My Four Steps to Debt Freedom (A UK Based Approach to Dave Ramsey’s 7 Baby Steps)
I have a confession to make: being UK based, I hadn’t heard about Dave Ramsey until about a month into our debt free journey! So we hadn’t went down the route of Financial Peace University, or read any of his books when we got started, and I had made my own plan, which I adjusted when I found his 7 Baby Steps (spoiler alert: I only have four steps!).
I’m really glad we were introduced to him via the Instagram #DebtFreeCommunity because I enjoy following him and listening to his podcasts. It seems though, that when it comes to debt, our US counterparts are slightly different. For one, they are much more open than we are here in the UK (I so wish we could remove the stigma surrounding money here, but we have a long way to go IMO). For another, our priorities differ, for example, when it comes to paying off student loans. I would consider myself debt free, even though I have outstanding student loan debt (basically due to the way it is repaid, I’m in no hurry to tackle it), whereas my US counterparts would not.
The truth is, during our journey, I didn’t stick to Dave’s plan religiously because it’s not as relevant to someone like myself, rather, I adapted it to suit my own circumstances, and thought I would share it on my blog today to help others get started, or decide how they want to interpret the 7 Baby Steps.
Step 1: Save an Emergency Fund (EF)
Dave’s BS1 suggests $1k as an EF and I know some people who convert this to £££s but I actually think £1,000 is a nice figure to start with. I liked that there were four figures in my savings, but to be honest, the figure shouldn’t be an arbitrary number dictated to you by someone who doesn’t know your circumstances; if you have children, you might want a larger amount of £2k, or if you are living at home with parents that you can fall back on financially if you need to, £1k might be a bit excessive- you know best what your expenses are and the likelihood that you will need to fall back on your EF. And if you are struggling to come up with a figure, perhaps go for the cost of one month’s expenses?
Step 2: Pay off all debt (excluding mortgages and student loan debt), in order of highest interest rate to lowest
I know Dave’s plan says you should pay off your debts from smallest to largest, to gather traction and also allow yourself to snowball your debts, but here in the UK we’ve been raised on Martin Lewis’ advice to pay off debts from highest interest rate to lowest, so I’m going with that! The reason I agree with Martin rather than Dave on this is, say you have a few payday loans totalling £500 at large interest rates and a 0% interest finance deal on a £1000 sofa- it absolutely makes more sense to pay off the payday loans because you save a lot of money in the long run.
Step 3: Save 3 months of expenses
Once your debt is paid off, you can start to focus on saving. Dave’s plan suggests 3-6 months of expenses as your new savings total but personally, we are saving three months- I don’t see why we would need more than that as a starting point. Remember, base your savings figure off your expenses, not your income (hopefully you’ll be well versed in how to create a budget at this point and you can just check on there what your monthly expenses total is). If you haven’t used your EF to pay off the last of your debt, use your EF funds as a starting point for your new savings pot.
Step 4: Pay off your mortgage and save
When you have three months in expenses in savings, re-adjust your budget and figure out how much you can afford to save each month (the reason I suggest you re-adjust is, up until this point, a lot more of your money was going towards savings and debt with gazelle intensity, whereas less is needed going forward). With this figure, use some to save for a home deposit or overpay your mortgage and the rest should go into sinking funds for whatever your priorities are, like your children’s future, travelling, retirement etc.
Important things to note:
Throughout your journey, there are some things that I believe are important and you should continue paying for these even whilst in debt, such as pension funding (whereas Dave’s plan is to invest in these after Baby Step 3), and some sinking funds. It is my personal opinion that you shouldn’t deprive yourself just because you are paying off debt, and still budget for holidays, socialising, or whatever you enjoy doing (within reason!) as ultimately, it will keep you motivated and prevent burn-out. In our particular example, we still travelled while paying off debt and as our budget was tight, we earned extra money to pay for it rather than pausing our debt snowball (you can read more about my particular side hustle of choice here).
Even though you are paying off debt, remember to enjoy life and still make time, and room in your budget, for things that are important to you. Life is for living after all!
So this is our plan, and the way I have interpreted Dave Ramsey’s steps for UK followers. I hope this helps you, and don’t forget to share with me below or over on my Instagram page if this helps you, or how you’ve decided to get out of debt and live your best financial life 🙂