Human beings like heuristics and rules of thumb because they make our complicated world a little bit more simple.
However, these steadfast rules that we believe in for generations, the ones that are passed down from grandparents to parents, to us. These can be dangerous if they go unchecked.
So, after 2020, a year that made us question everything, it’s time to reassess some of the old money rules that we heard from our parents and they learned from theirs. We need to ask ourselves if these rules still hold true. For example, is buying always better than renting? I mean, that’s what my parents told me. And should you always pay off debt before you start investing?
Here are 10 out-dated money rules that just don’t hold true in a post-2020 world.
What’s Ahead:
Real estate is always a good investment
Your parents have probably touted this financial truth, I know mine have. But is real estate always a good investment in today’s world? I can tell you from first-hand experience that no, it’s not always a good investment.
Sometimes you buy high and then the market changes and you’re stuck in a situation where you have to sell low and take a loss. This is what happened to me and my husband. When we were looking for our first home, the market was pumping. There were lineups to get into open houses and bidding wars were commonplace. Flash forward seven years and we are selling our home for a significant loss.
If we would have invested all of the money we spent on our downpayment and other homeownership costs into the stock market, we would be much better off financially today. But, we love our home. It’s where our children took their first steps and where we’ve shared many wonderful memories. Despite it being the anti-investment that we were promised by our parents, I’m still glad we did it. And it’s important to point out that this was just our experience. You may have better luck, but as with any investment, know the risks, don’t just take the advice of your family and friends.
Buying a home is always a better financial decision than renting
As I just discussed, buying a home is not always a guaranteed investment. Depending on your circumstances, renting can be a better financial decision. For instance, if you’re debating homeownership versus renting and you don’t plan to stay in the home long-term (more than five years), it probably makes more financial sense to rent. This is because moving and homeownership are expensive.
Buying a house requires a downpayment, home inspection fees, closing costs, lawyer fees, and moving fees. Once you’re in the home you have to pay mortgage payments, condo fees, property taxes, and home maintenance.
Other times when you might want to consider renting instead of buying are if you have a large amount of high-interest debt, if you value flexibility and the ability to move around frequently, or if you aren’t interested in taking on the risk and responsibility that come with maintaining a home.
You should pay off your mortgage as soon as possible
I’m sure you’ve heard this at least once before. It’s well-intentioned advice but it doesn’t hold true for every person. Paying off your mortgage as soon as possible is not always the best financial decision (again, for some). You can think about this in terms of opportunity cost.
Let’s say you are paying 3% interest on your mortgage. If you pay off your mortgage as soon as possible, then you put that 3% back in your pocket. However, you could be earning more elsewhere. The average return on the S&P 500, since its inception, is approximately 8%. This means you’re better off making your regular mortgage payments at 3% and investing any extra money that you have into the market for an average of 8%. This leaves you with a 5% profit.
Pay off all debt before you start investing
If you’re in heaps of debt and you’re just trying to make ends meet, you might be wondering if you should still contribute to your retirement savings. While you may have been told that you should halt all investing until your debt is completely paid off, this is not always the best course of action.
The debt versus investing debate is much more nuanced than just deciding to pay off debt or do both. Sometimes it makes sense to hold off on investing if you have a lot of high-interest debt. For instance, if you’re paying 20% or more in interest on a credit card, and you’re making an average of 8% on your investments, then, based on a simple calculation, it makes more financial sense to focus on paying off debt.
However, if you’ve taken out a mortgage at 3% and it’s going to take you 25 years to pay back, you don’t want to hold off on investing.
Investing is also about habit formation. Even if you start investing a super small sum of money each month, you get yourself into the habit of doing it. So, when your debt is paid off and you have more money to invest, you’re not starting from zero. You already know what to do.
You should always be hustling
I consider myself to be a hard worker. I always have been. I find joy in crossing things off of my “to-do” list. However, even I’m getting tired of the “rise and grind” or “I’ll sleep when I’m dead” style quotes. And, the advice to get up at 4 am if you want to achieve any kind of financial success…give me a break.
Your self-worth shouldn’t be based on how busy you are or how sleep-deprived. There’s nothing wrong with hustling but the goal should be to find balance. Sometimes you need to put in a few super long days to get your work done, and sometimes you need to go to bed at 7:30 and have a 12-hour sleep to refuel.
You need to have the equivalent of your annual salary saved for retirement by 30
Fidelity has a well-shared rule of thumb about how much you should have saved for retirement based on your age. They recommend saving at least one time your annual salary by age 30. This means if you earn $50,000 a year then you want to have $50,000 in retirement savings.
While this isn’t bad advice, it tends to oversimplify things. Rules of thumb are great for making financial concepts seem more simple; however, they eliminate all of the individual contexts. If you are nearing 30 and you know there is no way you will have the equivalent of your annual salary saved by your birthday, don’t feel bad.
Instead of focusing on a specific number, focus on creating short and long-term financial goals that are reasonable for you based on your individual situation. Thirty is still young. You have lots of time to increase your earning potential and your savings. The most important thing is that you are making saving a priority and putting away what you can each month.
Always pay with cash
The idea of always paying with cash is that it makes it easier to stick to your budget and avoid overspending when you can physically see your money leaving your fingers. When you can feel and see the cash leaving your hands, you might think more about how you are spending your money versus when you swipe your credit card.
Also, if you can pay for something with cash it means you have enough money in the bank to cover the purchase. In other words, you don’t have to borrow the money or pay anyone interest.
Again, while this isn’t bad financial advice it’s just not realistic for many people these days. First, there are advantages to paying for things using credit cards. You can earn cash back and points. With the rise of online shopping, it’s also more convenient to pay for your purchases using PayPal or Venmo.
Also, when paying with cash you have to consider the opportunity costs. If you want to buy a big-ticket item like a car and you have enough cash on hand to do it, it still might not be the right move. Again, it comes to a simple calculation. If you can borrow money at an interest rate that is lower than what you could earn on the money you invest, then it might be better to take out a loan and invest your cash.
If you want financial stability, find a steady nine-to-five job and stay there
In the past, it was normal to get a job right out of college, work there for the next four decades, and then retire with a healthy pension. This rarely happens anymore.
While working a steady job at the same company for an entire career might have been commonplace for your grandparents this is not the case for most Millennials. In fact, this doesn’t even hold true for most boomers. According to the Bureau of Labour Statistics, boomers born between 1957 and 1964 “held an average of 12.3 jobs.”
Today, more and more young people find themselves working multiple jobs in order to pay their bills. Contract and freelance positions are more commonplace and almost everyone you meet has a side hustle.
Now, most college grads leave school with a significant amount of student loan debt and often struggle to find a well-paying job that will keep them on and continue to promote them for years and years.
You can’t retire until you’re 65
Retiring at 65 is a money rule that is seriously outdated. In 1935 the Social Security Act set the minimum age of retirement at 65. This was the age when you could start receiving full retirement benefits.
Today, young Americans aren’t even sure they are going to receive Social Security. For those nearing retirement, many are worried about the state of their social security.
On the other side of this coin, many people have decided that they don’t want to wait until they are 65 to enjoy the benefits of retirement. With the FIRE movement, the goal is to save as much as you can in your younger years so you can stop working in your 30’s, 40’s, or 50’s.
The point here is that retirement looks different for everyone. Age 65 is an arbitrary number. Some people will never be able to fully retire while others are doing what they can to stop working as soon as possible.
If you can save $1 million, you can retire comfortably
$1 million. It might still sound like a lot of money, and it definitely is but it still may not be enough to cover the cost of your retirement.
As a result of people living longer and at a higher cost of living, a million dollars just isn’t what it used to be. And yet, it is one of those financial rules of thumb that many people still hold on to. According to a survey of 1,015 Americans by TD Ameritrade, 6 out of 10 Americans believe they can comfortably retire with $1 million saved.
For those living in a high-cost area or those that want to retire early, a million dollars is simply not going to cut it. Instead, you should be thinking about your individual context. Where do you live? What kind of retirement do you envision? At what age do you want to retire? Have you considered the cost of inflation? Have you considered the costs associated with long-term care?
For some, the idea of saving $1 million is completely inconceivable. For others, it won’t get them through their first decade of retirement.
Summary
When it comes to your personal finances remember this – it’s personal. What works for your friend Bob, or your Dad, or your aunt Sue, won’t necessarily work for you. While financial rules of thumb make the complicated world of money seem a little bit more manageable, they aren’t a silver bullet.
It’s important that you question these financial “truths” and really think about your situation and what works best for you. The best thing you can do is develop consistent habits around saving, investing, and debt repayment and continue to grow your financial knowledge.
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