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.
- 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.
- 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.
- 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.
- 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?
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?
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.