For most everyone, following the basic money rules is the path to success. However, just like all rules, there are exceptions. Knowing when to break a money rule can be the key to long term financial success breakers.
Let’s go through some of the basic rules, is it always a smart financial decision to pay off your debt as quickly as possible?
Eliminating debt makes sense unless your debt is a low rate, tax reducing debt like a mortgage and you are not contributing fully to your company 401k to at least get the full match. This is a rule to break because the tax benefits from having a mortgage and contributing to your 401k are far superior to being completely debt free.
Should you always pay off the debt with the high interest rate?
In many circumstances, this is the best method for saving the most money in the long term. However, if your more pressing issue is to increase your cash flow paying off the debt with the highest monthly payment is more beneficial. Sometimes, you want to start with the lowest balance so that you can have success quicker.
Is saving 10% of your income towards retirement a good rule to follow?
Yes, if you start before you are in your 30s, you are very likely to reach your retirement goals. However, if you are starting later in life, want to retire earlier, or want to move up in lifestyle during retirement, 10% will not be enough. This rule needs to be broken in these circumstances.
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.
What about the rule of saving for college as soon as your child is born?
Well, if you start saving as soon as the child is born, you can likely have enough saved to pay for college. 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.
Should all of your emergency funds be saved in a readily available savings account?
This one makes sense until you have 90 days saved, then you need to move this to longer term investments. The reality is that you won’t need all of your emergency funds at one time and you can slowly divest as you need the funds. The benefit is you will likely earn a higher return this way and not need to set aside as much into your emergency fund to see it grow.