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Four Financial Rules You Don't Have to Follow

Four Financial Rules You Don't Have to Follow

Financial rules are supposed to guide your behavior and help you make good decisions. However, there are some rules that don’t apply to every person and situation. Here are a few of them.

“Stay away from credit cards.”

When people advise to stay away from credit cards, it’s often because they’ve felt or seen what credit card trouble is like. They may have watched parents or friends struggle with credit card debt. Or, they may have suffered through credit card debt of their own. Either way, the advice to stay away from credit cards is a little overboard, especially since credit cards – when used correctly – help you build a good credit history. Use credit cards, but be disciplined with your spending and always pay on time each month.

“Pay off your debt before you save.”

It’s nice in theory: if you pay off your debt first, you’ll have more money to put towards savings. Plus, the interest you pay on your debt is costing you money. However, saving more money early gives your money more time to grow. For example, if you save $200 each month, you’d have $551,199 by age 65, assuming your investment grows at 6%. However, if you start at age 30 and save $200 each month until age 65, you’d only have $284,942.

“An emergency fund has to be six months of living expenses.”

The six-month rule of thumb is intended to help you survive for at least six months if you lose your job, but your emergency fund may need to be more than six months of living expenses. Your emergency fund isn’t just for covering an income shortage. Your emergency fund will be a lifesaver if you need a major home or car repair, appliance replacement, or expensive medical procedure. Having an emergency fund can also keep you from getting into debt – you don’t have to take out a loan or run up a credit card balance for major unexpected expenses. 

“Buying a home is better than renting.”

For years, buying a home has been considered an essential part of the American Dream. Tax benefits and equity are often cited as the best reasons for buying instead of renting, but buying isn’t always the best option. If you move often, don’t qualify for a low interest rate, or don’t want to be locked into a 15- to 30-year financial commitment, then buying may not for you. 

In some areas, the monthly cost of renting is actually lower than buying. Renters don’t have homeowner’s insurance or property taxes and renters can get out of a lease contract much easier than a homeowner can get out of a mortgage.

Not all financial advice is one size fits all. As you work to improve your finances, feel free to adjust the rules to fit you.

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Comments 1

Frank on Thursday, 14 January 2016 10:32

Helpful information, but I want to emphasize these rules shouldn't be followed ONLY if they make sense for you to not follow them. Every person is in a unique situation, and you should not blindly follow or not follow these rules until you fully understand your financial situation. A great example if whether to pay off debt or save. This is a tricky question, and very much depends on a ton of factors. It is advised to calculate your returns to determine which you should do. It is also recommended to reach out to a professional if you are unsure how to perform that analysis.

Helpful information, but I want to emphasize these rules shouldn't be followed ONLY if they make sense for you to not follow them. Every person is in a unique situation, and you should not blindly follow or not follow these rules until you fully understand your financial situation. A great example if whether to pay off debt or save. This is a tricky question, and very much depends on a ton of factors. It is advised to calculate your returns to determine which you should do. It is also recommended to reach out to a professional if you are unsure how to perform that analysis.
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Thursday, 22 August 2019

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