As part of my submersion into all things finance, I’ve decided to start educate myself in finance by reading through the “classics”. I’m also going to be applying them to my own financial situation and taking away things I need to concentrate on. This should then help rebuild our path to FI since I had to quit work.
Who is Dave Ramsay?
I must admit I had never heard of him, but I saw his name mentioned on one of the hundreds of FI blogs I read (I cant remember which one) and signed up for his email course to see what it was all about.
Dave sets out seven baby steps to sorting your finances out.
Baby Step 1 –
$1,000 £1,000 to start an emergency fund
I’m in the UK so I’m instantly changing this to £1,000! Dave recommends for this first step to go through your unwanted items, work an extra job “do whatever it takes” to save $1,000 as quickly as possible.
I’m cheating on this step as after closing and emptying all my matched betting accounts I already have £1,000 so I’ve opened a separate bank account and thats where it will live.
I was disappointed by the lack of actual assistance in this step but at the same he obviously cant do it for you. The point of this step is to get you used to saving.
Baby Step 2 – Pay off all debt but the house.
Dave Recommends listing all your debts except the mortgage. Starting with the smallest debt you then create a snowball approach by paying off the next one with the extra money you now have.
Mr Fire’s student loan isn’t really an issue since the interest is 1.25% which is less than inflation plus if when he does reach FIRE we will be below the income threshold. Even if we do end up paying it all back, its automatically deducted from his salary.
We don’t really have any debts that are suited to this method as all we have is a family business loan that doesn’t need paying back in full for a while or charges interest. It does need paying back though. Maybe I should rethink skipping this one?
I’m always confused as to where our “loan” fits in. The logic behind paying loans off is they are a drain on your overall expenses. Ours does not do this. But can we truly achieve FI if we are still carrying this loan? Am I using the fact that its a family business loan as an excuse?
Baby Step 3 – Have 3 – 6 months of expenses in savings.
This one is topping up the emergency fund FIRE style. He recommends working out 3 – 6 months worth of living expenses and then working towards saving it. This then should mean your never in debt again.
Again no real suggestions on how to achieve this other than selling things and another job.
Baby Step 4 Invest 15% of household income into retirement
The options here are of course US related (401(k), Roth IRA and Traditional IRA. Mr Fire pays into his pension monthly and I already have an ok size frozen for when I can access it at “retirement” age. I tried to think of a UK alternative to this but my options only seem to be ISA or pension. Since we already have a pension, I’m guessing we should max our ISA’s and this should be something we do yearly? Finding an extra £20k a year to stash into an ISA (roughly £167 a month each) sounds very challenging!
Baby Step 5 – College
Again this mentions the US way of saving for children. I guess in the UK we just have Children’s saving accounts and Isa’s? Money Saving Expert was a good one to read for this.
I really like the idea of our child being involved in the whole process of saving bit I do think currently she’s a little too young. I think we would probably be looking at an account she can use (save and withdraw) She currently has a piggy bank. We will start introducing pocket money and then move to her own bank account.
The children’s ISA seems a good way to save for her future. Definitely more thought is needed though as there are many options.
Baby Step 6 – Pay off the Home
This is my favorite one! I always love the idea of being able to pay off the mortgage and own our house. We also have big plans for redevelopment which makes more sense to do after we have paid off the mortgage.
The principle behind this one is easy, once you no longer have to pay the mortgage off you ultimately reduce your living expenses. I wonder why you can’t do this one first? It would mean less money is needed in the emergency fund and would make it easier to pay off our non interest business loan.
Dave recommends a few ways to achieve this step:
- Aim to pay an extra “month” each year. He says this means you “reduce your mortgage by four years and nearly $7,000 off the mortgage”
- Just pay $20 a month instead
- Take your lunch to work and use the savings to pay off mortgage.
Baby Step 7 – Give
This one really does sound like fun! Dave encourages you on this last step to live and give like no one else.
Has it helped me
Surprisingly yes. I didn’t think it would as I felt like I have “heard it all before” but I really took notice of this. It really started to make me think about my financial future. I even thought of things that Dave didn’t mention here such as life insurance ect…
Here are my things to work on:
Where are you up to with FIRE?