Thumb through any book about personal finance, money management, and investing written by an expert, and you’re bound to come across a number of rules dictating financial behavior. Sometimes the author-dictators believe their rules are unbreakable and chastise those who might think differently, while other writers leave room for flexibility. In general, the more powerful a brand behind the writer, the more likely he or she will ridicule and disparage those who are willing to put up an argument. That happens to be how cults succeed, as well; if you disagree, you’re shunned and embarrassed, but if you want to share in the glory of the brand, albeit in the shadow of the leader, toe the line and preach the truth.
Don’t get me wrong. People have created these rules over the years not to trap the public, but to provide some guidance. In most cases, the rules are good starting points, and the best way to communicate guidelines and to convince an audience to pay attention is to call them “rules.” Readers and listeners need to understand there are consequences for making bad decisions, but in order to make good decisions, there needs to be some sort of framework. That’s what these so-called rules provide.
But rule following doesn’t eliminate the need for reasoning. Now, not everyone is capable of financially-smart reasoning, and in the attempt to spread good messages and sell books, rule following can be an adequate replacement for self-awareness, contemplation, higher levels of cognition and understanding, and decision-making based on anticipating outcomes. Everybody needs guidance at some point in their lives, but mindless rule-following most often results in enrichment of the gurus who claim they have all the answers, and the answers are absolute.
There have been times in my life I have been willfully neglectful of the rules I’ve been reading about for years, and while my approach worked for me, it might not work for you. I bet many Consumerism Commentary readers have broken some of these same rules and not only lived to tell the tale, but thrived financially in spite, or in many cases because of those decisions.
Never buy a new car.
You should never buy a new car because the biggest depreciation is immediate. As soon as you drive off the lot, the car loses a lot of value. It’s better for someone else to pay for that, and smart people buy gently used cars.
I broke that rule when I bought a new 2004 Honda Civic LX in June 2004. And I made that purchase before I was done paying off my undergraduate student loan. (I earned that degree in 1999.) Civics were and are very economical cars to own, and the market knows that. Therefore, the price for “gently used” was close enough to “brand new,” and I needed to make sure my vehicle was as reliable as possible, so I made the purchase. The price differential wasn’t significant to me, and I paid the car loan off early.
Never rent a house when you can afford to buy.
In my early adult years, there was a lot of pressure to buy a house, and the housing boom seemed like a sure thing. Everyone was bragging about how the value of their homes was skyrocketing in value and preaching about how everyone should buy real estate as soon as they could. It’s probably a good thing I didn’t have the money for a down payment at that time, because things got out of hand quickly. Real estate is not a guaranteed investment, and on average appreciates in line with inflation.
There is a mantra I still hear from time to time that renting is “throwing money away.” It’s not. It’s saving on major cost-of-living expenses that go into owning a home. And while you’re not building equity in an asset (by paying off a mortgage and waiting for asset appreciation), that asset is generally useless for anything but providing shelter until you sell it. And then you just buy another. There’s no need to lock up all your financial assets in a house.
Save at least ten percent of your income.
A good rule of thumb like this can just lead to frustration. When I first starting working out of college at my first major job (that is, not a substitute teacher, not a student-worker in my college’s library, but a good position at a nonprofit organization), the thought of saving ten percent of my income was unconscionable. I couldn’t even afford my rent, commutation, and grocery expenses. I ignored my student loan repayment because I needed to eat. The boss brought in a financial advisor and began offering a 403(b) plan — a 401(k) for nonprofit organizations — and I couldn’t spare anything from my paycheck to make a contribution.
It’s just as well — the fees on that 403(b) plan were outrageous.
And now that I’m in a different situation, financially independent, I’m not really in saving mode, even though I am earning money from working. Unless I start a new business, I’ll be in asset depletion mode.
Don’t use credit cards.
There are certainly some people who should never use credit cards. It can be argued that even people who use credit cards wisely, paying off the balance every month and earning cash back or other perks, are damaging their financial health through the psychological phenomenon of spending more for every abstraction layer further away from cold hard cash. Yes, there are times where I’ve spent money I wouldn’t have had I not had a plastic or electronic form of payment — most notably whenever I’ve ordered anything online. But overall, making conscious decisions about spending, training yourself to wait when there’s an urge to make an purchase based on an impulse, can help control that urge.
Not everyone has self control or a sense of financial consequences. I’m not saying I’m immune to the psychological effects of spending with credit cards, but it my informed judgments based on self-analysis, I see credit cards as a tool for organizing spending and earning benefits. Just yesterday, I received a $525 check from American Express in return for Membership Rewards.
In addition to these four rules I’ve broken, here are four more rules I break either today or have broken in the past. What personal finance rules do you willingly break?