Rule breaking could lead to financial success

08/27/2020

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.

Is it always a smart 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 then paying off the debt with the highest monthly payment is more beneficial.  And 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 you are 30, you are very likely to reach your retirement goals.  However, if you are start later in life, want to retire earlier or want to move up in lifestyle during retirement, 10% will not be enough to reach your retirement goals and you might need 15% or more especially if you started later in life.
 
What about 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.
 
Should you always live within our means?
If you are already achieving success with your debt reduction and savings efforts, then this rule works very well. If you are behind on either of these two goals then you actually need to live below your means so that you can accomplish more of your financial goals. Sometimes living below your means now will provide the opportunity for a better future later.
 
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.
 
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. All of this depends on your tax situation now and in the future.  You should always talk to a tax advisor about your unique situation.

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