Baby Step 3B

Hi and welcome back to my series about Dave Ramsey. The previous posts in the series can be found here:

BS0 http://themoneyfreak.co.uk/2018/11/14/dave-ramsey-uk-baby-step-0/

BS1 http://themoneyfreak.co.uk/2018/11/21/baby-step-1/

BS2 http://themoneyfreak.co.uk/2018/11/29/bs2/

BS3 http://themoneyfreak.co.uk/2019/01/20/baby-step-3/

Today I am continuing this series with Baby Step 3b.

What is Baby Step 3B?

Baby Step 3B is the ‘Mini Baby Step’ that comes between Baby Step 3 (The Fully Funded Emergency Fund) and Baby Step 4 (contributing 15% of your income to retirement), and is saving to buy a house.

The reason that it is after baby step, is that you NEED to have your Fully Funded Emergency Fund before you make what will possibly be the biggest purchase of your life. Similarly, the reason it comes before BS4 is because saving for a house is a short-term goal, but you will be in BS4 for a longer time. You can afford putting off contributing to retirement for a few years, in order to save for your house deposit.

Guidelines for BS3B

Dave Ramsey suggests a minimum of a 20% deposit, although here in the UK there are Help to Buy schemes (starting at a 5% deposit), Shared Ownership, and various other government schemes that can help you get onto the property ladder.

The problem with these 5% deposit schemes, is that a lower deposit means higher mortgage payments. It is better to save for longer and have a higher deposit to p0ut down, so that your long-term mortgage payments are lower.

Another suggestion by Dave Ramsey is that you apply for a 15-year fixed mortgage. While this makes sense, its not always easy (or possible!) for the average Joe. I highly suggest using the Mortgage calculator and also looking at current Mortgage Offers on Money Saving Expert. https://www.moneysavingexpert.com/mortgages/

The final piece of guidance from Dave in regards to BS3b, is that your mortgage payments should be no more than 25% of your household take home pay. This makes absolute sense, as you don’t want to struggle paying your mortgage every month.

I hope this has been helpful if you are looking to save for a house deposit while on the Baby Steps. However, these suggestions are pretty solid even if you don’t use the Dave Ramsey Baby Steps.

I’ll be back in a few days with a post on Baby Step 4

C.

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.