I was speaking to a friend and I mentioned that in order to build wealth you need to have a plan. I mentioned using the Dave Ramsey baby step system and she asked me to explain them in simple terms. With this in mind, it inspired me to create a Dave Ramsey Baby Step Chart for my fellow UK users.
Dave Ramsey is all about building skills to help you achieve financial peace and freedom. Short term sacrifices for long term gain.
7 BABY STEPS
- Commit to never borrowing again
- Save an Emergency fund of £1000
- Pay off DEBT using the snowball method
- Save 3 – 6 months worth of expense
- Invest 15% of your household income into your pension
- Save for your kids’ university fees/ Mortgage deposit
- Pay off your home early
- Build Wealth and Give
Step 0: Commit to never borrowing again
Dave Ramsey is an advocate to changing our mindset and committing to being debtfree permanently. He always makes the statement.
You need to live off rice and beans until to pay off your debts
Step 1: Save an Emergency fund of £1000
Having an emergency fund stands on the principle of having money that has been set to the side to cover emergencies that can lead to getting into more debt. Having this cash buffer for when unexpected things happen. At least you have some money set to the side.
Step 2: Pay off DEBT using the snowball method
Pay down ALL debts except the mortgage and student loan. In the UK, student loan is very different to the US, student loans are calculated by deducting 9% of your income no matter how much you earn so it is a debt which gives room to pay it off slowly without accumulate excessive amounts of interest rates repayments.
The Snowball Method – UK Version
The snowball method is considered to be a debt reduction method. This process is about paying debt in order of smallest to largest, gaining drive as you tackle each balance. When you pay the smallest debt in full, you roll the money you were paying on the debt into the next smallest debt balance. Bare in mind, you need to pay the minimum amounts on your other debts.
It looks something like this:
Step 1: List your debts from smallest to largest regardless of interest rate.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.
The key to achieving this step is to find different means of making extra money and cutting your expenses.
EARN MORE + SPEND LESS = DEBT FREE
Step 3 : Save 3 – 6 months worth of expense
Now that you have paid off all of your debts, it’s time to put all of the money you have been throwing at your debts to the side. Saving 3 – 6 months worth of expenses can protect you and your family from life changing situations such as a loss of a job. This step is to build a life line and buy yourself time to adjust.
Practical Tip: Save this money in a savings account which is not easy to access. Temptation will be knocking at your door when you have a bit of cash.
Step 4 : Invest 15% of your household income into your pension
You now need to take 15% of your gross household income and start investing. Take advantage of work pension schemes; it is free money, depending on the company you work for. Your employer will contribute towards your pension and you avoid paying tax on it. FREE MONEY.
No matter how old you are, it is time to take retirement serious; especially because we are living longer. The current state pension age is 67-68. Imagine living for another 30 years when you retire, how will you fund your lifestyle if you are not saving now.
Step 5 : Save for your kids’ university fees/ Mortgage deposit
I personally do not agree with this step because in the UK, our student loans are not really loans, they are more like a graduate tax. You make payment based on your earnings. Instead, saying for a deposit will be better fitting. The property market has became near impossible to get onto it. Being able to give your kids a deposit to buy a property will put them ahead in life which will save a lot of money in the long run. No need to rent.
The more deposit a person has, the cheaper the mortgage will be. If you are able to gift your child £50,000 to use as a deposit can set them up for life.
Step 6 : Pay off your home early
Imagine life with no house payment! Baby step 6 at this stage is the only thing standing in your way of being completely free from debt and financially independent.
Any extra money you put towards your mortgage can save you tens (or even hundreds) of thousands in interest alone. I did a personal calculation on my mortgage and if I make an annual overpayment of £2500, I will pay off my mortgage 5 years earlier and save over £15,000 in interest alone.
Step 7 : Build Wealth and Give
The last and best step, you are now debt free, financially free and you can do as you please. You can give as much as you want and still have more. Imagine what it would feel like to be able to leave an inheritance for your kids and their kids. That’s all possible now because you had discipline for a few years. Let the generational wealth begin from you.
For more information on Dave Ramsey, check out his site.
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