FIRE, 50/30/20, Bogleheads and Ramsey’s Baby Steps

Financial movements like FIRE, velocity banking, and strategies promoted by personal finance influencers like Dave Ramsey and Suze Orman often play an outsized role in shaping families’ financial strategies. But this advice is a double-edged sword in the eyes of many professional financial planners.

These financial strategies can encourage individuals to face their financial situation and become informed, but general advice can sometimes be more harmful than helpful when applied to an individual’s particular situation.

“They give advice to the masses, so you have to take it with a grain of salt,” says Christopher Swan, founder and chief financial planner at Swan Capital. “General advice helps people get started. I’m fine with sitting down with a client who’s a Dave Ramsey fanatic because he’s done things to settle his debt and make things better. The downside is that these final rules aren’t always the best.

The following popular personal finance strategies include nuggets of wisdom as well as some downsides, according to experts. Keep reading to see which might best apply to your situation.

The FIRE movement is throwing traditional budgeting out the window. In its place, proponents of the movement practice extreme saving and investing with the aim of retiring much earlier than usual.

The idea for FIRE came from the 1992 book “Your Money or Your Life” by Vicki Robin and Joe Dominguez, but the movement has gained momentum in recent years, thanks to bloggers like Mr. Money Mustache, a site run by software engineer Peter Adeney, who retired at age 30.

This strategy requires individuals to spend a small percentage of their income and be prepared to invest much of the rest in a portfolio that will become their main source of retirement income.

This strategy is best for people with large incomes – usually in the six figures – who have the self-control and dedication to save up to 70% of their income. It is also best for FIRE practitioners to have a strong desire to retire early, whether motivated by an interest in a particular hobby or time spent with family, to support them through the savings process. .

The 50/30/20 rule is a budgeting strategy that suggests dividing your after-tax income into three categories: 50% for needs, 30% for wants, and 20% for saving or paying off debt.

This spending rule originated in the 2005 book “All Your Worth: The Ultimate Lifetime Money Plan” by Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi. For the purposes of following this rule, plan to count expenses like rent, utilities, transportation, minimum loan payments, and groceries as a need. Next, keep track of all other expenses and aim to spend no more than 30% of your after-tax income on wants. The rest can be used to save for retirement, college or other financial goals.

This strategy is great for people who need some wiggle room in their budget and may have struggled to maintain a budget in the past. However, this does not take into account a person’s age and how close they are to retirement, so this strategy may be best for those new to personal finance.

Dave Ramsey is well known for his Seven Baby Steps, a series of steps aimed at helping families build a strong financial foundation.

Ramsey’s baby steps are:

Ramsey is an advocate of debt snowballing, a personal finance strategy for debt repayment in which individuals pay off the smallest debt first, regardless of its interest rate. Others advocate a debt avalanche method, in which individuals pay off the debt first with the highest interest rate, regardless of the size of the principal.

The seven small steps are best for people with a lot of debt who are new to financial planning.

Bogleheads, named after Vanguard Group founder John Bogle, advocate an investment strategy that relies on low-cost investment vehicles and diversification.

Many of these investing principles are consistent with those that Andrew Dressel, Certified Financial Planner at Abundo Wealth, practices working with clients, but a DIY investment strategy can only go so far for individuals.

“We believe in low-cost, well-diversified investments, which is the framework for this movement. Our view is that it’s great to have a low cost, but diversification across a portfolio of two or three funds might not be enough. There are big parts of the market being left out,” he says.

The Bogleheads investment strategy might be right for you if you are looking for a drama-free method of investing – as long as you have the self-control to stick to your investment strategy amidst the ups and downs of the market .

Overall, Dressel says this and other similar money moves can be great tools to get people engaged and interested in managing their money wisely.

“It opens up the conversation,” he says, “But it’s important for people to understand that these aren’t hard and fast rules — they’re guidelines.”

Velocity banking is a money management strategy that has gained attention in recent years. But it can be very risky, so proceed with caution.

This strategy requires individuals to use a line of credit, usually a home equity line of credit, to pay for day-to-day expenses instead of a checking account. The idea behind velocity banking is that if you spread your money across various debt products, like a HELOC, you’ll minimize interest payments and hopefully maximize your mortgage principal payments to pay off your mortgage longer. rapidly.

This strategy is ideal for people who can spend less than they earn, have achieved career stability, and are comfortable taking the necessary risks associated with velocity banking.

All of these strategies can be powerful tools for sparking interest in personal finance, but individuals should also be wary of online scams or simply developing unrealistic expectations.

“Finance is not taught much in schools. People realize that over time,” says Bill Holliday, Certified Financial Planner at AIO Financial. “You hear bitcoin millionaire success stories and different headline news. People come in with very different expectations and ideas, and the best we can do is educate and guide them. But some people, that’s not what they want – they want to beat the market or get those great returns. All you can do is explain and describe the boundaries.