Confusions, Baby Steps, and Other Personal Financial Strategies You Should Know
With so much conflicting financial advice out there, it can be hard to sort through everything, let alone figure out which one is best for you. Some approaches are outdated, tried and true; others are fashionable, popularized by financial experts from major media platforms. You may have heard of some of these popular strategies, but what do they really mean? We will break it.
boobies
This strategy, named after Vanguard Group founder John Bogle, calls for saving at least 20% of your income, investing early and often, never trying to “time the market”, find a risk profile that is not too high or too low, invest widely low-cost diversified index funds (with a low expense ratio) and stay on course with the ups and downs of the stock market (i.e. don’t sell the minute you feel a bear market).
In his ” Investing with Simplicity ” speech, Bogle said, “Simplicity is the master key to financial success.” Instead of doing extensive research and tracking individual stocks, Bogleheads advocate achieving portfolio diversification by following a simple investment philosophy: building a “lazy” three-fund portfolio that includes a general stock market index fund, a general international stock index fund. , and a general bond market fund (the percentage Bogle recommends should be the equivalent of your age – if you’re 40, allocate 40% of your portfolio to bonds). Then, in addition to periodically rebalancing, set it up, forget about it, and watch your money return over time along with the market.
FIRE (Financial Independence Early Retirement)
You may be a candidate for this aggressive strategy if you 1) have a strong focus on early retirement, 2) have a high income, and 3) have the discipline to invest 50-75% of your income per year. (Goodbye, microbreweries and Starbucks sales.) While the idea behind FIRE isn’t new—it first came from Vicki Robin and Joe Dominguez’s 1992 book Your Money or Your Life —the strategy has gained popularity more recently, thanks to bloggers such as like Peter. Adeni, former software engineerMr. Money Mustache , who retired at 30.
Essentially, FIRE comes down to extreme budgeting, controlled spending, and low-cost investing—living lean and forgoing luxuries in order to invest at least 50% of your income in low-cost index funds. (Instead of the 10-15% of our pre-tax income that experts usually recommend saving for retirement each year.)
However, Adeni wrote on his blog that “Financial independence does not mean the end of your working career, it means “complete freedom”. He also told the Financial Times that “retirement” means different things to people. For some, this may be enough to balance work and personal life by switching to a part-time job or choosing a more lucrative but less paying career.”
50/30/20 rule
This budgeting strategy, popularized by Senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan, is based on dividing your after-tax income into three main categories: 50% needs, 30% wants, and 20% savings. or debt repayment.
In this paradigm, half of your income is allocated to essentials such as rent, mortgage payments, groceries, utilities, and gas. Thirty percent is spent on things like entertainment, personal care, restaurants, shopping, the gym, or vacations. And 20% goes to savings, retirement savings, investments or debt payments. We wrote here about creating a detailed 50/30/20 budget .
As an easier alternative, some people recommend simplifying this to the 80/20 rule , which automatically takes 20% of your paycheck and puts it into savings, leaving you free to do whatever you want with the remaining 80%. (This only works if you securely take care of all your basic expenses before spending on entertainment.)
Dave Ramsey’s 7 Baby Steps
No financial strategy review would be complete without a mention of Dave Ramsey. Love him or hate him, his reach and influence as a best-selling author and radio show host cannot be denied. Here are Ramsey’s 7 Baby Steps to a Debt-Free Life:
1. Save $1,000 in Starter Fund for Contingency.
2. Pay off debt (other than your house) using Ramsey’s controversial ” snowball method “, which is to attack the smallest debt first (regardless of interest rates on larger amounts of debt).
3. Build your start-up fund for emergencies, enough to cover expenses for a period of 3 to 6 months.
4. Invest 15% of your income in your employer’s 401(k) plan and Roth retirement accounts.
5. Save “as much as you can” for your child’s college using Educational Savings Accounts (ESA) and 529 Tax Relief Savings Plans.
6. Pay off your mortgage.
7. Create wealth and donate.
Speed banking
This somewhat risky approach, also known as the “HELOC strategy,” involves using a line of credit—usually a home equity line of credit (HELOC)—as a savings or checking account to pay your monthly expenses and repay the principal of the loan. , usually a mortgage. According to Money , “The basic idea is to strategically allocate your money across various debt products to minimize interest payments and maximize the amount that will go toward paying off the principal on your mortgage.”
This strategy will only work if you are spending less than you earn, have enough disposable income to pay the principal (and not just the interest) on your mortgage or other loan each month, and you can trust yourself to manage your debt and excess debt responsibly. cash flows. (This approach is not suitable for people who spend more than they earn and go into debt all the time.)
Some argue that with low mortgage rates, a more profitable approach is to use HELOC to pay your monthly expenses and then invest your disposable income in the stock market and other retirement accounts.
Warren Buffett’s investing style
While Buffett’s investment board doesn’t have a catchy name like the Buffettheads, with a net worth of $112 billion, when the Oracle of Omaha speaks, attention needs to be paid. One of Berkshire Hathaway’s most famous aphorisms is: “Rule #1: Never lose money. Rule #2: Never forget rule #1.” The investment legend lives a frugal lifestyle (he is known to still live in the $31,000 house he bought in 1958) and ” buys quality items at discount prices “. Buffett advocates buying high-value investments at low prices, forming strong money habits , always having cash, and avoiding debt (especially credit card debt).
Like Bogle, Buffett believes in index funds. In a 2013 letter to Berkshire Hathaway shareholders, he wrote, “Put 10% of your cash into short-term government bonds and 90% into the very inexpensive S&P 500 index fund.”
At the very least, this is what unites all these different philosophies.