Financial literacy still isn’t a part of most schools’ curriculums. So unless we hire a financial advisor, we must teach ourselves the ins and outs of the economy and how our personal finance factors into the massive equation. As we educate ourselves, we often gravitate toward a number of tried-and-true rules, like always having six months of savings in an emergency fund or buying a house instead of renting, if possible.
Then came 2020: a year that broke the world — and all the rules. Now, financial advisors are imploring clients to shake things up. It’s time to toss many of the pearls of wisdom and slivers of insight you’ve picked up about money along the course of your adult life, as they no longer serve you. Here’s a look at popular rules to break in 2021 and how to approach your finances instead.
Last updated: Feb. 18, 2021
Rule No. 1: When Paying Off Debt, Start With Your Highest Interest Rate First
“While that might make sense mathematically, if we were doing the math you wouldn’t have debt in the first place,” Dave Ramsey, bestselling personal finance author and host of “The Dave Ramsey Show,” told GOBankingRates. “The reason the debt snowball pays off debt from smallest to largest is that modifying your behavior and providing inspiration to get out of debt is more important than the math. Debt is a behavior problem, and the debt snowball is about quick wins and building momentum.”
Rule No. 2: Have 6 Months of Savings in Your Emergency Fund
“One money rule that people should consider shaking up at the moment relates to the size of your emergency fund,” Anna Barker, the founder of personal finance site LogicalDollar. “While the usual advice is that this should be equal to three to six months of expenses, this may no longer be enough in 2021.”
Given that it’s looking like the economy will stay rocky for quite some time, Barker reasons it’s a good idea to increase your emergency fund to at least nine months’ worth of expenses. “If you were to lose your job, it’s no longer guaranteed that you’d be able to find a new one in three to six months, especially if you’re in an industry that’s been directly impacted by the pandemic,” she said. “This means that giving yourself an extra buffer of at least three months could make all the difference.”
Rule No. 3: Max Out Your 401(k) Contributions
“This rule is really pushed by many financial professionals,” said Chuck Czajka, founder of Macro Money Concepts. “While saving for retirement is a must, COVID has shown that this traditional thinking and saving through a 401(k) might not be the best solution. 401(k)s have many restrictions and accessing your money can be difficult and costly. We recommend if you are going to use your 401(k) for your retirement savings, only contribute to your employer match. Anything over that should be positioned in a plan that provides liquidity, leverage and control.”
Rule No. 4: 'Set It and Forget It' for Retirement Planning
“When planning for retirement, many people are given the advice to save X amount of money and then are put into a target-date fund and just let it ride,” said Terry S. Mulhern, MBA, RICP, MDRT and author. “Given the turbulent times and markets, I don’t think you could get worse advice. Replace it with, ‘You are the CEO of your retirement – act like one.’”
“Adopt the habits of highly successful CEOs and actively manage your retirement plan,” Mulhern continued. “This includes taking care of your health, wealth and thinking about your legacy. The number one thing you can do is not go it alone. A CEO’s number one priority is building their team. Find the best experts to work with you on your plan. Think about your retirement portfolio and plan as the company that you will work for 20 or even 30 years after you retire. It is your company and [you must] make it the best it can be.”
Rule No. 5: Buying a Home Is Better Than Renting
“While buying can help increase your net worth over time, it’s not for everyone,” said Allison Baggerly, founder of Inspired Budget. “If you’re in an unstable job, or if you believe you might be relocating soon, then renting might just be better. The cost of home maintenance can be a burden on those that aren’t financially prepared for the added responsibility. In some cases, renting is better.”
Rule No. 6: The 50/30/20 Rule
“It’s safe to say many investment and savings rules no longer apply in the current economic climate,” said Dino Selita, president and co-founder of The Debt Relief Company. “Things have changed significantly for many consumers and I feel sticking to a rigid rule of thumb for allocation of cash is an old idea that does not reflect the dynamics of a consumer living today. Some consumers are saving more since the pandemic while others are not. Things have changed significantly and due to this, it’s best for consumers to adapt alongside their budget.”
Rule No. 7: You Need a Lot of Money To Start Investing
“Thanks to advances in fintech, and increased accessibility to various class assets, individuals can now start investing with the little money they have in their accounts and mobile wallets,” said Carol Tompkins, business development consultant at AccountsPortal. “Some online brokerages do not even charge commissions, which keeps the cost of investing considerably low.”
Rule No. 8: Paying Down Debt Should Be Your Top Financial Goal
“Being debt-free has become the rallying cry of what everyone should be doing with their money and while it is certainly not a poor goal, it is not remotely the only thing (or even the most important thing) you should be trying to achieve,” said Sarah Blanchfield, financial therapist at MyBulletproofBudget.com.
Becoming debt-free should be a component of a financial strategy, but not the whole strategy. “Only focusing on this one thing and ignoring all else until it’s done is a bit like only focusing on washing your car and never changing the oil, tires or getting a tune-up,” Blanchfield said. “The outside of your car will look awesome but the car will still break down and you’ll not be driving it anywhere.”
Instead, paying down debt and becoming debt-free should be a component of a financial strategy, not the whole strategy.
Rule No. 9: Pay Off Your Student Loans by Making Extra Payments
You should reconsider the popular money rule of making extra payments on your student loans to pay them down faster, said Mary Lyons, aka financial advisor the Wealth Woman.
“With interest rates so low, it could possibly be better to invest the extra payment in something that has the potential to grow faster than the interest rate on your loans,” Lyons said. “If you have a job loss because of COVID it might make sense to pause payments. Put extra payments in a side account then pay off your student loans earlier.”
Rule No. 10: Follow The Rules, Always
“It is important to shake up the rules of money precisely because people rarely make money decisions based on cool, clear logic,” said Timothy Iseler, founder of Iseler Financial. “While the rules related to personal finance best practices are based on historical returns, standard deviations and balancing risk tolerance with desired outcomes, the truth is that emotions drive far more of our financial decisions.”
“What might be right for you may seem crazy to me, and my risk tolerance might seem reckless someone else,” Iseler continued.“Furthermore, not only do we differ from each other when it comes to attitudes, beliefs, and emotions related to money – we also differ from ourselves depending on whether things are going favorably or straight into the toilet. The rules should be viewed more like guideposts or parables than hard and fast directions.”
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