11 Money 'Rules' That No Longer Hold True

It might be time to reconsider everything you thought you knew about your personal finances.
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Every year brings a fresh chance to get your life on track. If that includes getting your finances in shape, you may be wondering how to do it “right.”

There have been plenty of rules surrounding money that experts touted in the past. But modern life, policy changes, the decimation of pensions, a wild real estate market and more have changed many of those rules forever. So before you get to work, find out which conventional wisdom no longer applies.

1. Keep 3 Months’ Worth Of Expenses In Your Emergency Fund

Having an emergency fund is crucial for weathering financial difficulties such as job loss or medical expenses. And for a long time, experts recommended having a savings of three months’ worth of expenses.

“As the pandemic has illustrated, that often won’t be enough,” said Greg McBride, chief financial analyst for Bankrate. “Long-term unemployment (being out of work six months or longer) is on the rise and business owners have taken a financial hit like never seen before.”

The new target for most households, he said, should be at least six months’ worth of expenses. “The self-employed and sole breadwinners should target even more, enough to cover nine to 12 months,” he added.

2. Max Out Your Retirement Plan Contributions

It’s a great idea to contribute as much as possible to your retirement plan. However, you shouldn’t sacrifice your ability to afford essentials and avoid accumulating debt. Considering the unusual financial situation many people are now, it may be a good idea to prioritize today’s expenses over retirement.

“If you’ve accumulated high-interest debt over the year on credit cards or other types of loans, it might make sense to temporarily decrease your 401(k) contributions,” said Leslie Tayne, founder and head attorney at debt solutions law firm Tayne Law Group. Consider how much of your contributions your employer matches (if any) — you may choose to decrease your contributions to that amount and open up cash flow for current bills and other pressing financial obligations.

3. Keep Your Retirement Funds In Bonds

Experts often recommended keeping most of your investment portfolio in bonds if you were retired or nearing retirement. However, people are living much longer — meaning your portfolio may not earn enough to support you in retirement if it’s 100% made up of bonds, according to Aviva Pinto, an adviser with Wealthspire Advisors.

“You need to make sure you have a diversified portfolio that includes assets that will grow over time so that you can maintain your lifestyle,” she said.

4. Residential Real Estate Is Always a Good Investment

Owning a home has long been considered a great way to build wealth ― and it can be. But the return on residential real estate often falls short of other investment options such as stocks and bonds, especially when you consider the costs of owning property, such as mortgage interest, taxes and maintenance.

People often make the mistake of spending too much of their income on a house and effectively “crowding out” other investment opportunities, said Robert R. Johnson, a professor of finance for the Heider College of Business at Creighton University.

“What they don’t realize is that from 1890 to 1990, the inflation-adjusted appreciation in U.S. housing was just about zero,” he said. “That amazes people, but ... the decision to buy or rent a home is essentially a financing decision.”

Buying a home may not be the smartest investment once you consider the related costs, such as mortgage interest, taxes and maintenance.
LightFieldStudios via Getty Images
Buying a home may not be the smartest investment once you consider the related costs, such as mortgage interest, taxes and maintenance.

5. Pay With Cash Whenever Possible

It’s always a good idea to avoid accumulating debt. When used wisely, however, credit cards can offer a ton of benefits, including fraud protection and purchase/price protection, said money-saving expert Andrea Woroch. With more people shopping online, credit cards are really the best way to save money and protect purchases.

Using your card online with cash-back programs can also earn you extra money when you shop at certain retailers, she said, which is “an easy way to make some extra cash on the things you’re buying anyway.”

6. Never Carry A Balance

You’ve heard it before: Only use your credit card for emergencies and always pay off the balance in full. That’s great advice in theory, but not always possible.

“If you’re in a difficult financial situation, which so many Americans are facing now, survival comes first and following financial best practices can wait,” said Sara Rathner, credit cards expert at NerdWallet.

“If relying on your credit line as an emergency fund and making only the minimum payments means keeping a roof over your head and food on the table, so be it,” she said. “Sometimes, being responsible doesn’t mean making optimal money choices every time, it means doing the best you can during an unstable time.”

Once you’re back on solid financial footing, you can focus on paying down your credit card balance.

7. Cash Or Credit Cards Are Your Only Payment Options

“Many people make the mistake of overextending their budget when relying on credit cards to pay for the everyday things they need or for something unexpected, which happened to many of us [during the pandemic],” said Tonya Rapley, financial expert at My Fab Finance and spokesperson for Affirm. “But what also happened was that people started using ′buy now, pay later options instead of credit cards.”

When used responsibly, these new payment options allow people to break up the cost of a purchase into predictable payments ― interest-free ― that fit into a weekly or monthly budget. However, it’s important to do your research and watch out for BNPL services that have hidden fees or deferred interest. And as always, you shouldn’t use these services to buy things you don’t need or spend more than you can realistically afford.

8. Housing Costs Should Be 30% Of Your Budget

A common rule of thumb when budgeting is that you should spend no more than 30% of your household income on housing and related expenses such as insurance and utilities.

“This is an outdated rule that dates back to 1969 public housing regulations, and fails to take individual scenarios into consideration such as the housing market someone lives in or their other financial responsibilities,” Rapley said.

Instead of adhering to this rule, focus on creating a complete budget that is based on your financial responsibilities and goals.

“Determine what you can afford to pay for your housing costs while hitting your other financial goals such as debt elimination, savings and investing for your future,” Rapley explained. If you can achieve these things, it might be fine to spend more than 30% of your income on housing. On the other hand, 30% may be too high given your financial obligations.

9. Have A Certain Amount Of Money By A Certain Age

“Though I have never felt this money rule to be true, this year has highlighted that everyone is on a different financial path and comes from a different financial beginning,” said Brittney Castro, a certified financial planner with Mint. Instead of focusing on your age and the net worth that supposedly should go along with it, she said, focus on increasing your net worth year after year. You can do this by accumulating assets such as savings and retirement funds, and paying off your debts.

“Then celebrate your progress,” Castro suggested.

10. Check Your Credit Reports Once A Year

It used to be enough to check your credit reports once a year, or maybe quarterly if you were concerned about errors or fraud. These days, however, it’s important to check more frequently, according to Julie Ramhold, a consumer analyst with DealNews.

“With the issues caused by the pandemic, more people are hatching special payment plans or deferments for their accounts, like student loans,” Ramhold said. “It’s essential to know whether your credit report reflects accurate reporting, so it’s recommended to check your report once a month, if not more often now.”

11. Don’t Invest Until You’re Debt-Free

The traditional rule has been to pay off all debt and then invest. But following that advice can hurt your finances in the long run.

“As the student loan crisis grows, more and more people are saddled with debt for longer periods of time,” said money coach Delyanne Barros. In fact, the average length of time to pay off a student loan is 20 years.

“If someone waits that long to start investing, that is years of significant compound interest growth that they can never get back,” Barros said. If you can afford to keep up on your debt payments and set aside a bit of money toward investments, do it ― your future self will thank you.

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