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 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 address their financial situations and get educated, but generalized advice can sometimes be more harmful than helpful when applied to an individual’s unique circumstances.
“They’re giving advice to the masses, so you’ve got to take it with a grain of salt,” says Christopher Swan, founder and lead financial planner at Swan Capital. “The general advice helps people get started. I’m OK with sitting down with a client who’s a Dave Ramsey fanatic because they’ve done things to address their debt and make things better. The downside is that those definitive rules aren’t always what’s best.”
The following popular personal finance strategies include nuggets of wisdom as well as some drawbacks, according to experts. Keep reading to see which might best apply to your situation.
Financial Independence Retire Early (FIRE)
The FIRE movement throws traditional budgeting out the window. In its place, advocates of the movement practice extreme saving and investing with the goal of retiring much earlier than is typical.
The idea for FIRE came from the 1992 book “Your Money or Your Life” by Vicki Robin and Joe Dominguez, but the movement 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 willing to invest much of the remainder into a portfolio that will become their primary source of income in retirement.
This strategy is best for individuals with a large income – 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 they be motivated by interest in a particular hobby or time with family, to sustain them through the saving process.
The 50/30/20 rule is a budgeting strategy that suggests allocating your after-tax income to 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 Sen. Elizabeth Warren and her daughter, Amelia Warren Tyagi. For the purposes of following this rule, plan on counting expenses like rent, utilities, transportation, minimum loan payments and groceries as a need. Then, keep track of all other spending and aim to spend no more than 30% of your after-tax income on wants. The rest can go to saving for retirement, college or other financial goals.
This strategy is best for individuals who need to wiggle room in their budgets and may have struggled with maintaining a budget in the past. It doesn’t, however, account for a person’s age and nearness to retirement, so this strategy may be best for those who are personal finance beginners.
Dave Ramsey’s 7 Baby Steps
Dave Ramsey is well known for his seven baby steps, a series of steps aimed at helping families build a solid financial foundation.
Ramsey’s baby steps are:
- Save $1,000 for your starter 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 home early.
- Build wealth and give.
Ramsey is an advocate of the debt snowball, a personal finance strategy for debt repayment in which individuals pay down the smallest debt first regardless of its interest rate. Others advocate for a debt avalanche method, in which individuals pay down the debt with the largest interest rate first, regardless of the principal’s size.
The seven baby steps are best for individuals who have a lot of debt and are new to financial planning.
Bogleheads, so named after Vanguard Group founder John Bogle, advocate an investing strategy that relies on low-cost investment vehicles and diversification.
Many of these investing principles are in line with those that Andrew Dressel, certified financial planner at Abundo Wealth, practices in 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 of what that movement is about. Our take on it is that it’s great to have the low cost, but the diversification in a two- or three-fund portfolio might not be enough. There are big parts of the market left out of that,” he says.
The Bogleheads’ investing strategy might be a good fit for you if you’re looking for a drama-free method of investing – so long as you have the self-control to stick with your investing strategy amid the market’s ups and downs.
On the whole, Dressel says this and other similar finance movements 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 that people understand these aren’t hard and fast rules – these are guidelines.”
Velocity banking is a money management strategy that’s gained some 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 in place of a checking account. The idea behind velocity banking is that if you spread your money across various 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 individuals 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 to spark interest in personal finance, but individuals must also beware of online scams or simply developing unrealistic expectations.
“Finance isn’t taught much in schools. People pick it up 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 in with vastly 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 great returns. All you can do is explain and describe the limitations.”