For many personal finance nerds, and I dare say, even for some regular, everyday people, the world of personal finance is so exciting, especially soon after you experience your light bulb moment. What happens next is that you begin to consume gobs of information on the personal finance and investing world. Blogs. Magazines. Online forums. Books. Podcasts. You get hit with high-yield knowledge from every angle. After a while, you will realize that you get conflicting information about certain topics in personal finance from different sources and finance experts.
Like I’ve argued before, the sum total of personal finance is that all your money behaviors and actions should strive to push your net worth in the upward trajectory. For different people, the pace of that upward trajectory will be different. And that is okay. Diversity in opinions is also okay. It is called Personal Finance for a reason: it is all personalized. So you find what works best for you and apply it to your situation as long as it keeps your net worth in that upward trajectory.
Here’s a sampling of the differences in opinion in certain personal finance topics and I’ll share what we do for our household.
#1. Emergency Funds
Many people in the personal finance world recommend keeping an emergency fund. Now, the commonest recommendation is to keep 3-6 months of your monthly expenses in your EF. But a popular finance expert, Suze Orman, recommends saving 8-12 months of your living expenses in your EF. I have also read of people keeping 2 years worth of living expenses in their emergency funds.
On the other end of the spectrum, there is a handful of finance bloggers and experts who keep no emergency funds at all. The blogger at EarlyRetirementNow argues against the traditional emergency fund and does not keep one himself. He insists that if he gets into an emergency, his plan would be a float on his credit cards, his next paycheck, a $100,000 HELOC or tapping his investments.
So where do you keep it? Most recommend to keep it in a savings account or money market account. A few others recommend to invest it and a few others recommend a hybrid system where you invest some of it and put the rest in a CD or savings account.
What we do: For us, we keep an emergency fund of about 5 months of living expenses in an online savings account (Ally Bank).
#2. Life Insurance
To shore up your defenses, having a life insurance is a worthwhile thing that almost all personal finance experts recommend. While most say to get a Term Life Insurance (20-30 years policy), a few others (mostly the insurance salespeople themselves) recommend Whole Life Insurance (or its cousins like Universal Life Insurance, Indexed Universal Life Insurance etc). But when you reach FIRE status, you actually may not need a life insurance anymore.
Also, how much life insurance do you get? 10x your annual income? 20x your annual income? 10-20x your annual income plus the balance on your mortgage if you have one? Opinions differ.
What we do: When we bought our insurance few years ago, we got a 20-year Term Life policy that was each equivalent to our 10x annual income. When that policy expires, we should be self insured and have no plans of purchasing another life insurance
There are many different styles of investing. People like Dave Ramsey swear by active mutual funds that will likely beat the market. Over at the Bogleheads, they always ridicule this approach and recommend using mostly Index mutual funds when possible, and to always watch the myriad costs of investing as you only get what you don’t pay for.
And there are those that use only dividend stock investing and believe it’s the best strategy for investing. Jason Fieber is one such guy and claims he has reached financial independence and retired at age 33 by building a FIRE fund comprising 119 dividend-paying stocks in his brokerage account. He blogs at mrfreeat33.com.
Traditionally, most people invest in stocks and bonds (via single stocks and bonds or via mutual funds) and then rental real estate. Some invest in a combination of both asset classes, while some are only invested in real estate. Different boats for different people.
On asset allocation, some individuals are 100% in stocks (like Dave Ramsey and his apostles) or 100% in bonds or CDs, while the majority are somewhere in the middle with a variety of mixtures between stocks and bonds
What we do: We keep it simple. We have a 80% stock/20% bond asset allocation. And 100% of our mutual funds are in simple, Total Market Index Funds.
One of the corner stones of personal finance is the B word. It’s created a lot of controversies. For many people, they feel a budget is very constraining on them. Others feel the budget just gives them the freedom to do whatever they want with their money. Some budget monthly, some quarterly and even a few others, annually. A sizable number just track their expenses, while a few others just save first, invest a set amount monthly and just spend the rest. Different flavors.
What we do: We create a monthly spending plan and track most of our finances. But of course, we pay ourselves first too with our savings.
#5. Mortgage Types
The commonest conventional mortgage types in the US is the 15-year mortgage and the 30-year mortgage. Of course, there are other variations of mortgage like the 20-year mortgage, the 10-year mortgage or even the Adjustable rate mortgage, ARM (typically the 5-year ARM). There are many arguments about the 15 vs 30 year mortgages and each camp swears by each type and why it’s superior.
Typically the 15-year mortgage will net you a cheaper interest rate (about 0.5-1.0% lower than the 30-year mortgage rate) for the life of the loan. The 30-year mortgage will result in cheaper monthly payments (though it eventually costs you a lot more than the 15 year at the end of the loan) so you can use the extra cash to handle your other financial situations.
What we do: We went with the 15-year mortgage and kept it simple. I felt if we couldn’t afford a 15-year mortgage, we weren’t ready to buy a house yet
#6. Paying Off The Mortgage
Some of the most contentious discussions in the personal finance blogosphere is whether to pay off your mortgage early (by making extra payments to the principal) or to let it run to the end of its term. There seems to be no consensus at all on this topic. Indeed, I started one of the longest threads on Bogleheads on a question related to this topic. After several years running, people are still strongly divided on it.
Proponents of paying off the mortgage like the peace of mind it gives and they can then invest their mortgage payments after it’s gone. Opponents question the rationale to pay off a stable, low-interest loan, when you can use that extra cash to invest in the stock market and potentially make more.
What we do: We belong to the pay off your mortgage as early as possible camp. I hate ALL debt and a debt-free life is more in-tune with my personality. So we’re on a mission to obliterate our mortgage as soon as possible
#7. Co-mingling Finances In Marriage
There are variations in what people do. Some believe that once you’re married, you should join all your finances together. So, joint bank accounts, joint investment accounts, both names on the mortgage, both names on all properties etc. After all, in marriage, they say two has become one. They believe that since money and money troubles is one of the commonest causes of divorce in America, it pays to be on the same page and have everything joint.
However you find a number of personal finance experts that suggest couples should keep things separate. While a few others advice a hybrid system where you join certain accounts together and keep others separate. They insist that some couples need to find that sanity where they have an account to themselves so they can do whatever they want without the micromanaging by the other spouse. Some even have a joint account for household expenses and each spouse contributes to it.
What we do: We have joint accounts, though we have individual checking accounts that serve as conduit for our paychecks. However we share the passwords to all our financial accounts
#8. Buying Cars
Some buy only new cars. Others buy fairly-used cars. Some pay cash for their cars. Others use financing, including 0% financing. Each camp will swear by their own ways. Those who buy new say they can be sure of what they’re getting and will keep the car for a long time and maintain it well.
Those who buy used say they don’t want to take the depreciation hit on new cars as a car is a depreciating asset (once you drive off the lot after buying a new car, it loses almost 10%).
What we do: Currently, what we do is that we buy our cars with cash. Also we buy fairly-used (2-4 years old) after it has taken the depreciation hit, then we drive it for about 8-10 years. It is very possible that in the future, we can buy cars brand new. We’re not there yet.
#9. Credit Cards
Dave Ramsey tells his fans never ever to have credit cards. To those who have credit card debt, he tells them to pay it off and then cut up the cards and cancel the accounts and going forward to use only cash or debit card cards. Radical advice, yes, but may be needed by many to get a hold of their spending. Most other personal finance experts recommend wise use of credit cards mostly to help you build and maintain a strong credit: pay it off every month, don’t have too many cards, don’t get ones with annual fees.
Not a few personal finance bloggers are credit card churners and go crazy about the points, miles and cash backs they can get. Some show off the exotic international trips they went on virtually for free based on the miles or points they got from their credit cards. This strategy is not for the faint of heart
What we do: We have just one credit card with a 1.5% cash back and no annual fees. The reason for keeping this card is not to build and maintain a good credit score, but just for the convenience. However, we stay disciplined and pay it off every week (not at the end of the month). And we only charge large expenses here like flight tickets, hotel fees, car rentals, etc. We even pay our tithes from this credit card. The cash back we get from this card every year goes to investing in my play investment account.
#10. Savings Rate
Here, I’m talking about the retirement savings rate. The common ones you will see in the mainstream is to save 10% of your gross income towards retirement every year. Some others recommend 15%. Those in the FIRE community recommend >30% (there are those that aim for 50-70%). Some recommend to those just starting out to save as little as you can afford, say 5%, then ramp it up yearly or every time you get a pay bump. This way, it will be easier for you to get to your desired point.
What we do: In the last 3 years, we have saved about 25% of our gross income towards retirement. In most things, the middle course is often my strategy. However once the house is paid off, our savings rate will go even higher for obvious reasons.
So, What’s the Deal Here?
You will see with all the above that there is a lot of variability in personal finance opinions. Bottom line? It doesn’t really matter which ones you choose to do, as long as the sum total of your money behaviors push you towards a higher net worth. Yes, it is possible, some strategies may be faster that others, but in the grand scheme of things, that’s not the worst thing in the world.
Building wealth is a marathon, not a sprint. I’m happy to be a turtle and not the hare. And still get to FIRE before the traditional retirement age. All of this can be achieved regardless of what options you choose above. Just select the ones that are comfortable with your personality and run with it.
At the end of the day, most of those options will get you to the promised land. As they say, there are many roads that lead to Rome. And like my mentor, Warren Buffet once said, to be successful, you only have to do a few things right in your life, as long as you don’t do too many things wrong.
What do you think? What is your personal finance philosophy and do you have a differing opinion than most people on any of the topics above? Comment below!