This is my take on Dave Ramsey Baby Steps UK edition, the steps that are relevant to us living in the UK so you can take to be debt free.
Hi fellow mums (and dads), I know you’ve worked hard all your life to create the family you now have. Life these days are all about juggling raising kids, looking after older parents while trying to advance on your job.
While living in a nice house, you are also sitting on probably the largest debt you have in your life. I’m sure you know paying off the mortgage debt earlier is probably the right thing to do, but life got in the way of doing long term financial stuff and it all just feel such a big task!
Do you know…
By overpaying £200/month would reduce your mortgage term by 3 years and save you more than £11,000?
That’s 2 luxury family holiday!
But it’s not all too late for you.
In this post – Dave Ramsey Baby Steps UK, you will learn how to take small actionable steps today to secure your finance in the future to be ultimately debt free.
Before we jump in, let me tell you a little bit about Dave Ramsey.
Who is Dave Ramsey?
Dave Ramsey is a well-known American financial guru who helped millions of people to be in control of their finances. In particular, his money management plan walks you through a sequence of steps to be debt free, famously known as Dave Ramsey’s 7 “baby steps”.
While Dave Ramsey’s baby steps is a fantastic financial tool, it was very much geared towards the US audience.
… Which is why I have created this post – Dave Ramsey Baby Step UK edition. My take on this long term financial guide that is relevant to the UK, so you can too benefit from these steps to be debt FREE.
Dave Ramsey Baby Steps UK [Step 0] – Create a Budget and Stop Borrowing What You Can’t Afford
Before taking your first baby step, Dave Ramsey advises creating a monthly budget.
Rolling your eyes? I was too…
Like many of you, our finance is not stretched by any means. I don’t want to go back to the penny bitching uni days that I am writing down every expense… I simply don’t have the time, nor worth my effort at this stage of my life.
The idea here is to analyse 2-3 months of your bank statement to be able to outline, the monthly income, regular expenses, bills etc. If you are using online banking, you can do this pretty quickly using the tools many online banks already have available.
By creating a budget, not only you have a good idea of what you can or cannot afford at a monthly basis, but also can detect some of the regular unintentional expense that adds up quickly.
When I did this exercise, here are some items brought to my attention:
- We spent £100/month just on coffee
- By canceling my personal mobile (I already have a work mobile), I can save £240 a year
- I can also save £96 by cancelling my audible as I already have loads of credit for free books
Budgeting also doesn’t mean you have to cut everything out to a bare minimum. It just means that you make plans for all your expenses including things you spend for fun, and other fine things in life, as long as it’s within what you can afford.
Having a monthly budget will also set the foundation to help you pay off your debt earlier (more on this later).
Now you are ready to take on Dave Ramsey’s baby steps to be debt free.
Dave Ramsey Baby Steps UK [Step 1] – Save For an Emergency Fund
We all know, shit happens in life and they can be costly.
I’m talking about dental fillings, car tyre punchers, dishwasher stop working etc… things you just have to pay for in order for life to function normally.
Dave Ramsey’s 1st baby step [UK] to be debt free is to save an emergency fund of £1000 for those unplanned and costly events in life.
This will prevent you from falling back to borrow money with a high interest rate.
Want to save money on your weekly food shopping?
Dave Ramsey Baby Steps UK [Step 2]– Payoff Debts Except for Mortgage and Student Loan
This 2nd step of Dave Ramsey’s Baby Steps definitely take some interpretation in order to make it relevant to the UK.
The original advice is to pay off all debts except the mortgage.
While that’s true, the additional exception in the UK is the student loan.
With the low-interest rate and the policy for the student loan in the UK, in most cases, there is NO advantage to pay if off early. The cash is better saved for other things. You can read more in details HERE.
So if you have been sensible with money and don’t have any debts apart from Mortgage and Student Loan, well done! You can skip straight to the next step.
For the rest of you who still have other debts, you can use Dave Ramsey’s “The Debt Snowball” strategy. (Personally, I’m not a fan of the name as it sounds like getting your debt bigger. Is it just me?)
Anyway, if you can get past the name, The Debt Snowball is a way to reduce your debt one at a time.
List out all your debts from the smallest to the largest, except mortgage and student loan. Start with paying off the smallest, before moving to the next smallest until all debts are paid off.
I know it all sounds really easy, but to implement it takes discipline and structure, which is why having a monthly budget (baby step 0) is particularly important if you have the habit of impulsive buying.
Dave Ramsey Baby Steps UK [Step 3] – Save for a 3-6 month for Living Expense
Once you have paid off the debt mentioned in baby step 2, the next step to debt free is to save for a 3-6 month worth living expense, including the mortgage.
Unlike the £1000 emergency fund (baby step 1), this lump sum is to create a cushion for times that your income will be disrupted, instead of borrowing money with a high-interest rate.
It could be situations that you lose your job, or want to make a career change intentionally, or even starting your own business…
Unlike US, we have pretty good employment law in the UK. Many people get a decent redundancy package. If you get more than 6 months worth of pay from your redundancy package, you are probably fine without having to save additional money.
However, if you simply lose your job and don’t get much out of the employer, it is a good idea to save up to 6 months of living expense to allow you to transition.
Starting a side hustle is a great way to create additional income to pay off your credit card debt, or save for emergency fund.
Here are some ideas on how to make money online:
Dave Ramsey Baby Steps UK [Step 4]– Invest in Your Pension
Dave Ramsey’s baby steps #4 [UK] to debt free is to invest in your pension.
In fact, I would say, it’s NEVER TOO EARLY to invest in your pension, so you can consider this as a Baby Step that can be done in parallel to Steps 0-3.
Aim to contribute 15-20% to your pension which can be (but not limited to) a private pension, an investment ISA, or a company pension.
Most of us are probably in a company pension scheme. Many of the employers match your contribution (see below), so take advantage of that by maxing out the company contributions. That is FREE money towards your retirement!
Regardless of what your employment situation is, the idea here is to have a savings plan for your retirement and START NOW.
Dave Ramsey Baby Steps UK [Step 5] – Fund Your Children’s Education? Saving for Your Children’s Mortgage Deposit
The original Dave Ramsey’s baby step 5 – fund your children’s education, doesn’t apply as is in the UK.
As a starter, colleges are free to attend for children who are under 19 before enrolling the course. If you live in Scotland, that free ride continues into University education. So one financial weight off of your shoulder.
For the rest of the UK, I am afraid we will need to put some thought on our children’s university education. But don’t start panicking yet, remember the student loan that I mentioned earlier?
Assuming the interest rate for the student loan remains one of the lowest interest rates, it’s worth to take advantage of it instead of saving for it. This is because of the way the loan is set up, your child only need to pay it back when he/she starts to earn a certain amount of money after graduating.
For us, it makes more sense to save for our children’s mortgage deposit. If they have a larger deposit on a house they will get a lower mortgage rate, so helping them to get at 80/20 Loan To Value rate or better, would be a huge help in buying their first property.
Dave Ramsey Baby Steps UK [Step 6]– Payoff Your Mortgage Early
This baby step from Dave Ramsey works exactly the same in the UK. The steps to debt free are ultimately having your mortgage paid off completely.
It won’t happen overnight, but by setting up a small amount to overpay your mortgage each month, will make a huge difference for the long run.
Paying off a mortgage is the ultimate goal for our family too. Although we are still a long way from achieving that, by overpaying 20% of our base monthly payment, we will be able to pay off our mortgage 5 years earlier.
Before you set up that overpay amount, make sure to check that you won’t be penalised by paying it early. Most cases you can pay up to 10% of standing balance each year without incurring any overpayment charges.
Dave Ramsey Baby Steps UK [Step 7] – Build Wealth and Give
Now you’ve gone through all the steps to be debt free, Dave Ramsey’s final baby step [UK} is to build wealth and give.
This is another step that I think can go in parallel with other baby steps. Personally I interpret give as in forms of both time and money.
If you are in a position that you can donate money to charities and/or causes that you are passionate about, amazing. But if you are in early steps to be debt free, you can always give your time by volunteering.
Finally, continue to build your wealth the way it has worked for you.
There you have it. My interpretation of Dave Ramsey Baby Steps UK edition to be debt free.
It is a great long term financial guide breaking down to easily actionable baby steps that everybody can do.
Notice that I didn’t give you too many specific “how-to” for each step because I believe it is not about penny-pinching and following these steps to a T. Instead, I want to help you to see the forest (not the tree).
Once you decide what your long term financial goal is, then you can follow the structure and adapt Dave Ramsey’s baby steps to suit your personal situation.
I’d Love to Hear From You…
Where are you financially in Dave Ramsey Baby Steps to be debt free?
Comment below, I’d love to hear from you.