Classic money advice never goes out of style. But as the economy, technology and our lifestyles continue to evolve, so should the way we manage our finances. Unfortunately, not all the advice out there has caught up.
We asked eight certified financial planners what rules of thumb have become outdated – and what they tell their clients instead.
1. “You have to save 20 percent for a home down payment.”
If you’ve ever thought about buying a house, you’ve probably heard it: Don’t take out a mortgage until you’ve saved up at least 20 percent for a down payment. Otherwise, you’ll be forced to pay notorious private mortgage insurance.
Higher mortgage payments can be a pain, but the financial trade-off between paying more now versus waiting years to save up enough money could be worth it.
“If we look at the macroeconomic factors of the last couple decades, real estate has appreciated considerably while wage levels have largely stagnated,” explained Justin Chidester, owner of Wealth Mode Financial Planning in Logan, Utah. This, he said, makes it unrealistic for most people to save up a 20 percent down payment within a reasonable amount of time.
“My new rule of thumb is this: If you can save 20 percent down for your target home within about five years, go for it,” advised Chidester. “But if you take much longer than that, you’re going to be chasing a moving target with home prices going up, which also means you missed the opportunity to experience appreciation on something you own.”
2. “Credit cards should be used for emergencies only.”
As a young adult, if your parents talked to you about money at all, they probably warned you about the dangers of credit card debt. “For emergencies only” was usually the caveat that accompanied access to plastic.
Today, credit cards have become diverse and effective tools that allow you to “track your spending in one place, increase security and theft protection, and potentially gain cash-back rewards,” according to Eric Maldonado, owner of Aquila Wealth in San Luis Obispo, California. Often, it makes much more financial sense to do your spending with a credit card over cash.
But that doesn’t mean you should swipe with abandon.
“Make sure to set up a monthly automated payment from your checking account to pay off your credit card balance in full every month,” said Maldonado, “so as to never incur any interest charges.”
3. “Getting married requires merging your finances.”
Getting married means sharing just about everything with your spouse – your home, your time and maybe even a family. But one thing you don’t have to share, contrary to popular belief, is your money.
“Getting married doesn’t mean you have to merge all your bank accounts,” explained Ryan Frailich, founder of Deliberate Finances in New Orleans. He said it’s much more common for marriage to happen later in life after couples have spent years building their financial lives independently.
“I see many couples have great success with a ‘yours, mine, ours’ system,” said Frailich. Each spouse has separate accounts but contributes a portion of income to a shared household account. “Having open conversations about your finances, spending and debt is vital … but you can do all that without putting all your money into shared accounts,” he said.
4. “Use your age to determine asset allocation.”
Tricia Rosen, the founder of Access Financial Planning, based out of the greater Boston area, said she used to work at a large mutual fund company during the 1980s and 1990s. Back then, it was standard to give the following asset allocation advice: “Subtract your age from the number 100 and that is the percentage of your portfolio that you should have invested in equities, with the remaining percentage in fixed income, adjusted each year as you age.”
Today, many investors still follow that rule of thumb. But according to Rosen, that advice is not only outdated – it’s potentially harmful to your future earnings.
“Today, we have many more investment choices available to the average investor,” said Rosen. “We have a better appreciation of a person’s individual tolerance for risk and individual financial goals. A person’s ideal asset allocation is more unique to the individual person than was previously recognized,” she added.
So instead of following a strict approach to investing, consider talking to a professional about how you can tailor your portfolio to your personal risk tolerance and goals.
5. “Save 10 percent of your income.”
The 10 percent savings rule used to be the gold standard when saving for your golden years. Today, unfortunately, 10 percent of your income probably isn’t enough to retire on.
“While it’s a fine start and certainly better than nothing, it certainly shouldn’t be used to benchmark success,” said Michael Troxell, a senior wealth manager at USAA. “That number won’t be enough for 90 percent of individuals, especially with longer life expectancy and rising healthcare costs.”
The problem, he says, is that following the 10 percent rule ignores expenses. “It is the expenses that end up hurting retirements, not the savings rates during one’s working years,” said Troxell.
So rather than aiming for a specific percent, Troxell recommends saving as much as you can while still maintaining a good quality of life and focusing on cutting unnecessary expenses.
6. “Pay off your mortgage as fast as possible.”
For most people, a mortgage is the largest debt they’ll ever shoulder. So if the opportunity arises to pay off that debt early, shouldn’t you jump at the chance?
“At one time, when interest rates were double-digits and investment returns were an average of 8 percent, that made sense,” said Melissa Ellis, founder of Sapphire Wealth Planning in Kansas City, Missouri.
She explained that today, however, the majority of homeowners have a mortgage rate of less than 5 percent, while they can still expect to earn 8 percent or more annually on investments.
“It’s better to make your payments on time, take your mortgage interest deduction on your federal income taxes and have more [money] invested for higher returns,” said Ellis.
7. “You need a prestigious degree to get a good job.”
There was a time when in order to get a “good job,” you had to get a degree from a prestigious university. That’s what our parents said, anyway. And 20 or more years ago, they probably would have been right.
“The cost of college 20+ years ago was much lower compared to wages,” explained Mark Struthers, founder of Sona Financial. “Because wages have not kept pace, and the money had to come from somewhere, student loan debt has become the next big crisis.”
Today, if you spend too much money pursuing a degree, few jobs are good enough to warrant the cost. “If you buy the stock of a company… and pay too much for it, then the fact that’s it’s a good or even great company means little,” said Struthers. “The same holds true for college.”
Instead, students and their parents need to consider the return on investment when it comes to college. In other words, you should think twice about shelling out six figures for a private education in art history – and maybe even consider vocational school over a traditional four-year degree.
8. “Renting is the same as throwing away money.”
Homeownership has long been a staple of the American dream. So when you send rent checks off to a landlord for years with nothing to show for it, you might feel like you’re failing at achieving an important goal.
On the contrary, renting affords you a life free from major expenses such as mortgage interest, property taxes, maintenance and more. Plus, it opens up opportunities to earn more money.
For instance, “paying rent means that you don’t have an expensive illiquid asset that would prevent you from taking a lucrative job offer in another market,” said Justin Harvey, the president and founder of Quantifi Planning in Philadelphia. “In cases like these, there is significant monetary value to being nimble with regards to your living arrangement,” he said.
Of course, Harvey noted this isn’t true for everyone, as it depends on your profession, location and more. But in general, young adults shouldn’t believe “that buying a house is the default option,” according to Harvey.
Money is deeply personal. So when it comes to your finances, you should take any one-size-fits-all recommendation with a grain of salt. There’s always an exception to the rule – and you could be it.