Bogleheads, Baby Steps, and Other Personal Financial Strategies You Should Know

Bogleheads, Baby Steps, and Other Personal Financial Strategies You Should Know
Photo: RojaninSri, Shutterstock

With so much conflicting financial advice available, it can be hard to keep it all straight, much less figure out which one is best for you. Some approaches are old-fashioned, tried and true; others are trendy — popularised by financial experts with large media platforms. You may have heard of some of these buzzed-about strategies, but what do they actually mean? We’ll break it down.

Bogleheads

Named after Vanguard Group founder John Bogle, this strategy advocates for saving at least 20% of your income, investing early and often, never trying to “time the market,” finding a risk profile that is not too high or too low, investing in broadly diversified low-cost (low expense ratio) index funds, and staying the course through the stock market’s ups and downs (i.e., not selling the minute you smell a bear market).

In his speech “Investing with Simplicity” Bogle said, “Simplicity is the master key to financial success.” Rather than doing extensive research on and tracking of individual stocks, Bogleheads advocate achieving portfolio diversification by following a simple investing philosophy: the creation of a three-fund “lazy” portfolio that includes a total stock market index fund, a total international stock index fund, and a total bond market fund (a percentage that Bogle recommends should be equivalent to your age — if you’re 40, allocate 40% of your portfolio to bonds). Then, outside of periodic rebalancing, set it, forget it, and watch your money produce returns with the market over time.

FIRE (Financial Independence Retire Early)

You may be a candidate for this aggressive strategy if you 1) place a high priority on retiring early 2) earn a high income and 3) have the discipline to invest 50-75% of your income yearly. (Bye-bye, microbrews and Starbucks runs.) While the idea behind FIRE is not new — it first came from the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez — the strategy gained popularity more recently courtesy of bloggers like Peter Adeney, the former software engineer behind Mr. Money Mustache, who retired at age 30.

Essentially, FIRE comes down to extreme budgeting, controlled spending, and low-cost investing — living frugally and cutting out luxuries in order to put a minimum of 50% of your income into inexpensive index funds. (Rather than the 10-15% of our pre-tax income that experts usually recommend we put towards retirement yearly.)

Adeney wrote on his blog, however, 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, it could be saving enough to obtain a greater work/life balance by switching to part-time work, or choosing a career that is more rewarding but lower paid.”

50/30/20 Rule

This budgeting strategy, popularised by Sen. Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan hinges on funnelling your after-tax income to three main categories: 50% on needs, 30% on wants, and 20% to savings or paying off debt.

In this paradigm, half your income is allocated to essentials such as rent, mortgage payments, groceries, utilities, and petrol. Thirty per cent goes towards things like entertainment, self-care, restaurants, shopping, the gym, or vacations. And 20% is funneled into savings, retirement, investment, or debt payments. We’ve written here about creating a detailed 50/30/20 budget.

As a simpler alternative, some recommend simplifying this to an “80/20″ rule that automatically withdraws 20% of your paycheck and funnels it into savings, leaving you free to do what you want with the remaining 80%. (This only works if you’re reliable in taking care of all your essential expenditures before spending on entertainment.)

Velocity banking

Also known as the “HELOC strategy,” this somewhat risky approach involves using a line of credit — typically a home equity line of credit (HELOC) — as a savings or checking account to pay for your monthly expenses and make principal payments on a loan, usually a mortgage. According to Money, “The basic idea is to strategically spread your money across different debt products in order to minimise interest payments and maximise the amount going to pay down your mortgage principal.”

This strategy will only work when you spend less than you earn, have sufficient disposable income to make monthly principal (not just interest) payments on your mortgage or other loan — and you can trust yourself to manage debt and excess cash flow responsibly. (This approach is not for people who have a track record of spending more than they earn and wracking up evermore debt.)

Some argue that with mortgage interests rates being low, a more lucrative approach is to use the HELOC to pay for your monthly expenses, then investing your disposable income in the stock market and other retirement accounts.

Warren Buffett’s style of investing

While Buffett’s investing advice doesn’t have a catchy name like Buffettheads, with a net worth of $US112 ($155) billion, when the Oracle of Omaha talks, attention must be paid. One of the Berkshire Hathaway owner’s most famous aphorisms is, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” The investing legend is all about living modestly (he famously still lives in the $US31,000 ($43,034) house he bought in 1958) and “buying quality merchandise when it’s marked down.” Buffett preaches purchasing high value investments at low prices, building strong money habits, always having cash available, and avoiding debt (especially credit card debt).

And like Bogle, Buffett believes in index funds. In a 2013 letter to Berkshire Hathaway shareholders, he wrote, “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”

At least that’s one thing all these varying philosophies have in common.

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