In the September issue of Kiplinger’s Personal Finance magazine, the editors shared twelve “new rules” for your money, although most of them do not sound new at all. Fundamentals don’t change, but the general consensus point of view does. If there is anything new here, it’s that the a downturn in the economy has forced people to reconsider some assumptions.
Here are a few of the “new” money rules with some thoughts.
“Renting might beat buying.” Kiplinger’s Personal Finance points out that buying a house only beats renting a similar home if your monthly payments won’t exceed the costs of rent and if you stay in the house long enough to recover the costs of buying and selling. They neglect to mention that you should consider all the expenses of owning a house that you would never have to pay when renting.
“Consider a Roth.” Roth IRAs have long been touted by financial experts. The primary benefit comes when you retire and your withdrawals, including gains, are tax-free. With a traditional Roth IRA you will be required to pay ordinary income tax rates on your withdrawals, and with the way things are going, it might be wise to expect higher tax rates later than what we have now. Then again, a Congress of the future could decide on a whim to begin taxing Roth IRA gains.
“Focus on dividends.” This isn’t new. There has always been a strong cadre of investors promoting stocks that pay dividends. There are pros and cons to this approach. Companies can suspend or cancel dividend payments at any time. Furthermore, some companies require retaining profits for research and development or other investments, so returning profits to shareholders isn’t always the best way for a company to grow.
“Personalize your emergency fund.” I suggested determining the right size for your emergency fund two years ago. This goes well beyond typical advice calling for three to six months’ worth of expenses. Your cash reserve should be tailored to your unique situation, taking into account your access to other support, your income stability, and your flexibility.
“Cut your credit-card debt, but not your cards.” It’s old news that closing your credit card accounts will harm your credit score.
“Think single-digit returns.” This has been a popular point of view since the aggregate value of the stock market tanked in the recent recession. Financial planners once promised 10% to 12% for stocks over the long term, but have shied away from these predictions recently. Some have always preached after-tax returns of 6% to 8%, and that more conservative assumption is probably a safer bet. Then again, no one knows what the future will bring.
“Save early for retirement.” I’m not quite sure this can be considered a new rule unless it is compared to financial thought popular at least ten years ago. I wish I had thought about saving for retirement when I was in college or recently out of college. In all honesty, in the late 1990s I wasn’t earning enough money to pay for my commute to work. Retirement wasn’t even on my radar screen. There were not financial blogs at the time professing the ideas that I needed to learn about.
The rules of money don’t change, but at certain times, different rules are emphasized more than others.