A few days ago I shared four personal finance “rules” I’ve broken. So-called rules sell books because they provide a way for an author to be declarative and have solid opinions, even when these rules have been around for a long time, repeat already well-known concepts, or aren’t appropriate for everyone.
Start saving for retirement when you start working.
And sometimes, the ideas are good in theory, but difficult in practice. And difficulty shouldn’t be an excuse. Sometimes you have to make difficult choices. For extraordinary results, you have to do things differently than most other people.
I’m sure you’ve heard all the motivational sales techniques. The bottom line is you can teach good financial behavior to students all you want, but it’s not going to have a positive impact on financial behavior. Imagine yourself without the financial help of friends and family, and perhaps without the financial support from a family throughout your entire life growing up. Now, after a receiving a degree from college because you knew that higher education is the surest path to life-long financial success regardless of the degree, you followed your passion and are in an entry-level position — perhaps even in a nonprofit organization where you are paid effectively much less than minimum wage for 80-hour work weeks.
You can’t consider your needs in retirement. It’s just not going to happen when you’re not even earning enough to pay for your food and housing. Urgent needs take precedence, and thinking about the future is a luxury that only some people have. You can’t look for other, more lucrative work because you only have time for your current job and sleep, and not much sleep at that. And when shiny, happy motivational people try to get you to see that all you have to do is change your “mindset,” you want to punch them. And you’re allowed to feel this way, because most of the time, the shiny, happy motivational people are so far removed from your situation that they have no capability to understand your life and empathize with you.
Well, that’s where I was when I was twenty-three and twenty-four years of age. As I mentioned the other day, I couldn’t save ten percent of my income, and I couldn’t think about retirement. No words from a financial advisor or a motivational speaker could change the fact I couldn’t afford my all-ready bare-bones existence. Getting out of that situation wouldn’t have been possible without a safety net, which in my case, was living with my father for free for a few months to change my life’s direction.
Spend less than you earn.
This is perhaps the core tenet of personal money management and getting started on a path to financial security and eventually financial independence. It makes mathematical sense. You only grow when you have a surplus. A business that never has profit will eventually fail. A person whose financial position deteriorates every month will eventually crash and burn.
Just out of college working in nonprofit, I could barely make this work; in fact, most of the time, I was simply unable to reduce my spending below my income, simply because I needed sustenance and shelter. So I had to break the same money rule I was reading about every day on the Motley Fool discussion boards. And I did not feel good about that. I mentioned that I only had time to work at my job and sleep; I took up much of that time available for sleeping to try to freelance. I offered my services as a web developer to a few companies, and probably worked too much for too little money.
Now that my situation has significantly improved, I’m once again breaking this rule. That’s after a decade of being mindful of my financial situation, from both income and expense perspectives. With a new job working fewer hours and making much more money, and while keeping my expenses low, I not only was able to meet my expenses, but I had time to focus on my own projects, which eventually resulted in being a proprietor of a multi-million dollar business.
Particularly in the last few months of last year, my income from working has been significantly down from before I sold that business. And I’ve been spending more than I’ve been earning from work. The good news, and why I can break this rule today, is that I can afford not to work. I have investments that should last me for the rest of my life, and these investments also generate income.
I haven’t been using this income so far, and I’ve been depleting my savings instead. Starting with this month, I’m changing that approach. I will continue to write for Consumerism Commentary and earn money as a writer, and I will supplement that working income with income from investments, at least until I’m free to work on some more lucrative projects. And I consider myself very fortunate to have this flexibility.
Keep six months’ worth of expenses in your emergency fund.
This rule comes in many forms. The “six months” idea seems to be the most popular, but I also like the idea of keeping a months’ worth of expenses in liquid savings for every percentage point of unemployment. Emergency savings should, among other things, keep you going in the event of the loss of a job. In times of high unemployment, it could take longer to find a job. And the more time you spend unemployed, the harder it will be to get a new job, as unemployment carries a pretty significant stigma among hiring managers.
My situation today permits some flexibility for me. And my situation at the beginning of my career would have prevented me from having any emergency fund. Many people will argue that you can start an emergency fund with as little as a dollar a week. This is true, and it’s probably affordable for just about anyone with a job, even minimum wage. But it’s going to take a long time to build a complete emergency fund with a dollar a week, especially if your living needs still exceed your income.
I’ve seen the popular year-long project in which you start with saving a dollar the first week a year and double that amount every week until the end of the year. This is a great idea if you have the capacity. But exponential savings can quickly climb to a requirement that’s unattainable for someone like the twenty-three year-old me.
Have life insurance valued six to ten times your annual income.
This might be a good rule for some people, but even as written, it’s pretty vague. There’s a big difference between carrying insurance at six times your income versus ten times your income.
I don’t carry any life insurance. The only reason I would possibly buy insurance now would be because it’s apparently cheaper to start now than wait until I’m older and my living situation warrants it. But that’s not a great reason; it’s like buying a second refrigerator just because it’s on sale and you expect your current refrigerator to stop working sometime within the next thirty years.
I have no children, no wife. There’s no one relying on my ability to earn income. That will probably change one day, but even if it does, because of my good fortune in business, I would have other options for caring for my loved ones after an untimely demise.
Rules are made to be broken. Well, that’s what they say. It’s a meaningless cliché, and in fact, rules are not made to be broken. But the personal finance rules you often read about, if you read financial blogs or books, or if you watch television shows, or if you’ve ever listened to a financial speaker who prefers the sound of his or her own voice, are usually nothing more than guidelines. Sometimes they are ideals. And in many cases, the reasons for not being able to “obey” are beyond your immediate control.
So please, when you read about rules of personal finance, keep your neurons engaged. And don’t feel guilty or inadequate if you feel you can’t meet someone else’s goal. And feel free to disagree and argue. Gurus like it when people don’t argue, and just go along with their words of wisdom. They will dismiss those who disagree, and accuse adversaries of “just not getting it.” They will call you jealous of their success rather than defending their views, because their views don’t always stand up to criticism, and calling names or attacking character is easier than discussing ideas intelligently.
What rules do you break?