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Welcome to baby step 1! There’s a full guide to Dave Ramsey here, otherwise, let’s talk step 1!
Amazing, you’ve got to what Dave Ramsey calls baby step 1!
If you’ve ever listened to Dave Ramsey, you’ll have heard him talk about the Emergency Fund you need to build up during baby step 1.
So what exactly is this emergency fund, why do we need it and where is it going to come from?
Is the sound of the car making a strange noise enough to fill you with dread at the thought of the bill? It did for me, too.
Most of us who’ve been in debt and have struggled for money most months know that saving money seems like an impossible task.
When something goes wrong: the car breaks down or the boiler packs up, it’s a given that the money to fix that problem is going to be borrowed from somewhere. This might be an overdraft, a credit card, or parents but certainly when we were in debt, it was a sure thing that the money would need to be borrowed from ‘somewhere’.
If you’re on Dave Ramsey’s baby step 1, you’re going to be spending the time in this step getting your Emergency Fund together. The point of this emergency fund is that you’re not going to be ‘borrowing’ to pay for those emergencies anymore. Things are going to happen. Cars will go wrong, washing machines will break and, in my case, dental fillings will need replacing. But you’re going to have the money to cover them and honestly? It’s an amazing moment when you realise you can cover whatever expense it is, without having to add more debt to the stack you’ve already got.
Dave Ramsey says you need $1000 so of course it’s generally accepted in the UK this simply translates to £1000. Is it enough? It was for us, and if you dip into it as we did a few times, you stop your snowball and get straight back to building up your fund again to £1000.
I suppose whether £1000 is enough to see you through until you’re all but mortgage debt free depends on how quickly you can plough through getting rid of your debts. It should be enough to see off most breakdowns. If it’s not…….read the next part and be honest with yourself!
What IS an emergency? – UK Baby Step 1
Deciding what is, and what isn’t an emergency is quite important in baby step 1. Although it seems like a pretty obvious thing to think about, it’s amazing how you’ll be able to talk yourself into spending money from your fund that you really shouldn’t.
Dave’s rule of thumb is that if you COULD have planned for it (but didn’t) then it’s not a real emergency.
I got a little confused by this part at times as you could potentially plan for just about anything, but it doesn’t mean it’s necessary or realistic to keep cash stashed away for it.
So in order to feel ‘covered’ to the emergencies I knew could cost way more than £1000, I made sure all our insurances were up to date and the lowest premiums they could be.
Debt Snowball or no Debt Snowball, I knew that if my cat needed the vets I’d not blink at the thought of adding debt to the pile, ditto the dog. The house flooding, catching fire, the car being crashed and anything else that could potentially derail us, well, forever, meant I needed to have all insurances up to date. With a fixed monthly premium I knew where we stood should the worst happen.
So for us, with insurances up to date, £1000 was enough.
First off, if you can sell something to get your fund, do it! The faster you get out of this stage the better. Baby steps are about motivation and you need to get onto paying off your debts as fast as you possibly can! If you have nothing to sell however…..
Where is the Emergency Fund going to come from?
You need £1000 and you need it NOW! Yes, I know that might seem impossible right now, but it really isn’t. You’re going to be able to get £1000 together fast, without using a penny of your day to day income at the moment.
You might not have the physical cash in your hand right now, but what you do have, even if you have to sacrifice other things, is TIME. And if you’ve got a little time, you’re going to be able to get your fund together. Don’t have time? Make time.
It took us 2 months to get our fund together. I’ll tell you what I did in a second. At the same time as you’re going to be creating your budget if you haven’t already done it in baby step 0. You’ll no doubt have found savings when you did an audit in baby step 0, but try to make this an everyday part of your life. Could I do this cheaper? or for free? became the question constantly in my head during our debt free journey.
We got our Emergency Fund together in 2 months, and it’s perfectly possible that you can too. It’s not something that’s available to a few people who have the ‘know how’, making money in side hustles in something that ANYONE can do. You’ve got to spend the time picking a few, and then knuckle down and get started.
These posts talk about the exact things that I did to get our fund together. I carried on with a lot of these throughout the time we were paying off our debts, but these are the things I did to make money for our Emergency Fund.
I also had a few part time jobs that used to fit in around the kids and made me some extra money. Do bare in mind that you’ll need to register for these and pay tax accordingly.
If you prefer selling physical ‘things’, these are some of the things that I found sold the best!
Where to keep your emergency fund
We kept our emergency fund in a totally separate account, and didn’t have access to it on a mobile app. That way we couldn’t transfer it quickly for a non emergency while promising ourselves it’d be paid back the following day.
I wouldn’t keep it in cash, that’s just way too tempting. I also wouldn’t tie it up in a 30 day account or anything like that. It might seem like a good idea so you can’t spend it, it sort of defeats the point of having it there for REAL emergencies.
We opened a cash account with another bank to our regular current account, and had to go into the branch to withdraw it. It worked for us!