credit cards). We use a mix of both Ramsey’s budget and yours. We live frugally enough that the essentials are covered by his base pay and my paycheque. We include entertainment, retirement savings, car savings and emergency savings as essentials. His commission is split up by percentages every month for things like travel savings, christmas savings, technology savings, and long term house maintenance. We usually keep the prepaid credit cards and save them for surprises that we don’t want to… Read more »

April W.
April W.
9 years ago

I just wrote about this very thing on my blog today. My income varies greatly form month to month, so it is essential that my budget is prioritized. All I will add is that you must never forgo savings, even during a bad month. It must be part of your routine, even if it is only $10.

Kelley
Kelley
9 years ago

If I remember right, he specifically refers to your buffer as the “hills and valley” fund (bigger than has normal $1000 recommendation). It would be a couple of months expenses if your amount of income would drastically increase. Excess goes into this account, and when you hit a target amount, that money is used for the snowball. Unfortunately, and I’ve seen this in my parents behavior, it is VERY difficult to get out of debt with variable income especially if you’re not on the same page. Dad spends, mom makes the money and neither knows what the other hand is… Read more »

Cole Brodine
Cole Brodine
9 years ago

I can understand why utilities are first. Most landlords and even mortage lenders are more forgiving than utilites. If you call your landlord, I’ve heard many people say they are willing to work with you on rent payments. Mortage lenders supposedly do the same. I work for a utility, and I can tell you that you don’t want to get disconnected. You end up with not just late fees but also disconnect and reconnect fees. If you get reconnected “after hours” there can be additional charges. There are programs to help you pay utilites, but I think they have to… Read more »

JonasAberg
JonasAberg
9 years ago

I like this idea. In the case you lose your job, you will already have figured out what to cut first.

Josh Cheney
Josh Cheney
9 years ago

I have an irregular income, and have facilitated Ramsey’s Financial Peace University class. The particular piece of advice you heard is only a small portion of what he talks about in the class. Yes, debt is figured into the equation, as are all other expenses, and this process is intended to be undergone monthly/biweekly/weekly, or however often you have money coming in. The reason why he sets it up this way is that if you’ve suddenly lost your job, and have only $100/week coming in, you need to be able to sit down and spend that $100 in the way… Read more »

ami
ami
9 years ago

I kind of hate to read that housing is #3. The hit to your credit score is pretty high with a late mortgage payment (assuming we’re talking about a mortgage and not rent). I believe some landlords can/will report late rent to credit bureaus as well. However – maybe this is where Ramsey was going – if you’re late on housing payments, there are a number of hoops that mortgage lenders (and landlords) have to go through before they can kick you out of your house. These hoops give you a bit of time to make things right, so from… Read more »

moink
moink
9 years ago

You’re in a different place than the man Dave Ramsey was advising, and that’s why you’re a bit confused by the advice. That budget priority is the right approach when you are very poor, when some months you really do have to choose between food and utilities. Stuff like comic books and new clothes don’t even come into the picture. And yep, utilities before food because eviction is a long process but it takes much less long for your heat to be turned off, which is almost as catastrophic. I’m not as poor as this and my income is steady… Read more »

JohnB
JohnB
9 years ago

@JD

Quote “I don’t necessarily need to put all $100 toward dining out before allocating even a penny to clothes or comics.”

In this case you would have multiple allocations for a certain category. For example:

15. Dining Out – $40
16. Comics – $50
17. Dining Out – $20
18. Clothing – $25
19. Dining Out – $40

You would do the same thing with debts. Put the minimum payments as higher priorities, then address accelerated payments farther down the list.

boxty
boxty
9 years ago

I’ve also heard Ramsey say that if you have a slow period in your business (say summer) then you need to hold back some of your income from the rest of the year to cover the lean months. Sort of like teachers who have summers off but have their paycheck spread out over the entire year instead of just nine months. Another good piece of advice comes from YNAB. That is to live off your previous month’s paycheck. Whatever you earn in September is what you live off of in October. That way you know your income ahead of time… Read more »

Lori
Lori
9 years ago

Long time listener, first time poster here. The prioritized spending approach makes sure that you first address the lowest priorities on Maslow’s Hierarchy. As J.D. states, this means basic survival on whatever you make each pay period. Another method to manage variable income, which is commonly used by non-profits and fundraising organizations with endowments, is to calculate your average income or endowment return over a set horizon. Target that value as your budget, with the understanding that in some months you will spend above your average and some months you will spend below. In the long run, however, things should… Read more »

Tracy
Tracy
9 years ago

I really enjoyed this article. I have recently started tracking all of my spending in order to more efficiently budget my income. For the last few months I have been following the YNAB approach to budgeting, but after reading this article I may start looking into some alternatives that work better. I do like the approach that JD mentioned in the middle of this article. Thanks.

Maureen Thomson
Maureen Thomson
9 years ago

My husband and I own a business where the bulk of our income comes in the first 9 months of the year. So we calculate our non-fixed expenses (entertainment, clothing, personal money, charitable donations, etc) for 12 months and then budget for them over a 9 month period.

When October rolls around, we only pay the mandatory expenses–rent, food, utilities. It works well for us.

Noel
Noel
9 years ago

“For one thing, I don’t know when it’s on.”

http://www.daveramsey.com/radio/find-a-station/

Megan
Megan
9 years ago

I never thought of prioritizing food above everything else, but the comments above make sense – you can’t function at work if you have an empty belly.

Wes
Wes
9 years ago

My guess is that Dave’s order of priorities is based on timing (or more specifically, how long you can go w/o something). For instance, you can’t go a week w/o food, so that’s #1. Water/utilities are also important, but don’t get immediately shut off if you’re late, so that’s #2. Housing (even renting) usually has an even longer period of delinquency before one gets kicked out (i.e., if your water bill and your mortgage payment are both due on the same day, and both late, you’re more likely to lose your water before your house), so that’s #3. My guess… Read more »

Rosa
Rosa
9 years ago

I’ve never worked pure commission, but when I did work base/commission I did what Andrea #9 said – base expenses on that base pay, commission is for “extra” stuff.

It meant that on a normal month I had enough money for everything I wanted, in a bad month I had enough money for what I really needed, and in a good month I had a lot of extra money to stash away for the future.

paul
paul
9 years ago

I miss FRED on 44 too!! 🙁 🙁 🙁

cc
cc
9 years ago

i’ve got a bit of a patchwork system- i’m a freelance artist/designer so my checks are fairly irregular. every check that comes in gets divvied up percentage-wise: 30% of the money is set aside for taxes, 10% savings, 10% to pay off credit cards, 10% goes back into my business, 5% goes into my emergency fund. whatever’s left i send into my general bills account, where i pay rent, phone, groceries, etc. no priorities, i need them all! sometimes i have to dip into another fund to help cover the bills, but it’s worked out so far. if i notice… Read more »

Edward - Entry Level Dilemma
Edward - Entry Level Dilemma
9 years ago

I agree with those that would put food spending at a lower priority than housing. My wife and I generally spend about $200 per month on grocceries. But if we are having a tight month, we can cut back and still eat 3 meals a day for $150, or one for about $75. And, if there is absolutely NO money available for food, there are still options available, like food banks. If you can’t afford food, the only thing that could stop you from getting free food at a food pantry is your own ego. My father is an OTR… Read more »

Nate
Nate
9 years ago

With Ramsey, everything is “spent on paper – on purpose” (0 sum budgeting). Under his plan you would put the surplus you have in your budget into debt repayment (assuming you already have the $1000 first step emergency fund). Then any surplus goes straight into a 3-6 month emergency fund (after debt repayment). Once the 3-6 month emergency fund is in place (you might still have debt on your home) then 10-15% of your income straight into retirement… If you have kids and CHOOSE to help fund their education – this is next (Dave is big on taking care of… Read more »

Honey
Honey
9 years ago

I’m glad to hear that Dave Ramsay recommends not buying a house until you’ve paid off your student loan debt. I’ve never been interested in owning a home anyway, but this means that my boyfriend and I don’t even have to think about it for another 30 years, after we’ve paid off our combined $200K or so :-/

Brent
Brent
9 years ago

@JD,

Excuse me if this has already been pointed out, but you can listen to Dave’s show on his website live or you can listen to an archive of his show.

Lindsay
Lindsay
9 years ago

Disagree with Ramsey about the student loans. I’m 33, married, have a stable income and my husband and I are proud to have our own home where we can start a family. I haven’t paid off my student loans yet, and they won’t be paid off for many years. We’re very frugal and have no car note, we have a lot of savings, we have no consumer debt, we got a good price and interest rate on the home. Why should we have to wait ten+ more years to pay off the loans and save up for a down payment?… Read more »

Nitza
Nitza
9 years ago

Hi J.D.

FYI- I listen to Dave Ramsey’s show from his website during the weekday. You can listen live or listen to archived radio shows. Dave isn’t on the radio in my area, but I listen from his website.

Hope this helps!

Lindsay
Lindsay
9 years ago

Okay, Honey said the same thing much more succinctly! If you’re not interested in owning a home, more power to ya. If you are, it’s silly to put it on hold for 30 years.

Lisa
Lisa
9 years ago

Tips on the travel questions — I just got back from France, Italy and Luxembourg and faced the packing of shoes dilemma. If you are taking the trains and hauling your own luggage…don’t bring the other shoes. It’s too tough to make transfers loaded down with a lot of baggage. But if you can bring more than a carry on, I would bring a pair of tennis shoes that are hybrid walking shoes. Sketchers were my choice. The cobblestones on the streets were tough without them. Best case, you can always buy a pair of shoes there! That will gives… Read more »

El Nerdo Loco
El Nerdo Loco
9 years ago

I’m self-employed and with a variable income, and I agree with you that the Ramsey book merely glosses over the spending plan. If I recall well, he doesn’t what is the first priority, he says to write what is most important *for you*, and food is an example. On the question of rent vs. food, I’d say it depends on your situation. If you’re overweight and could afford the occasional day of fasting, maybe food is not your priority today. If your state laws protect the tenant/homeowner from eviction, then maybe you want to put food first and delay rent… Read more »

Honey
Honey
9 years ago

@ Lindsay, #30 and #31 – I do agree that if you are going to have children, it might make sense to buy a house and delay your student loan payments. Since I’m not having children, flexibility in my living situation is a lot more important to me than stability, and so I’ll probably never buy – just pay off my loans as quickly as possible, continue to rent forever, and be completely debt free (rather than student loan debt AND mortgage debt, which have a reputation for being less destructive than credit card debt but really aren’t). However, I… Read more »

chacha1
chacha1
9 years ago

@Honey, well said.

Very fortunate that Mr. Ramsay’s method is completely irrelevant to my life. Wishing the best to all of you who still are having to juggle more than you’d like.

El Nerdo Loco
El Nerdo Loco
9 years ago

“We shouldn’t have to wait” is the reason why people stay in debt forever. I disagree with the notion that we need to be in debt for the rest of our lives and that we should get used to it. Debt slavery is definitely not for me. Having kids is great, but why should we buy a house before having kids? My family moved a lot when I was a kid and I grew up in rental homes, but I went to good schools, ate well, had good medical care, always had nice clean clothes, had toys and a bicycle… Read more »

ldk
ldk
9 years ago

My husband and I have been self-employed since we were 24 and have always had variable incomes coming in through our businesses. We found the key was to deposit all business revenues into one account and then pay ourselves a minimum monthly ‘salary’ out of that that covered our basic living expenses–if, at the end of the year, after all taxes and business expenses were paid there was still money in the account, we sat down to decide how to allocate it (vacation, increased savings, project on the house, etc.). As the businesses (and revenues) grew, we continued to only… Read more »

Lindsay
Lindsay
9 years ago

I also disagree with Ramsey’s advice to pay off the mortgage as fast as possible. If the money to pay off my mortgage was put into my hands right now, I think I’d rather invest it into CDs that would earn more than my mortgage interest and keep the money relatively liquid. What if I put all that money into the house, there’s no guarantee that I would ever be able to get it all back or gain on it by selling the house. There’s no guarantee that an act of war won’t destroy my house tomorrow — not covered… Read more »

Lindsay
Lindsay
9 years ago

@Honey I don’t necessarily even want kids. I just value stability higher than many other things. @El Nerdo, I have emotional reasons for my financial decisions, and the biggest one is the need for security. Paying a mortgage makes me feel more secure than paying the equivalent in rent. I don’t equate it with debt slavery, as I am not suffering or hurting financially because of it: I max out retirement and HSA, have 6 months in emergency savings and sock away dedicated savings. The stability it affords makes me feel secure. During the great depression, homeowners survived by letting… Read more »

beth2
beth2
9 years ago

My situation is that dh has a very stable job while I work for myself and get paid irregularly and vastly different amounts. All important expenses are paid with dh’s salary such as mortgage, utilities, and food. All non-essential expenses are paid with my income: vacation, retirement savings, investment savings, clothes, and entertainment. This year my business brought in more income than my dh but even so, there were a few months where we cut back on everything but essential spending just because we don’t bank on my income until I see the check(s) in my hands and dipping into… Read more »

Briana @ GBR
Briana @ GBR
9 years ago

I think the advice is good for people with stable and variable income. Sure, the people with variable income may run out of money, but people with a stable income are met with temptation with things they could buy but don’t need. For example, I can either spend money on tickets to a conference I really want to go to or put that money towards my debt. The conference could be really beneficial to my networking/career, but paying off/down my debt is a huge priority.

Honey
Honey
9 years ago

@ El Nerdo Loco, I agree with you re: debt is NOT necessary, and people really probably SHOULD wait until they’re out of debt to do a lot of things. I don’t *necessarily* think that people should wait until all their student loans are paid back before buying a house, since there are a lot of other factors that could influence things. However, I do think that no one should buy a house unless they have a 20% down payment and 20% of the house’s value in an emergency fund for repairs/upgrades/the million and one other ways houses cost you… Read more »

Carrie
Carrie
9 years ago

My income definitely fluctuates; feast and famine are unfortunately real. I manage it by putting aside percentages: 30% of everything that comes in for taxes, 20% for retirement, 10% for regular savings, and 50% of whatever I bring in for bills, spending etc. Caveat: my husband works full-time and this covers our monthly bills, so I can afford to ride out the months in which there is nothing coming in. It hurts, but we aren’t going to be evicted.

El Nerdo Loco
El Nerdo Loco
9 years ago

Lindsay– oh, I see. My parents bought a house once they had saved enough to buy one, and have owned a house since then (now retired they live in a nice apartment, as a house is too big for them and my mom can’t climb stairs well). I on the other hand was lured by credit cards in college, and as my income grew so did my credit card debt. Got married, more debt. Eventually we figured out Visa owned our lives and we had to do something about it. So yes, debt gives me rashes! I want the power… Read more »

Amanda
Amanda
9 years ago

I want to work at getting rid of our mortgage. My dad built houses we lived in so I’m comfortable w the idea of not paying for a house payment every month!!

Debt free is the way to be.

cc
cc
9 years ago

el nerdo: part of moving to nyc is you do make more money. getting here is the hard part, the initial moving in, first-last month rent, and the sticker shock of everyday items; but a reasonable lifestyle is easier to maintain once you’re being paid nyc rates!

sarah
sarah
9 years ago

I don’t get that at all. How could food come before housing? If you don’t have a cent to spend on food you can eat from the pantry/fridge or go to a food pantry, but if you don’t pay your rent your landlord can give you a 5-day notice and then you’ll probably lose your job too which kind of puts a stop to paying for much of anything after that.

shares