When & Why to Break Money Rules

Money Rules to Break PDF

For the most part, people want to follow the rules, especially when it comes to their financial situation. And usually that is a smart move to make. However, there are times when breaking some important money rules can improve your financial situation.

Often the rule of thumb for debt repayment is to pay off the highest rate first, should we break that?
Yes, sometimes the highest rate might not be your biggest concern. If you focus on quickly paying off the smallest debt amounts first, you can build momentum and eventually pay off all your debt faster. It is called the snowball effect. As you pay off the small balances, those payments add up so that for the last remaining debt, your available funds will be much greater. If you are looking for cash flow relief, the first loan to pay off may be the one with the highest payment amount. Focusing just on the rate could lead to a longer payoff time or less cash flow availability.

Should we always put 20% down when buying a home?
The 20% down rule is great if you are buying your second home and have built up equity or have a windfall of money that you can use for a down payment. For most younger people, getting to 20% down with the prices of homes today is somewhat unrealistic. It’s okay to break this rule if your mortgage payment and the cost of private mortgage insurance (PMI) is less than or equal to what you are paying in rent. PMI doesn’t last for the entire length of the loan and while you are paying PMI you are also building equity in your home. You won’t build equity by paying rent. Plus, if rates go lower and your house appreciates quickly, you have the potential to refinance and may find yourself with over 20% equity and the PMI will go away.

Should everyone always build a 6-month emergency fund?
Although building a 6-month emergency fund is preferred, if you have a high amount of interest debt, paying it off should be your primary focus. Build a small reserve for unexpected expenses and then focus all your effort on paying off your debt. Having lower debt will help if you have an unexpected drop in your income. Once the debt is paid, you can work on building your preferred level of a true emergency fund.

Should you always start by contributing 15% of your gross income to retirement?
While it is extremely important to eventually reach 10 to 15% of your gross income going toward retirement, there may be times you want to focus first on meeting the company match. If you have high debt or don’t have an emergency fund, then it’s important to focus on those priorities first. Often it will be unexpected expenses that can cause significant financial distress in your life. It is always important to evaluate what the most pressing financial issues are for your unique situation.