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

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

These financial strategies can encourage people to deal with their financial situations and get an education, but generic advice can sometimes be more harmful than helpful when applied to an individual’s unique circumstances.

“They give advice to the masses, so you have to take them with a grain of salt,” says Christopher Swan, founder and chief financial planner of Swan Capital. “General advice helps people get started. I agree with a client who is a Dave Ramsey fanatic because he has done things to address his debts and make things better. The downside is that those definitive rules aren’t always the best. “

The following popular personal finance strategies include nuggets of wisdom and some drawbacks, according to experts. Read on to see which one might best fit your situation.

Financial independence in early retirement (FIRE)

The FIRE movement throws the traditional budget out the window. In its place, supporters of the movement practice extreme savings and investments with the aim of retiring much earlier than normal.

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

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

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

50/30/20 Rule

The 50/30/20 rule is a budgeting strategy that suggests allocating 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. In order to follow this rule, she plans to count expenses such as rent, utilities, transportation, minimum loan payments, and groceries as necessities. So, keep track of all other expenses and aim not to spend more than 30% of your after-tax income on desires. The rest can go to savings for retirement, college, or other financial goals.

This strategy is best for people who need wiggle room in their budgets and may have struggled with maintaining a budget in the past. However, it doesn’t take into account a person’s age and closeness to retirement, so this strategy may be best for those new to personal finance.

The 7 small steps of Dave Ramsey

Dave Ramsey is known for his seven small steps, a series of steps aimed at helping families build a strong financial foundation.

Ramsey’s baby steps are:

  1. Save $ 1,000 for your initial emergency fund.
  2. Pay off all debt (except the home) using the debt snowball strategy.
  3. Save three to six months of expenses in a fully funded emergency fund.
  4. Invest 15% of your family income in retirement.
  5. Save for your children’s college fund.
  6. Pay your house in advance.
  7. Build wealth and give.

Ramsey is an advocate of the debt snowball, 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 debt with the highest interest rate first, regardless of the size of the principal.

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

Bogleheads

Bogleheads, named in honor of Vanguard Group founder John Bogle, supports an investment strategy that is based on low-cost investment vehicles and diversification.

Many of these investment principles align with those that Andrew Dressel, a certified financial planner at Abundo Wealth, practices working with clients, but a do-it-yourself investment strategy can only go that far for individuals.

“We believe in low-cost, well-diversified investments, which is the framework that movement is about. Our view is that it is great to have a low cost, but diversification into a portfolio of two or three funds may not be enough. There are large parts of the market excluded from this, “he says.

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

Overall, Dressel says this and other similar financial movements can be great tools to engage and interest people in managing their money wisely.

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

Speed ​​bank

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

This strategy requires people to use a line of credit, usually a home equity line of credit, to pay for daily expenses in lieu of a checking account. The idea behind speed banking is that if you spread your money across various debt products, such as a HELOC, you will minimize interest payments and hopefully maximize mortgage principal payments to pay off your mortgage more. quickly.

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

All of these strategies can be powerful tools for sparking interest in personal finance, but people also need to beware of online scams or simply developing unrealistic expectations.

“Finance is not taught much in schools. People pick it up over time, “says Bill Holliday, certified financial planner at AIO Financial.” You hear success stories from Bitcoin millionaires and various headline-catching news. People come with very different expectations and ideas and the best we can do it’s educating and guiding. But some people, that’s not what they want: they want to beat the market or get these big returns. All you can do is explain and describe the limits. “

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