Following These Personal Finance Tips Could End Up FAILING You!
In the world of personal finance, there are gurus and then there are gimmicks. The simple truth is that everyone wants to make more money while increasing their personal net worth. Unfortunately, these gimmicks can transition into ‘common knowledge’ and that ‘knowledge’ can end up seriously harming your finances. Today, we are going to take a close look at four common personal finance tips that could end up ruining your economic situation.
4 Personal Finance Tips That Can RUIN You!
Attaining complete financial independence is a goal worth striving for. Commonly referred to as ‘saving for retirement’, sorting out your finances is incredibly important. What you do with your money today will end up impacting how you live your life ten, twenty, and thirty years down the line. It’s true! The financial decisions that we make today will have a domino-like impact on everything else that we do in our future. You can probably understand why it is important not to fall for gimmicks and misguided personal finance tips, right? Listed below, you’ll find four common finance tips that are routinely bandied about. We’ll introduce you to the thought process behind each tip as well as the real-world impact these tips can have on your life. Let’s begin!
1) Dedicate 10% of Your Income to Retirement.
One of the most common personal finance tips that we stumble across is the ‘10% Rule’. The 10% rule essentially argues that you should be saving 10% of your income for retirement. That’s it. Pretty simple, right? Like most bad advice, the 10% rule is easy to remember, easy to implement, and easy to be fooled by. While the idea behind this rule is great, dedicating a portion of your income to retirement, the execution is going to be lacking. Since this is a discussion about personal finance, let’s dig into the numbers.
Let’s assume that you start saving 10% of your income at the age of 30. Let’s assume that you are earning roughly $35,000 per year. This means that you are going to be saving $3,500 in your first year. Let’s assume that you get a 2.5% raise every year until you turn 62, a common retirement age. Along the way, you receive investment matching through your work to the tune of another 7% ROI. By the time that you decide to retire, you’ll end up stashing away nearly $441,000. That sounds like a decent amount of money until you realize how quickly it will evaporate once your weekly check stops being deposited. If your Social Security benefits need to match up to 90% of your pre-retirement earnings, you’ll end up out of money before you turn 76.
In the hypothetical situation that we outlined above, it’s easy to see how people are failing to prepare for retirement in an appropriate way. If you want to live comfortably once your paycheck stops coming in, try to save at least 15% of your income for retirement. Remember, more is always going to be better.
2) Purchase a Home to Increase Your Net Worth.
One of the most important financial decisions that you’ll ever make revolves around purchasing a home. Purchasing a home is intrinsic to the American Dream. In fact, pop culture has repeatedly drilled it into your head that without your own home, you are something of a failure. Besides, purchasing a home just makes sense, doesn’t it? When you purchase a house, you build equity. When you build equity, you make your money work for you. When your money works for you, you end up on the fast track to wealth. Right? Well, not exactly. There are going to be countless situations where purchasing a home simply does not make any financial sense. For example, look at home buyers who took the plunge right before the real estate bubble popped.
Of course, purchasing a piece of real estate can make absolute financial sense. However, you are going to need to be well aware of the realities of the real estate market. You will also need to be financially secure and able to withstand a bad investment. Finally, you’ll have to be prepared to give out a hefty down payment in order to make the purchase worth your while. If you can check all of these boxes, go right ahead with your purchase. If you have any remaining doubt, consider holding off on purchasing your own home. In the short term, renting can make plenty of sense for people of a certain financial situation.
3) The 4% Rule Will Keep You Financially Secure.
Alright, it is time to learn about a conventional rule that might leave you wondering what went wrong. Saving for retirement is only part of dealing with your post-work world. You’ll also have to be very careful with how you withdraw your money once you are retired. Conventional thought in the financial world tends to circle around the 4% rule. This rule means that you can withdraw 4% of your retirement savings during your first year of retirement. From that point forward, you can raise your withdrawal rate based on corresponding inflation adjustments. While this sounds like a financially secure concept, the details are a little less clear.
According to research performed by the team at Morningstar Investment Management, the 4% rule is historically fickle. Due to plummeting bond yields, following the 4% rule is as likely to lead you to financial ruin as it is to lead you to success. The team at Morningstar Investment Management literally concluded that the 4% rule would lead to a 50/50 outcome. If you want to dedicate your retirement to worry about which side of the coin you land on, follow this rule. If you want to take control of your financial independence, opt to follow the 2.8% rule, instead.
The 2.8% operates in exactly the same way as the 4% rule, obviously with minor tweaks. While you might have to tighten your belt a few times over the years, this financial path will make certain that your income lasts throughout your retirement.
4) Prioritize Paying Down Your Debt.
The final financial pitfall that you need to be worried about has to do with debt. We are raised in a society that looks askance at debt. If you have debt, you aren’t doing well, right? Whether you are dealing with student loans, a mortgage, or credit cards, your debt can begin to take on a life of its own. In order to become financially soluble again, you need to prioritize paying down your debt, right? Well, not exactly.
Debt is a very confusing subject. There are many kinds of debts that can impact your life in a variety of different ways. Fundamentally, all debt is not created equal. For some debts, such as a low-interest student loan, you would be perfectly fine by taking the time to get rid of the loan. High-interest debt, such as a credit card, however, needs to be taken care of in a much quicker manner. The crux of this discussion basically boils down to your return on investment. Let’s explain.
As it turns out, you need to take a close look at your interest rates and opportunity costs before deciding to pay off a loan. Let’s look at a mortgage loan for a prime example. Let’s say that you have an incredibly low-interest rate on your mortgage at just 5%. If you paid off your mortgage in full, your ROI would max out at the 5% interest that you are saving over the life of the loan. Now, could you invest that same money to earn more than 5% ROI over the corresponding life of your mortgage? Probably, right? Dealing with debt isn’t nearly as simple as you might have thought. In fact, you’d probably better served to speak with a financial advisor before making any large debt payments.
Working Your Way to Financial Freedom
Following the path to financial freedom can be difficult. The path is constantly changing, winding, and adjusting based on the world around you. No two people are going to be dealing with the same financial problems, pitfalls, and decisions. No two people are going to be similar enough in their situation for a ‘personal finance tip’ to perfectly apply to them both. Instead of following all the common tips that you read on the internet, consider finding a financial advisor to guide you forward on your journey.
