Financial movements like FIRE, fast banking, and strategies promoted by personal finance influencers like Dave Ramsey and Suze Orman often play a significant 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 people to address their financial situations and educate themselves, but blanket advice can sometimes do more harm than help when applied to a person’s unique circumstances.
“They’re giving advice to the masses, so 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 okay with sitting down with a client who is a fan of Dave Ramsey because he has done things to address his debt and make things better. The downside is that those definitive rules are not always the best.”
The following popular personal finance strategies include nuggets of wisdom as well as some drawbacks, experts say. Read on to see which might apply best to your situation.
Financial Independence Early Retirement (FIRE)
The FIRE movement throws the traditional budget out the window. Instead, proponents of the movement practice extreme saving and investing with the goal of retiring much earlier than usual.
The idea for FIRE grew out of 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 people 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 when they retire.
This strategy is best for high earners, typically six figures, who have the self-control and dedication to save up to 70% of their income. It’s also best that FIRE practitioners have a strong desire to retire early, whether motivated by interest in a particular hobby or time with family, to sustain them through the savings process.
The 50/30/20 rule is a budgeting strategy that suggests allocating your after-tax income into three categories: 50% needs, 30% wants, and 20% savings or 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 purposes of following this rule, plan to count expenses like rent, utilities, transportation, minimum loan payments, and food as a necessity. Then keep track of all other expenses and try to spend no more than 30% of your after-tax income on wants. The rest can go toward saving for retirement, college, or other financial goals.
This strategy is best for people who need wiggle room in their budgets and may have had trouble sticking to a budget in the past. However, it doesn’t take into account a person’s age or approaching retirement, so this strategy may be best for those new to personal finance.
Dave Ramsey’s 7 Baby Steps
Dave Ramsey is well known for his Seven Little Steps, a series of steps intended to help families build a solid financial foundation.
Ramsey’s baby steps are:
- Save $1,000 for your initial emergency fund.
- Pay off all debt (except the house) using the debt snowball strategy.
- Save three to six months of expenses in a fully funded emergency fund.
- Invest 15% of your household income in retirement.
- Save for your children’s college fund.
- Pay off your house early.
- Generate wealth and give.
Ramsey is an advocate of debt snowballing, a personal finance strategy for paying off debt in which people pay off the smallest debt first, regardless of its interest rate. Others advocate a debt avalanche method, in which people pay off the debt with the highest interest rate first, regardless of the size of the principal.
The seven baby steps are best for people who have a lot of debt and are new to financial planning.
Bogleheads, named for Vanguard Group founder John Bogle, advocate an investment strategy based on low-cost, diversified investment vehicles.
Many of these investment principles are in line with what Abundo Wealth Certified Financial Planner Andrew Dressel practices when working with clients, but a DIY investment strategy can only go so far for people.
“We believe in low-cost, well-diversified investments, which is the framework of what that movement is about. Our opinion is that it is great to have a low cost, but diversification in a portfolio of two or three funds may not be enough. There are large parts of the market that are left out of that,” he says.
The Bogleheads investment strategy could be a good option for you if you are looking for a drama-free investment method, as long as you have the self-control to maintain your investment strategy amid market ups and downs.
Overall, Dressel says this and similar financial 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 been turning heads 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 everyday expenses instead of a checking account. The idea behind speed banking is that if you spread your money across multiple debt products, like a HELOC, you will minimize interest payments and hopefully maximize your mortgage principal payments to pay off your mortgage faster.
This strategy is best for people who can spend less than they earn, have achieved career stability, and are comfortable taking the necessary risks associated with fast banking.
All of these strategies can be powerful tools for sparking interest in personal finance, but people should also be wary of online scams or simply developing unrealistic expectations.
“Finance is not taught much in schools. People learn it over time,” says Bill Holliday, certified financial planner at AIO Financial. “You hear success stories of Bitcoin millionaires and different headline-grabbing news. People come with very different expectations and ideas, and the best we can do is educate and guide. But some people, that’s not what they want, they want to beat the market or have these big returns. All you can do is explain and describe the limitations.”