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Don’t always follow conventional financial wisdom

Following conventional wisdom is usually a sound practice, especially when it comes to financial decisions.  However, like all rules, there are exceptions even to financial rules.  Knowing when to follow conventional wisdom and when to bypass it can be tricky looking a little deeper into most will help you make the best decision.
401k contributions should always be maxed out first right?
There are very good reasons to follow this rule, including tax benefits and employer match funds, however, if your employer doesn’t match and you are in a lower tax bracket, you might want to reconsider maxing your 401k contributions.  There are other options that might actually yield you more return and overcome the tax advantages of the 401k contribution.
Should we always fully fund a 529 account for college expenses?
This isa good idea unless you are not saving for retirement at the proper level.  There are many different ways to pay for college expenses but there is only one way to pay for retirement and that is to save. Hold off on fully funding college education savings until your retirement savings are in order.  You can’t borrow to fund your retirement so make sure you save first for retirement and then save for college.
Conventional wisdom is to have 6 months of an emergency fund saved, is that true?
That’s a good place to start but you also have to take into account your individual situation.  Is your career one that takes longer to find a new job or is the job market in your area currently weak?  If that’s the case, you might want up to 12 months in your emergency fund.  The amount you should save in an emergency fund is always specific to your individual circumstances.
Should emergency funds all be saved in cash accounts?
You really don’t need all of your emergency funds in cash. The reality is that you normally use your emergency funds overtime. One idea is keep just 3 - 4 months in cash accounts and then save the rest using other investment choices.  This will ensure you are earning a better return and avoid losing out on potentially more income. You can sell your other investments as needed to replenish your cash reserve if you have a prolonged need for your emergency funds.

Posted: 9/3/2014 with 0 comments

Categories: Financial, Money Matters

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