Hi, and welcome to the 2nd installment of my Dave Ramsey Baby Steps series for the UK.
You can find the first in the series (Baby Step 0) HERE, and today I’ll be explaining Baby Step 1.
Before we start Baby Step 1, I personally think it’s very important to have written a budget. If you need help on how to do that, I’ve written a post about that HERE.
What is Baby Step 1?
Baby Step 1 is the starting point to our financial plan. It is to save £1000 CASH in the bank. Or if your household income is less than £20k a year, that amount is reduced to £500.
This is our Baby EF (Emergency Fund). Now, don’t panic. Later on in the Baby Steps, we will come back to this ‘Baby EF’ and add more money to it, but right now, we just need to focus on saving that £1000/£500.
The aim is to save this money as quickly as possible, so that we can move onto the next step. So, we can sell any unwanted or unnecessary items that we have in our home (clothes, furniture, shoes, music equipment, ANYTHING goes) or cut out anything we can from the budget (this is why I feel it’s crucial to have written a budget before you start this step). Be lethal. As Dave Ramsey himself says, “sell so much stuff that the kids think they’re next!”.
Why have an Emergency Fund?
According to The Money Charity, around 9.45m (35%) of UK households have no savings whatsoever. That is a scary thought, that 35% of households in the UK don’t have any savings for emergencies.
As you can probably tell from its name, the EF is ONLY for emergencies. Things that we cannot see coming and unexpected life events. It is not for things like Christmas, Birthdays, Days out etc.
The fact is, that unless we have an emergency fund to cover emergencies, we WILL end up getting into more debt than we currently have. Life happens, and we need to be prepared for it.
Imagine that you lost your job, or that your car was in an accident, or you had an urgent plumbing problem in your house. Without that EF, how are you going to pay for the expenses that will occur? Well, if we don’t have the cash to pay for it, we’ll end up using credit cards, loans or other forms of debt. When we have an EF, we have that small safety net.
Many people find Baby Steps frustrating and pointless. Once they have decided that they want to pay off debt, they want to get straight into that Baby Step. But for the reasons I outlined above, Baby Step 1 is absolutely crucial.
I hope that has explained what an emergency fund is, and why you need one. I’ll be back later in the week with a post about Baby Step 2.