Whether you first heard the money tips from Grandma, or they have been repeated so many times in the media you just assume they are true, the fact is some popular personal finance tips will do you more harm than good. While there is more to life than having money, there’s no arguing that managing it well can greatly contribute to your quality of lie.
Before you follow the latest piece of financial advice, be sure to investigate whether it truly is the best thing to do in your circumstance. One size fits all may work well with clothing labels, but it’s terrible advice to follow when it comes to financial matters.
Saving 10 Percent of Your Income for Retirement is Not Nearly Enough
The conventional wisdom when you first started your career might have been to put 10 percent of your income aside for retirement. Most financial experts today agree that 10 percent won’t last you long enough regardless of your salary. A better way to determine how much you will need to save for retirement is to multiply the salary you expect to earn your last year of full-time work by 10. If you really have no idea or that’s just too far in the future, aim to save more in the 15 to 20 percent range.
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Saving as much as 20 percent of your income for retirement can seem like a Herculean task if you already have difficulty setting aside 10 percent of your pay. If you have a 401(k) benefit through your employer, be sure to contribute up to the maximum amount you need to earn a match. Everyone likes free money, which is exactly what you are getting with the 401(k) match.
Another idea is to increase your contribution every time you receive a raise at work. You were living without the raise before so diverting the funds should not be a big deal. It will probably be necessary to cut back on unnecessary expenses as well. Although the sacrifices might be slightly painful now, your future self will thank you for making financial survival during retirement much less stressful.
It’s No Longer True That You Won’t Run Out of Money Following the Four Percent Rule
This piece of personal finance advice has been around for decades. It encourages people to withdraw four percent of their savings the first year after retirement and then adjust withdrawals according to inflation after that. Some experts say that four percent is too much to withdraw due to longer life expectancies and historically low returns on investment accounts such as stocks and bonds.
Today, you would only have 50 percent assurance that you would not run out of money in retirement if you follow this rule. Financial experts now say that you should decrease the amount of your withdrawal to 2.8 percent of your savings during the first year of your retirement. This will increase the likelihood of having enough money to last the remainder of your life from 50 percent to 90 percent.
According to the Social Security Administration (SSA), women have a current average life expectancy of 86 years and five months while men live to an average age of 84 years and zero months. The agency also states that one-third of all people who are currently age 65 will live to see their 90th birthday and one out of seven will make it to age 95.
If you retire at age 65, that means you could have another 30 years of life to finance without the benefit of an ongoing income. That should put the need to save more than 10 percent annually and withdraw less than four percent during first-year retirement into better perspective.
Buying a House Does Not Necessarily Increase Your Net Worth
Pursuing home ownership has been a personal finance goal for generations. Not only did it earn people status as an official grown-up, it also provided benefits such as building equity and eventually selling the house for a profit. Unfortunately, these benefits are not quite the guarantee they were for earlier generations.
The housing crash of 2008 is just one factor that changed the real estate game forever. It was difficult for people to sell their homes at all when the market plunged, let alone for a profit. If you plan to buy a home, it’s essential to time it right to obtain the best value. Here are some factors to consider:
- Check home sale pricing trends in your area, particularly within a three-block radius of your home.
- Decide whether it’s currently a buyer’s market or a seller’s market. Obviously, the best time to purchase a home is when current trends favor the buyer. You can determine this by looking up the average number of days it takes to sell a home in your area. The longer it takes, the more you’re working with a buyer’s market. When homes sell quickly, you’re working with a seller’s market and can expect to pay more to outbid other people interested in the same piece of property.
- Without asking your neighbors’ personal questions that might offend them, you can do some research to find out average income and employment rates in your area. Housing prices are too high if they are not in line with these statistics.
- Periods of low new home construction means that existing homes are in shorter supply. This is the basic supply and demand cycle you probably learned in high school. The greater the demand and the less the supply, the more you can expect to pay.
Your work still isn’t done if you have evaluated the above factors carefully and want to move forward with buying a house. You should also make sure that you have saved for a down payment, which is typically 20 percent of the home’s selling price, that you have an emergency fund, and that your mortgage payment works out to 30 percent or less of your income.
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Make It a Priority to Pay Down Debt
High-interest debt accounts such as medical bills, payday loans, and credit cards can seriously cripple your financial future. That’s why it makes sense to pay them off as soon as possible. The popular Snowball Debt Payment Method can help. This asks you to list your debts from smallest to largest and then put all extra funds you have towards the smallest debt until paid in full. Repeat this process with each debt until you no longer have any.
It’s also important to consider that not all debt is bad debt. Student loans and mortgages, for example, typically have low-interest rates as well as offer a tax deduction. A mortgage is also most people’s largest expense. Instead of paying it off early, it might be a better idea to invest funds in an account that pays a greater rate of interest than the mortgage loan charges.
It’s Not Always Best to Follow the Crowd
When it comes to personal finance, following advice just because it’s popular can have disastrous consequences. That means you should keep renting if you’re not financially ready for a house, pay down high-interest debt, and put as much effort as possible into saving for retirement. Although a financial planner can help you prioritize, you’re the one who must live with the decisions in the end. Choose wisely.
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