The Money ‘Rules’ That Sound Smart — Until You Look Closer
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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Financial rules are often just guidelines rather than strict standards, and they depend a lot on unique circumstances, including income, assets and financial goals. While you should never play too fast and loose with sound financial advice, there’s often more gray area inside these rules than it seems at first glance.
Finance experts explained which financial rules you can ignore, and when. There still may be a lot of wisdom tucked inside the rules, but there may also be room to break them … wisely.
Debt Is Always Bad
If you take a hard line that debt is always bad, you might miss out on some key financial opportunities, according to Taylor Kovar, CFP, founder and CEO at 11 Financial.
“Yes, toxic credit card debt and high-interest personal loans can wreck your finances, but not all debt is created equal,” he said.
For example, a low-interest mortgage or business loan might actually be helping you build wealth. “I’ve seen people delay growth opportunities because they were too focused on being 100% debt-free instead of strategically using leverage,” Kovar warned.
Someone who has just gotten out of debt consolidation, on the other hand, might want to stick with a hard line “debt is bad” strategy, at least for a good long time.
Always Pay Off Your Mortgage Early
Another common rule is that you should pay off your mortgage as early as possible by making extra payments or making a larger mortgage payment each month so as not to accrue too much interest.
Kovar said this rule is situational. If you’ve got a low fixed rate, paying extra toward your mortgage might not be the smartest use of your money, especially if you don’t have solid savings or you’re not maxing out retirement accounts.
“I’d rather see someone build a healthy financial cushion than tie up all their extra cash in a house they can’t liquidate quickly,” he said.
Renting Is Just Throwing Money Away
Kovar gave this one a hard “nope.” Renting can give people flexibility, he pointed out, especially if they’re not sure where they want to live long term or if the housing market is overpriced in their area.
“Owning a home comes with a lot of hidden costs — repairs, taxes, insurance — that people don’t always factor in. Renting can be a smart move depending on the season of life.”
You Can Budget Your Way to Financial Stability
Kovar has worked with a lot of families who aren’t overspending, they’re just under-earning or don’t have a system that works. For them, budgeting isn’t the answer to everything.
“Sometimes the stress isn’t coming from the budget itself, it’s from trying to manage everything manually without the right tools or support.”
Wait Until the Stock Market ‘Calms Down’ To Invest
When the stock market makes wide swings, you often hear that you should wait for it to calm down before you invest money in it, but that’s not always the best rule to follow, according to Robert R. Johnson, PhD, a chartered financial analyst and professor of finance in the Heider College of Business at Creighton University.
There is always a reason not to invest in the stock market if you give yourself one, Johnson said, because stock market corrections and crashes are virtually impossible to predict. This is exacerbated by media fear mongering.
“The market prognosticators who gain the most traction are the ones who make the most outlandish predictions — either bullish or bearish. Many of these people are introduced as someone who predicted a previous market decline or rally. The fact is that many of these people also predicted crashes or rallies that didn’t happen.”
You Shouldn’t Take Risks in Investing
Johnson also finds that people are “extremely risk averse and are overly cautious in their asset allocation” when it comes to investing and typically don’t take enough risks.
While you do have to balance your risk tolerance based on your age and your financial goals, he said, “Counterintuitively, the biggest mistake many people make in investing is not taking enough risk.”
He shared an adage often tossed around in finance circles, “You can sleep well or eat well,” pointing out that, “You will sleep well if you commit funds to low-risk investments like money market funds or Treasury bills, but your investments will not grow substantially and may even have trouble keeping pace with inflation. You will eat well by consistently investing in stocks.”
Buying a Home Is the Best Way To Build Wealth
While real estate is undeniably a good investment, Johnson said that using it primarily as a vehicle to wealth is “overrated.”
Once you factor into account routine maintenance, property taxes and other costs, “residential real estate has not been a very efficient way to build wealth,” he said. Additionally, many people make the mistake of buying the most expensive house they can afford and become house poor.
“Overextending and buying a large home is a losing strategy. Their mortgage payments crowd out other investing activities.”
You Should Save Money for Retirement
Before you call him crazy, Johnson is not suggesting that anyone should not save for retirement, but that “one should think about saving and investing money for retirement.”
Saving alone won’t get you to true financial security. “Because of compounding, time is the greatest advantage of investing.”
While you do want to develop the discipline to save early in life, you should jump on the investing train as early as you can, too.
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