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 3

Hi and welcome back to my series on the Dave Ramsey Baby Steps.

You can find the other posts in the series here:

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

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

Baby Step 2 http://themoneyfreak.co.uk/2018/11/29/bs2/

I’ll reiterate that you NEED to have written a budget before you start the Baby Steps (see how to do that here http://themoneyfreak.co.uk/2018/06/24/how-to-write-a-budget/) and you NEED to follow the Baby Steps in order.

Today I’m writing about Baby Step 3. Now, in my own opinion, this is the most difficult Baby Step. I feel like when we are in BS0, we have just started and are really motivated, and in BS2 we are on a mission to pay off all of our debt and will see an end result (more money for us instead of going to creditors). But BS3 kind of leaves me feeling a little flat. Having cash in the bank for no reason other than ‘just in case’ isn’t something I’m familiar with.

Plus, I would also say that this is the first of the Baby Steps (BS) to differ slightly from the American system.

What is Baby Step 3?

Baby Step 3 is a CONTINUATION of BS1. So, in BS1 we saved a £1k emergency fund and in BS3 we add to that until we have 3-6 months’ worth of expenses. That’s why BS1 is called the Emergency Fund, and BS3 is called the Fully Funded Emergency Fund (FFEF), because it’s a continuation of, not as well as.

To calculate how much you’ll need for BS3 you look at your budget and see what you would need to live on per month if you had no income at all.

This is where things differ in the UK, as most of us would be fortunate enough to receive some Government Assistance in the form of Benefits. Assistance such as Universal Credits, Tax Credits, Child Benefit, Council Tax Support etc.

Whether you take that into account when working out what your 3-6 months of expenses will be, or not, that is entirely up to you.

Also, when doing your calculation, remember that this is an EMERGENCY budget, in case of a job loss, or death, or any other emergency. We don’t include Sinking Funds, any eating out, any pocket money, gym memberships or luxuries. Its just what we would need each month to keep a roof over our heads and the bills all paid.

Why do we need BS3?

Although I am finding BS3 incredibly boring, I do see the value in it. In fact, this is probably (in my opinion) the most important Baby Step, as it’s the one that will stop us from getting into debt once we become Debt Free.

It is our buffer from big emergencies like job losses and can be the difference between putting food on our table or not. It isn’t for dipping into at Christmas time, or if our car breaks down, we cover that with Sinking Funds (here is info on Sinking Funds if you would like to read it http://themoneyfreak.co.uk/2018/08/12/sinking-funds-how-to-save-for-large-expenses/). This Baby Step is for EMERGENCIES ONLY.

Without this Baby Step, when we have an emergency, we will end up getting back into debt. That is why this Baby Step is so crucial.

I hope that explains a little about Baby Step 3, and I’ll be back in a few days with the next in my Baby Step series, Baby Step 3B.

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.

 

 

Preparing for Christmas In October

 

I know it’s only Autumn and Christmas is about 9 weeks away, but I always like to prepare for it ahead of time. While some people look at my early prep and roll their eyes, there are others who think that by starting in October, I’m leaving it too late.

There are several reasons why I plan ahead of time for Christmas, and why I think you should too.

 

  1. First, and most importantly, you need to make sure that you have enough money for Christmas. If you have Sinking Funds (see HERE for more info on Sinking Funds) then you are more than likely safe in the knowledge that you have exactly the right amount of money for your family to celebrate Christmas. If you don’t, then by the time October rolls around, you only have 2 paydays to pay for it.

Making Christmas a Debt-Free time of year is so important, you don’t want to be paying for Christmas 2018 in December 2019! If you don’t have Sinking Funds (and even if you do!) then its not too late to write a Christmas budget, but you’ll need to keep it realistic. Maybe scale back slightly, or only buy for the children in the family, for example.

 

 

  1. It means that you have time to find bargains. You don’t have to run around a week before Christmas, paying full price for everything because you don’t have time to look for bargains, coupons, vouchers or good quality second-hand items. You’ll also have time to make any handmade gifts and change them if a mistake is made. This really does help with the budgeting aspect of Christmas, and making sure that YOU are in control of Christmas, instead of the other way around.

  1. You have time to enjoy the festive season instead of being rushed and stressed. You can relax the week before Christmas Day, because you have bought and wrapped presents, cooked food ahead of time and planned everything that needs to be done. You can enjoy spending time with your friends and family, go to festive activities, spend quality time at home, because you know everything is taken care of.

So, those are all the reasons that I think EVERYONE should prepare for Christmas as early as possible. In 2019 I’ll be preparing as early as January!

When do you prepare for Christmas?

Till next time,

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.