Dave Ramsey UK Baby Step 3

Welcome to baby step 3! There’s a full guide to Dave Ramsey here, otherwise, let’s talk step 3!

It’s a great feeling, isn’t it? You’ve finally paid off all your debts and have reached the Dave Ramsey UK baby step 3.

This step, for us, was hard. You’re debt free. If you’re anything like we were, you’re (rightly) pretty proud of where you’ve got to and feel like a treat would not be undeserved!

Dave say’s not :)

In true Dave Ramsey style I did in fact not treat us, except to a shiny new cash ISA where we stockpiled cash like it was going out of fashion! I’ve got to say, it did nothing to stop what developed into urges like nothing I’ve known to go and book a holiday/buy a car/laptop. You get the idea, but stay strong. Your fully funded emergency fund is going to let you sleep like a baby. Seriously, nothing financial will phase you when you know you could be out of work for 3-6 months and not financially drown.

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How to budget money

So the big question is….how much should you have in your emergency fund?

The answer to this question is going to be unique to everyone pretty much. Some questions to ask yourself to get a realistic picture are:

  • How secure is your job? Is your company established and there doesn’t appear to be less of a need for your role? Can you see your role not existing soon?
  • Do you have a redundancy package? Would you get some sort of a payout if you were made redundant?
  • Is your role on a contract? Are you able to guarantee work after your contract ends? It’s likely the answer to this is no, in which case you should have a bigger emergency fund than others.

Dave Ramsey suggests 3-6 months of emergency fund and I think this is reasonable. If you happen to have a particularly good redundancy package you could go for 3 months expenses.

The rest of us? 6 months is really where you want to aim for.

This is scary. At least it was for us.

Most (all?) of my adult life I’ve been in debt of some sort. I’ve never had any savings, so the thought of saving up SIX MONTHS worth of salary was huge. BUT…and I think this is really important, it’s 6 months of savings that would literally ensure you ate and had a roof over your head, rather than 6 months of living as you are now.

This is NOT the time to be including city breaks in your monthly budget or thinking about upgrading your car. This is the Bare Bones of expenses.

Use our budgeting sheet here to figure out what the VERY least you could survive the month on would be. For us, it was about half our monthly income (remember you’ve got no debts to repay now!).

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Hopefully after you’ve done the Bare Bones budget sheet, you’ll see you need quite a bit less to live on than you might have thought.

How long does baby step 3 take?

This is a bit of a how longs a piece of string question. The answer is that it’s as fast as you are. If your motivation is waning a little by the time you’ve got here, I’d recommend breaking this stage down into bite size pieces!

In the US, this fund is crazily important because you have to pay your own medical costs, or at least your contribution (or deductible) before your health insurance kicks in. We are super lucky not to have to worry about this in the UK, and honestly, it takes a bit of pressure off to build the emergency fund in record time.

Of course I’m not for a second saying that it’s not equally as important to have a rainy day fund to fall back on if you happen to be in the UK, because it is. I’m just saying that your health won’t be one of the things you need to worry about paying for.

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We definitely didn’t feel as much pressure to get our emergency fund complete as we did to clear our debts in baby step 2. I think that’s because once you decide to get rid of your debts, you’ve started to see them for what they are: a complete drain on your finances. So you want them gone ASAP and the emergency fund just doesn’t feel like it has the same sense of urgency.

That said, we did get there. And when we did, it was an amazing feeling to FINALLY have savings for once in our grown up adult married life!

Have you got to Baby Step 3?

Let me know your thoughts on making the transition from baby step 2 to baby step 3. I’d love to compare notes!

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