From debts to financial independence - what are the milestones?

adamdevon

Hi,

I've known that MSE is a big community, and lurked a bit previously, but this is my first post as my wife and I really try to get on top of this.

I've got some debts from a few years of living beyond my means, but I earn a reasonable amount and it should be manageable. As I think about the journey from debts to financial security and even working towards financial independence, I wanted to get some thoughts on what would be the milestones along the way.

I've just found some of the material by Dave Ramsey and see how the idea of baby steps is useful for his U.S. viewer base, but I'm not sure how applicable it is here.

I'm thinking the following steps:

Step 1) Ensure you have credit facility or emergency fund (if I have a credit card facility, I don't see why I should prioritise an emergency fund over paying debts) of one month expenses.
Step 2) Pay all debts including student loan (rationale being that for me I pay a good bit over £100 per month so it feels like a real doubt and I'd see the benefit if that was cleared).
Step 3) emergency fund, but I'm not sure how much. I'm in a secure job with a good company, and I could find employment easily, so I'm not sure if 3 months is really necessary.
Step 4) Begin saving X percentage for retirement (no idea what this should look like? Any thoughts?
Step 5) Save for kids future - education etc (how much? Is this really important?
Step 6) Pay off house?

I'm wanting to map out the steps, but lots of the similar information seems geared to US readers - maxing out Roth and 401k etc. I'm hoping you might share how you map things out?

Many thanks,:beer:

Turningacorner_2

I think it's personal for everyone. I've got 3 steps at the minute.

1. Work within my budget and use a zero budgeting system to learn to live within my means
2. Pay off each debt in order that is going to cost me the least
3. Have some savings and emergency funds, to build resilience. I have stacks of available credit, but I don't want to fall back on it. The next time I use a credit card, I want it to be through choice for some sort of benefit

Not sure if I answered your question. Welcome to the forums!

Playing_with_Fire_2

Welcome, Dave Ramsey's steps are a great place to start, but there are some things he says that aren't great. In particular, his advice on investing is IMO, awful and self serving.

This is what I would suggest as a UK alternative:

Step 1) A credit card is fine for most emergencies, but there are some costs that you can't pay with a credit card, and taking out cash on a credit card is offensively expensive. Think about the step ahead, how much money could you raise in a month if you cut back on expenses and only made the minimum repayments on your debts, would this be enough for a car repair or surprise energy bill?. Also, if you would pay fees on an overdraft, then consider having a buffer of a few hundred pounds so that you don't get stung by fees after an adventurous debt overpayment.

Step 2) Pay all debts[STRIKE] including student loan (rationale being that for me I pay a good bit over £100 per month so it feels like a real doubt and I'd see the benefit if that was cleared). [/STRIKE].
- Choose between the highest rate or the smallest loan, Dave will tell you to pay off the smallest because it makes you feel better, but you will pay less interest by paying off the highest interest rate first. Check out the snowballing website.
- Pay the minimum payment on everything else apart from your primary target account, when it is done then role that overpayment and minimum payment into the next target account.
- If you have difficulty with the minimum payments then look at an IVA/DMP etc

Step 3) emergency fund, but I'm not sure how much. I'm in a secure job with a good company, and I could find employment easily, so I'm not sure if 3 months is really necessary.
- This is a personal decision, but three months' expenses (not wages) is a great idea even if you could get another job easily, because a new job could take time (maybe references take a while to clear, or the HR person is on holiday/parental leave, you could be involved in an accident and not be able to job hunt?).
- Hold this in a separate savings (can be a high interest current) account, or a Cash ISA

Step 4) Begin saving X percentage for retirement (no idea what this should look like? Any thoughts?
- The biggest of: half your age in % of gross income when you start (ie 15% if you are 30 years old), get the maximum contribution from your employer, all your higher rate tax pay, what you spend going on holiday per year, what you spend on your car per year, and, if you are within five years of being able to access the money then every penny you can afford.
- Later on then you can calculate how much you want to retire on, how old you want to be when you retire and then decide how much to contribute.
- If your work provides a pension scheme then start with this, otherwise look for personal pensions

Step 5) Save for kids future - education etc (how much? Is this really important?
- Much less important in the UK. If you don't have kids and plan to have kids then saving for child expenses and reduced wages during maternity/adoption leave is a good idea (target 12 months' expenses). If you want private school then you need to save mega bucks.

Step 6) Pay off house?
- If you have a low interest rate mortgage and a steady job then you may be better off investing the money rather than paying it off. This is a really personal decision.

7) Invest for the future and for wealth. Read Monevator, get a S&S ISA and come over to the Savings and Investments Board. Do not follow Dave's investment advice because it is horrible.

8) Pay off student loan if you really want to.
- depending on which cohort you are in, your payments will stop if you stop work and will be reduced to nothing at some point. If there is any chance that you will not pay everything back before that then you might be wasting money. Fine if you choose to make a different decision, but read Martin's article on this.

And please keep us updated!

Mort

Hi adamdevon,

For me it's all about setting a budget, this boils down to one that you can live with. It has to cover your debts, regular bills and living expenses. Ideally it should also allow you to save for an emergency fund.
As long as your are not in debt crisis snowballing debts is a good way to go, also small monthly overpayments on a mortgage can reap large rewards.
You need to consider how safe your future income is. Can you get by for 3 months on just one wage? Consider how safe your jobs are, do you both work for the same firm.

There's lots to consider but just to repeat it comes down to budgeting.