Baby Step 1

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.

Claire.

 

 

Dave Ramsey- UK Baby Step 0

 

I’ve mentioned quite a few times that I loosely follow the Dave Ramsey 7 Baby Steps. I say ‘loosely’ because living in the UK means I do things slightly differently.

I’ve had quite a few requests to explain what the 7 baby Steps are, so I’ve decided to do a series of posts over the next few weeks, explaining each Baby Step, and how I ‘translate ‘them for the UK market.
This is the 1st post, which is all about Baby Step 0.

What is Baby Step 0?

Baby Step 0 is essentially, getting current on all of our bills. We don’t need to think about any of the other Baby Steps until we are current on our bills and are out of our overdraft.

So, in this step we need to think about our 4 walls.

These are:

1. Food-above all else, before we do anything else, we need to feed ourselves and our families.

2. Shelter (rent or mortgage)- We also need somewhere to live.

3. Utilities- we need to have lights, heating and electricity.

4. Transport- if we need to get to work then we need to think about this as it is crucial to making a living.

Then, we get current with things like credit cards, loans and other debt, before we actually start the Baby Steps. So, we are covering our 4 walls, and paying the minimums on all of our debts.
The aim is for us to get (and stay) current all the way through paying off the Baby Steps.

Stay tuned for the next post, all about Baby Step 1.

Claire.

Debt and Mental Health (UK)

 

 

 

I really want to preface this blog post by saying that everybody experiences mental health issues differently. People with exactly the same diagnoses can have polar opposite experiences.

Also, if you are struggling with Mental Health issues, please reach out for help. I have linked some mental health resources and helplines at the end of the post.

 

 

We all know that managing our money can be difficult, even when we are healthy and our lives are calm and running smoothly. So it makes sense that it gets even more difficult when we experience mental health problems, and approximately 1 in 4 of us do.

 

Issues like depression can make us blow the budget as we aim to try and make ourselves feel better, and problems such as bipolar disorder can find us spending like a millionaire when we are in a manic phase.

 

It is no coincidence that poor mental health is very strongly correlated with high levels of debt (Approx 50% of people with debt, also have mental health difficulties).But the opposite can also be true, that high levels of debt (or ANY level of debt) can cause mental health issues.

 

66M people live in the U.K.  That means that 16M of us currently have some sort of mental health issue. And out of that 16M, 8M are in debt.

 

BUT I FEEL ITS CRUCIAL TO NOTE THAT DEBT IS ALWAYS, ALWAYS, ALWAYS SOLVABLE. The solution may not be a quick or easy one, but it is still possible. There are plenty of charities and organisations that can help you if you are struggling with debt and you have a mental health issue.

 

Sources of help (This list was taken from The Royal College of Psychiatrists);

 

National

The MoneySavingExpert website also has a wonderful FREE booklet to download which explains the topic in more detail. You can read and download it here https://images6.moneysavingexpert.com/images/documents/mentalhealthguide_new_march_2018.pdf?_ga=2.42162853.1413502628.1535804009-1252977763.1534859923

And there is a wonderful blog post on Debt and Mental Health that is well worth a read,over on My Debt Diary

 

Until next time,Claire.

Sinking Funds- How to save for large expenses

When sticking to a budget (If you need help writing a budget, you can find that here ) my biggest priority after paying for my fixed expenses, is to contribute to my Sinking Funds (SFs). This is because SFs stop me from acquiring more debt.

In this blog post, I’m going to talk all abut SFs, what they are and how I use them.

What are Sinking Funds?

Essentially, all of the things that you expect will happen at some point, are covered with small amounts of money that you put away into an account every month.

I like to think of Sinking Funds as lifeboats on a sinking ship. All is going well, you are sailing along quite happily on your debt free journey, your budget is running smoothly, you are paying off your debts using your Debt Snowball (or Avalanche), when BAM! All of a sudden, you hit an Iceberg. That Iceberg may be a broken down car, or School Uniform costs, or whatever the case may be.

What Sinking Funds do is take away that panic of hitting the iceberg. So you aren’t left panicking about how you are going to cover that expense. In reality we know these things WILL happen at some point. Its unheard of for you to buy a car and NEVER spend a single penny on it and then sell it 10 years later. All cars need money spent on them, whether its expected or unexpected. The same goes for lots different categories.

Some examples are:

Christmas- It’s on the 25th December every year, plan for it!

Birthdays-Similar to Christmas, birthdays are

School Uniform Costs

Car Maintenance/M.O.T

Pet Expenses

Home Repairs

Clothing.

 

How to start Sinking Funds

The general rule of thumb is to work out what Sinking Funds you need, then work out how much you’ll need for each fund, divide by 12 and save that amount every month.

So, if you’ll need £250 a year for car repairs, you’ll divide that by 12 (approx.£20.80) and save that amount every month throughout the year.

Where that may not work is when you’ve only just started SFs and you have a shorter time to save for expenses. For example, it’s September and you haven’t any SF for Christmas, or is August and you haven’t any SF for School Uniform costs.

In that scenario, I would work out the BARE MINIMUM you can get away with spending for that item, and save for that first. It may mean having to scale back significantly on Christmas for example. In 2017, I only spent £250 on Christmas in total. I never thought that was possible, but I managed it. And I’m sure you could manage on an equally low budget, if push came to shove.

 

At What stage to I set up Sinking Funds?

If you are following Dave Ramsey’s Baby Steps (as I do) then you will start SFs once you are in Baby Step 2 (paying off your debt).

This is not something that you ever stop doing either, it will continue to serve you for the rest of your life.

Where do you keep your Sinking Funds?

 

It’s really up to you. I keep mine in a separate bank account, and transfer the money to them every month. I don’t have them in a high interest account, I just have them in a cash ISA that I can withdraw from quickly when I need to.

I know of some people who keep their Sinking Funds in cash in their house. If you are going to do this, I highly recommend checking with your house/contents insurance to see how much would be covered by them in the event of an emergency (fire, robbery etc).

 

I hope that helps!

Claire.

 

 

 

 

 

 

How to Write a Budget

 

 

Before we get into the nitty gritty of HOW to write a budget, first of all I think it’s important to explain why we might NEED to write a budget.

If we are aiming to pay off debt, or even if we are debt free but seem to have little to no money left at the end of the month, we are going to want to know exactly where our money is going. In the words of Dave Ramsey, ‘We need to TELL OUR MONEY WHERE TO GO, instead of wondering where it went’.

If you’ve ever attempted to write a budget and on paper it says you should have £300 a month left over, but you never actually do, you need a budget. In fact, whether you’re in debt or not, I believe that everyone needs a budget! Having a budget enables us to pay off debt faster and more consistently, build savings and invest more.

With that being said, lets look at the steps we need to take when writing our first budget.

Before you start:

-Make sure you have an hour or so when you won’t be interrupted. Don’t do it when you are in a rush or stressed. Not only will it become a hassle to even start writing a budget, but you’ll also miss out things because you are not focused.

-Get all of your paperwork together. Namely, your last 3 months bank statements. This is so you can look back on your expenses and Income to have a baseline from which to start, and also see what dates your Direct Debits and other payments come out.

It may also be handy to have your payslips for the past 3 months, although you may be able to get that info from your bank statements if you are paid via BACS.

-Make sure you include income and expenses for not just yourself, but also your husband, wife, children, pets and anyone else that you are responsible for.

 

First steps:

-To work out how things stand before writing your first budget, I recommend this online Budget Calculator from the Citizens Advice Bureau  https://www.citizensadvice.org.uk/debt-and-money/budgeting/budgeting/work-out-your-budget/budgeting-tool/  as it will prompt you for what to include and you can print and save the results.

This will give you a basis from which you can write your first proper budget.

Once you have filled in the Budget Calculator above, you’ll get 1 of 2 outcomes; your income is LESS that your outgoings, or your income is MORE than your outgoings.

 

What if I have more outgoings than Income?

The good thing about writing a budget is that you can see where all of your money is going, and more importantly, where your money is being wasted. So, if your outgoings are more than your income, you either need to increase your income or decrease your expenses.  For many people, the easiest category to cut down on is the food budget. Meal planning definitely helps with this, and you can see how I meal plan here http://themoneyfreak.co.uk/2018/04/01/how-i-meal-plan/

 

Now you can write your new budget.

Work out if you are going to write a weekly, 2 weekly, 4 weekly or monthly budget. This is individual to every person and will probably depend on how often you get paid. I get paid 4- weekly as well as monthly, so I do a fortnightly budget.

Be realistic! If you have been spending £800 a month for food, reduce it slowly. Don’t decide that the new food budget will be £300 a month. You’ll end up throwing in the towel and blowing the budget. Maybe decrease it by £50 for the first month and again by £50 the next month.

Don’t over complicate it. Just a piece of paper with Income on 1 side and Expenses on the other is perfectly fine. I’ve been budgeting for almost 2 and a half years and still use this method!

It is 100% normal not to get your budget right the first, second or even third time round! If you forget something the first month, just add it in to the second months budget so you don’t forget it again. Don’t give yourself a hard time about it, you are learning!

Budgets are fluid and they regularly change. The budget that you write this month may not work for you 6 months from now, or even 3 months from now. As your job, situation and family changes, so will your budget. I’ve had to change mine as children have left education, when we’ve added a new pet to the household and our diets have changed. There may be many other reasons why your budget will change from month to month.

For those of you who have an irregular income, Emma over at My Debt Diary has a great blog post on how to write a budget here

Once you’ve written your budget, how on Earth do you stick to it? To see what helps me, read my post http://themoneyfreak.co.uk/2018/04/20/how-to-stop-spending-when-paying-off-your-debt/