If you're determined to get out of debt and get ahead financially, you might have heard about rational budgeting. A rational budget starts as a zero-based budget and then looks at spending trends, expected income, expected expenses, cost of living and other factors to come up with an amount for each category of spending. Dave Ramsey, a radio talk show host and author of "Financial Peace University," has surveyed his readers and discovered that a zero-based budget is about 19 percent more effective in helping people pay off debt. Even though a rational budget has many advantages, there are also some disadvantages to be aware of.
Creating a rational budget can be time-consuming. Expenses must be calculated and factors like rising costs taken into consideration, so bills, costs and fiscal reports all have to be gathered, which can take hours. Because each fund starts at zero, knowing how much to put into each category can be grueling as the budget maker considers all factors involved. In an article on public-sector budgeting, "Zero-Base Budgeting in the States," Ronald K. Snell wrote that "zero-base budgeting is likely to be an elaborate and time-consuming process."
Variable Income Issues
A rational budget plans for a set amount of expenses in each category, which can cause issues if your budget varies. If you are laid off, take family leave or work a seasonal job, sticking to a strict monthly allowance in each category becomes more of a challenge. Author Dave Ramsey advises that those with variable income go with a "hill and valley approach." When money is good, set aside extra in a fund for when pay is lean. Over the year, things should balance out.
Unless you plan for the unexpected and have some flexibility in your budget, getting hit with a big repair or medical bill is devastating to a budget. The rational budget can overcome this disadvantage if you add a category for an emergency fund. In a May 2012 article of Fox Business, Christina Couch recommends setting aside three to six months of living expenses in an emergency fund.
Too Much Tracking
In rational budgeting, every dollar should be accounted for and put into a spending category. It can take a lot of time and effort to keep track of where every dollar is spent, and some people simply throw their hands up and walk away because they simply don't have time for all that record keeping. One solution is to carry a small notebook and jot down spending. This also keeps the person accountable for small items, like a soda or cup of coffee. Popular money-tracking software tools also help track categories of spending and save time and effort.
- StateBudgetSolutions.org: Zero-Base Budgeting in the States: by Ronald K. Snell
- Budgeting: A Comprehensive Guide; Steven Bragg
- Financial Peace University; Dave Ramsey
- Fox Business: Three Financial Goals That Trump College Savings: by Christina Couch
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