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Money rules that you might want to break

For most people, following the basic money rules is the right choice for their financial situation.  However, as with most things in life, there are situations that following the tried and true advice might not be the best option. Knowing when to break the basic money rules is a key financial concept to be able to achieve your lifetime goals.
Let’s start with the idea of paying off debt and building an emergency fund before saving for retirement.
Building an emergency fund is a smart move and getting rid of high interest debt makes sense however, if your debt is a low rate, tax reducing debt like a mortgage and your company offers a 401k match, then you need to break this rule because the tax benefits from having a mortgage and contributing to your 401k are far superior to building an emergency fund.  Plus, these two moves might free up funds to allow you to starting building an emergency fund.
Should you always pay off the debt with the high interest rate?
This is generally thought to be the wisest method because one will in theory pay less in interest by starting with the highest interest rate first.  However, sometimes the more pressing issue is to get more monthly cash flow to build retirement savings or an emergency fund so paying off the debt with the highest monthly payment is more beneficial.  Or it might be better to pay off the lowest balance and not worry about the interest.
Saving 10% of your income for retirement is a rule to reach your goals right?
If you start before you are in you are 30, saving 10% is going to get your very close to your retirement goal, maybe even earlier than you planned.  However, if you are starting after your mid-thirties, you need to break this rule and save even more than 10% because you will have a large gap to make up to reach your retirement goals by the time you want to retire.
Should you always max out your employer sponsored account?
This one normally makes sense, however, you need to also consider your situation in retirement.  If your employee sponsored plan doesn’t offer a Roth feature, you might want to only contribute to get the full match and then look for another option for retirement savings that offer a Roth feature.  All of this depends on your tax situation now and in the future you always talk to a tax advisor about your unique situation.
What about this rule - buy a house that costs 2 ½ times your annual income?
For most people, this is a good rule of thumb to determine how much house you can afford but breaking this rule is highly encouraged if you have other debt obligations that would make it difficult to afford the monthly payment.  And if you plan to move in less than 5 years it might be even more important to buy less of a house or even rent.
College is expensive, so start saving for college as soon as the children are born.
Well, if you start saving as soon as the child is born, you can likely have enough saved to pay for college, however this rule should be broken if you haven’t started saving or are not at least saving 10% for your own retirement.  Your kids can work, take out loans or you can even take out loans to pay for college. There is only one way to fund your retirement and that is by saving for it and saving as aggressively as possible if you are starting late.

Posted: 5/14/2015 with 0 comments

Categories: Finances, Money Matters

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