Dave Ramsey Baby Steps UK Version

Are you in debt? Want to know how you can build your savings, save for emergencies, get out of debt and build wealth?

If you’re, you can use the Dave Ramsey Baby Steps to build your savings and get out of debt. In the UK, the average credit card debt per household in February 2021 was £1,962. During the same period, the total unsecured debt per UK adult was £3,724, while the average total debt per UK household was £60,935.

Overall, people in the UK owe £1,698.4 billion as of February 2021. This is an increase of up to £15.1 billion from £1,683.3 billion in February 2020. Want to take control of your financial life? Follow Dave Ramsey’s 7 Baby Steps.

What are Dave Ramsey’s Baby Steps?

Dave Ramsey’s Baby Steps is a money management program that can help you learn to save money, build wealth and overcome debt. The steps are the brainchild of Dave Ramsey, a personal finance expert and guru. As the founder of Ramsey Solutions, Dave has helped millions of people in the UK and worldwide. He helped them get out of debt, invest for retirement and achieve great things financially.

He came up with the 7 steps following the many mistakes he made financially. When he was young, Dave struggled with debt, but he eventually overcame it. He decided to share the 7 steps with the world to help people avoid the mistakes that cost you money.

What are Ramsey’s 7 Baby Steps?

Research shows that the COVID-19 pandemic exacerbated the high debt levels. The pandemic pushed more than 700,000 people into poverty and debt.

From the same report, findings reveal that 8.3 million people in the UK were over-indebted before the pandemic. In fact, 22% of adults had less than £100 in savings. This sounds scary, but when you follow the 7 Baby Steps by Dave Ramsey, you can start noticing positive changes in your financial life.

Here are the 7 steps…

Baby Step One: Save £1,000 for Your Starter Emergency Fund

Dave Ramsey proposes that your first financial goal is to save £1,000. You need to save this amount as fast as you can. This is your starter emergency fund.

An emergency fund is money safeguarded in case of a financial emergency. For example, job loss or illness. Financial experts worldwide recommend having three to six months of expenses kept in an emergency fund account.

So, how do you save your first £1,000 in your emergency fund account? The answer is budgeting. One of the main pitfalls for people who make financial mistakes is the lack of a budget. The second is abandoning the budget.

Random expenses are frustrating, especially with a budget. They make you feel that budgeting is hopeless. You can change this by creating a realistic budget that’s easy to follow and understand.

The following are steps to create an easy to follow budget.

• Note your income
• Track and categorise your spending
• Set your goals
• Make your plan
• Evaluate your spending and adjust your habits

It’s critical to review your budget regularly. This ensures that you’re on track. The elements in your budget are not set in stone. For example, your income can increase when you get a raise, and so will your expenses. Whatever the reason, keep track of your budget.

Baby Step 2: Pay Off All Debt

The next step is to pay off all debts. That includes credit cards, student loans, car loans and many more. To pay off your debts, start by listing them except your mortgage. Sort the debts by balance from the smallest to the largest.

Once you do so, start by paying the minimum amounts on all debts except the little one. For the little one, pay it off immediately. After settling the little one, take the payment and put it toward your second smallest debt. This is the debt snowball method.

The debt snowball method is a debt payoff system where you pay your debts from the smallest to the largest. This is regardless of the interest rate. Let’s assume your debts are as follows:

• Car loan – £3,000
• Credit card debt 1 – £500
• Credit card debt 2 – £1,500
• Student loan – £25,000
• Mortgage – £5,000

Your smallest debt is credit card debt 1. Using the debt snowball method, pay off this debt. You can pay £50 to £100 a month. Once it’s gone, take that payment and put it toward your second-smallest debt, which is credit card debt 2.

Repeat until each debt is fully paid. Once you pay off your debts, avoid them. Instead, you need to budget, adjust your spending habits, track your expenses, and live within your means.

Want to get out of debt faster? Ramsey Solutions has a debt snowball calculator. The calculator can show you how fast you can get out of debt.

Baby Step 3: Build a Fully-Funded Emergency Fund

Now that you’ve paid most or all of your debts, do not start spending your money. A good rule of thumb is to build a fully-funded emergency fund that will cover 3 to 6 months of your expenses. The emergency fund will protect you against life’s surprises. They include:

• Job loss
• House repairs
• Car repairs
• Unexpected bills and much more.

With a fully-funded emergency fund, you don’t have to resort to debt to pay off your expenses. How do you build a fully-funded emergency fund?

The first step is to decide how much you need. For example, if your total monthly outgoing, including mortgage payments, car loans or rent, are £2,500, you should aim at having £6,000 to £7,000. However, the more you can save, the better.

Having a bigger emergency fund ensures that you can handle even the biggest financial shocks. Since Dave Ramsey recommends having 6 months worth of living expenses, your ideal emergency fund should have £12,000 to £14,000.

The second step is to save. Based on the amount you decided to save, you need to set milestones and a target date. It would be best if you had a separate savings account for your emergency fund. This ensures that you’re not tempted to dip into the funds. You don’t want the funds in a locked savings account because you quickly need access to the money.

One of the best ways to stick to your plan is to set up a standing order. This will help to move money into your savings account each month. Whenever you want, you can put extra money into the savings account.

Lastly, have a clear plan and keep topping up the emergency fund. If you use your emergency fund, make a plan to top it up. It’s crucial not to allow the funds to shrink over time without topping it back up.

Baby Step 4: Take 15% Of Your Gross Income and Invest in Retirement

It’s never too early to save and invest for retirement. Dave Ramsey recommends investing 15% of your gross household income in retirement accounts. In the UK, the government pays the state pension. You can claim this if you’ve made National Insurance contributions during the time you’ve been working. The state pension is usually split into:

• Basic
• New State
• Additional

Unfortunately, the state pension is not likely to be enough for maintaining a comfortable living after you stop working. So, it’s a good idea to set up another retirement savings pot. A general rule of thumb is that you need to save 25X your annual expenses to retire comfortably.

One of the best retirement accounts is the Individual Savings Accounts. There are four types of ISAs.

• Innovative finance
• Stocks and shares
• Cash
• Lifetime

You can save money into each of the ISAs above every tax year. A Lifetime ISA can help you save for later life or buy your first home. To open a Lifetime ISA, you must be 18 and over but under 40. Each year, you can save up to £4,000 until you’re 50.

The government will add a 25% bonus to your ISA savings up to a maximum of £1,000 each year. Once you turn 50, you will not be able to pay into your Lifetime ISA. But your account will stay open, and your savings will earn interest.

You can withdraw money from your ISA if you’re aged over 60 or over, terminally ill with less than 12 months to live and if buying your first home. If you withdraw cash or assets for any other reason, you’ll incur a withdrawal charge of 25%.

Baby Step 5: Save for Your Children’s University Fees

Over 66% of graduates in the UK have taken student loans. When you convert the percentage into real numbers, it reaches a whopping £17 billion every year. The average student loan debt in the UK is about £35,000.

Eligible full and part-time university students can borrow up to £9,250 per year or up to £6,165 a year for private universities. Just like retirement, saving for your children’s university fee should be part of your overall financial plan.

The best way to go about this is to start early. Plan and start saving for education early can prevent strains on family finances. Next, be realistic about the cost of university education. On average, UK students spend £41,200 throughout a university degree. This includes tuition fees, living costs, accommodation and other expenses.

Next, adopt good financial habits. It’s essential to take advantage of financial tools for budgeting and investing available online. These tools can help you plan and reach your savings goals. If you’re serious about saving for your child’s university education, open a separate savings account.

This will allow you to save money into the account. Also, it prevents you from dipping into the funds and spending the money without a plan. Any extra money you’ve, save it in the account. If your child gets birthday money or allowance, suggest they save in the account instead of spending it. The birthday money or allowance will act as a nest egg for your children.

Baby Step 6: Pay Off Your Mortgage

The only item remaining between you and financial freedom is paying off your mortgage. In step 2 – Pay off all debt – Dave recommends paying the big debts last, such as your home mortgage.

For example, you took out a 30 year fixed home mortgage loan, and you plan on sending payments for the next 2, 3 or 4 decades. This means you’ll pay a lot covering both your principal, interest and insurance.

There are several reasons for paying off your mortgage early. First, paying off your mortgage early reduces the cost of interest. Interest on your mortgage is a huge financial liability that homeowners have to deal with. The longer you take to repay your mortgage, the more you pay in interest. If you pay your mortgage early, you significantly reduce the high-interest rate.

Second, paying off your debt gives you the financial freedom to pursue other ventures. For example, have you dreamt of opening a business or just having extra money in your bank account? Well, pay off your mortgage early, and you can pursue such ventures and more.

Third, you’ve protection in case of a housing crisis during an unstable market. During a financial crisis, the real estate market usually takes a hit. If you want to tap into fast equity out of your house, it’ll be difficult since the value of your home went down due to the unstable market.

But if you pay off your mortgage early, your financial burden will get lifted, and once the market improves, you can seek the equity you need.

Lastly, paying off your mortgage early is a financial security. How you may ask. Without the burden of paying your mortgage every month, you’ll have extra room in your budget. Now, you can redistribute your money to pay off other debts such as credit card balances, student loans, utility bills and other kinds of debts.

If you overpay on your mortgage, it does not mean that you get to pay less in future years. It only means that you’ll pay it off sooner. For example, a £150,000 to £200,000 mortgage at 5% with 20 to 25 years remaining, paying off a £5,000 to £10,000 reduces the interest by more than £11,500. This means you get to repay the mortgage 18 to 24 months earlier.

If you decide to overpay your mortgage, time it right. If the mortgage lender charges your interest daily, the sooner you make the overpayment, the better. But if charged annually, time your overpayment to count towards the interest charged for the year.

Baby Step 7: Keep Building Wealth and Become Outrageously Generous

This is the last step. By now, you’ve paid off your credit card debts, student loans and even your mortgage. You also have a retirement pot that’s growing every month and a fully-funded emergency fund.

Now, all that’s left is to keep building wealth and become outrageously generous. At the core of building wealth includes trading stocks, savings, investing and budgeting. Basically, building wealth is all about ending up with more money than you started with. You also get to leave an inheritance for your children and their kids.

Also, it creates a financial foundation that will ensure you and your family live a financially comfortable life. So, how do you go about building wealth? There is no fool proof plan for building wealth, but tips can help you achieve a strong financial foundation.

You have the usual – budget, pay off all your debts, reduce your living expenses, build an emergency fund, and adjust your lifestyle. What’s not included in this list is investing. Once you paid off all your debts and built an emergency fund, invest your income.

There are four golden rules of investing. The first rule is diversity. It’s critical to diversify your portfolio across several investment categories. Financial experts also recommend diversifying within categories. This helps to spread risk and protect your portfolio against a financial crisis.

The second rule is rebalancing. Review your investment portfolio yearly. This is to make sure your mix of investments do not stray from your original investing goals. If possible, sell investments that perform well and then use the proceeds to invest in underperformers. This helps you regain balance.

In rule number three, it’s all about keeping the costs down. To keep costs down, save by using an online discount broker. Financial experts also recommend that you stick to low fee index funds and others.

Lastly, take emotions out of the equation with dollar-cost averaging. Most investors miss on buying opportunities when prices are low. Also, euphoria can make investors buy high. But by investing the same amount in similar securities regularly, you take advantage of the dollar-cost average.

Once you build wealth, remember to give generously. Not only to your children but to charities and the needy. This is how you leave a legacy.

Final Thoughts

The Dave Ramsey 7 Baby Step method is a sure way to build wealth, get out of debt and leave a legacy. Basically, Dave Ramsey puts the ownership of your finances in your control. Rather than blaming outside factors for your financial mistakes, the baby steps encourage you to take action.

They also push you to act now and not later. Instead of procrastinating, the baby steps push you to start working towards your financial freedom today. Since they are easy to follow and understand, you can succeed and achieve your financial goals.