15 Personal Finance Rules You Should Be Breaking

Personal finance rules can serve as handy means for guiding your money behavior. But rules of thumb that don't fit your situation can be a waste of time — or worse, actually worsen your finances. Here are 15 personal finance rules that, depending upon your circumstances, you should consider breaking.

1. Before Investing or Saving for Retirement, Be Debt-Free

Although this is a generally sound rule, there are a few justifications for breaking it.

First of all, personal finance isn't an all-or-nothing practice. Good financial planning involves balance and attentiveness to your unique situation. If your debt is low-interest, it might behoove you to pay it off more slowly in favor of saving money first (such as for retirement or major expenses). Remember: compound interest has immense value, so the more money you can invest earlier in life, the less money you'll have to invest overall. (See also: The 5 Most Important Financial Lessons People Learn in Their 20s).

Also, if your company matches 401(k) retirement plan contributions, it almost always pays to save for retirement, even if you're concurrently juggling debt. Though it can be tempting to forego 401(k) contributions when your paycheck is lean, remember that you're leaving money on the table and jeopardizing your future financial security if you do. Plus, some retirement plan contributions are tax deductible, so you can use your tax refund towards your debt.

Lastly, if you wait until you're entirely out of debt, you may never start investing. For various reasons (none of which we recommend, of course), some people are practically never able to extricate themselves from the clutches of debt. Maybe your income is low and expenses too high, or perhaps you unexpectedly lost your job or had large, unexpected medical bills to contend with. If you're one of these people, then it's best to start setting aside a little money now and balance your cash outflows between debt payment and investing. I have a friend who is in her 60s with no savings whatsoever. Why? Because she always had debt to contend with, and spent a lifetime waiting until it was clear before saving money. Now, she's in trouble.

2. Pay off Your Mortgage Before Saving for Retirement

This builds on the above rule about eliminating debt before investing. I had some clients who were so intent on paying off their mortgage that they did it at the expense of everything else in their lives, including retirement savings and emergency funds. They thought if something went wrong and they needed money, they could borrow against their house (even in retirement). But when tough times hit, their house had declined in value and they couldn't borrow anywhere near the amount of money they needed.

3. Don't Borrow Money to Invest

Borrowing money to invest is known as leveraging, and is generally considered risky — if your investment declines in value, you've still got a full debt-load and a disproportionately low asset to show for it.

However if the item/investment is tax-deductible, and/or loan is low-interest (which might also be tax deductible), such that the tax saved equals more than the interest paid on the loan, you can work this scenario to your benefit and use your refunds to pay off your debt more efficiently. (See also: Borrowing to Invest: Helpful or Hurtful?)

4. Save 10% of Your Income

This is a somewhat arbitrary rule, since 10% may or may not be enough for you to reach your savings goals. Focus on the amount of money you need saved in the end and work backwards from there; you may need to break this rule if you've waited so long to start saving that 10% won't help you reach your goal, or if you need to save more money than 10% of your income will allow.

5. Go to University to Get a Good Job

Unless you're tracking for a career that specifically requires a university degree, you could save the six figure expenditure of a university education in favor of something more practical and less expensive, such as trade schools or alternative forms of education. Not all good jobs are borne of a university education. I didn't go to university (but I am indeed educated), and in some ways it saved my life.

6. Don't Use Credit Cards

Using credit cards responsibly can be beneficial if you're collecting frequent flyer miles or other credit card rewards that allow you to get extra value from charging expenses. The trick is to pay the entire balance off as soon as you receive your statement; that way you don't accrue interest and you thus avoid the credit card debt trap. (See also: Financial IQ Test: How Healthy is Your Debt Management?)

7. Get the Biggest Mortgage the Bank Will Give You

What the bank will lend you and how much mortgage you can afford can be two very different things. The bank only takes your income and existing debts (and sometimes assets) into account when calculating the mortgage you can qualify for. What about your cash flow, expenditures, and the additional costs of home ownership, like maintenance, property tax, etc?

Depending on the area you live, real estate might be easily affordable or prohibitively expensive. Don't let the bank lure you into a mortgage larger than you can truly afford, because ultimately they win if you can't make payments.

8. Tax Refunds Are Good

Tax refunds mean the government is holding onto your money (and earning interest on it) during the course of the year! I had a client who loved to get tax refunds so much that she deliberately overpaid her taxes each year through payroll just so she could get a refund, which she inevitably squandered since she saw it as "found money."

Consider selecting fewer exemptions on your tax forms at work. You won't get a fat tax refund in the end, but you'll have more money in your pocket now, and will be less likely to splurge than you would with the "found money" of a refund.

9. Build Credit by Carrying a Balance With Your Credit Card

This rule is just plain wrong. You build a good credit rating by using — and paying off — your credit card. You don't need to carry a balance.

10. You Have to Spend Money to Make Money

Unless you have disposable cash to spend, this rule reeks of high-risk business offers, gambling, and mail-order scams. Although sometimes a prudent investment (in a business or financial vehicle) can reap rewards, don't use this phrase as a rule of thumb for your personal finances.

11. A Budget Keeps Your Spending on Track

I wish it did, but unless you're unnaturally disciplined, it often it doesn't. Budgets are more often than not made of abstract categories with arbitrary amounts of money that don't account for things like irregular expenses, quarterly payments, and other elements.

More important than a budget (and an essential first step to creating a workable budget) is keeping track of your expenses so you actually know what you spend. The longer you keep track of your expenses, the better you can understand and control your spending. (See also: Financial IQ Test: How Healthy Is Your Budget?)

12. Choose Index Funds for Passive Investing

Although index funds carry lower management fees than mutual funds, this is for a reason: They are not actively managed. Although active management doesn't guarantee higher returns, it can help with asset allocation, re-balancing, and other investment activities you may not wish to undertake yourself.

When choosing investments, instead first focus on asset allocation (which is the biggest factor affecting your returns — not investment picking as you might suspect), then choose a basket of diversified investments that satisfy your asset allocation plan. (For more information on mutual funds and index funds, see: Mutual Funds for Wise Bloggers).

13. You Need to Have a lot of Money to Invest

How do you think people who have a lot of money got it (if they weren't born into it)? They saved — and invested! Don't belittle your own finances by thinking you don't deserve to invest or don't deserve the help of a financial planner because you don't have money. You have start somewhere, and you can start investing with as little as $25/month.

14. Your Emergency Fund Should Be Six Months' Expenses

While this is an apt rule of thumb, depending on your situation it might not be suitable. Evaluate your expenses and what would need to be paid if you found yourself in an emergency situation; you may find you need more or less, depending on various factors, such as the quality of your insurance, level of regular cash outlays, and so forth.

15. Leasing a Car Is Bad Value

The general school of thought is that leasing a car costs more (after all is said and done) than buying one outright. Depending on your situation however, this might not be true. For example, if you can deduct the car as a business expense, leasing could reduce your income and increase your cash flow more effectively than deducting the capital costs of buying a car. Also, if your business is new and cash flow is tight, leasing might get you into a necessary set of wheels for a lower monthly expenditure than buying.

Have you ever broken a personal finance rule in a way that served you well? Please share in the comments!

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