The global pandemic seemingly came out of nowhere and left most of us flabbergasted, especially when it came to our finances. But for those who have managed to make it to the other side of it, there are a few lessons that we’ve been left with.
One of the biggest lessons we learned is that we don’t know anything about our finances. Many of the “rules” of money management that we’ve been conventionally taught are either no longer true or need to be seriously upgraded. Here are 8 of them:
3 Months of Expenses for the Emergency Fund
An emergency fund is an essential aspect of good money management, and the pandemic proved it to be truer than ever before. However, while traditional financial wisdom stated that an emergency fund should have 3 months’ worth of expenses, people quickly realized that was nowhere near enough.
“As the pandemic has illustrated, that often won’t be enough,” said Greg McBride, a chief financial analyst for Bankrate. “Long-term unemployment (being out of work six months or longer) is on the rise and business owners have taken a financial hit like never seen before.”
He suggests that people upgrade their emergency funds to hold at least 6 months’ worth of expenses. “The self-employed and sole breadwinners should target even more, enough to cover nine to 12 months,” he added.
Check Your Credit Reports Once a Year
Once upon a time, it used to be that checking your credit reports once a year was enough. Or maybe you were advised to do bi-annual or quarterly checks if you were worried about errors. However, Julie Ramhold, a consumer analyst with DealNews, says that it is important to check them more frequently.
“With the issues caused by the pandemic, more people are hatching special payment plans or deferments for their accounts, like student loans,” Ramhold said. “It’s essential to know whether your credit report reflects accurate reporting, so it’s recommended to check your report once a month, if not more often now.”
The good news is that the major credit bureaus (Experian, Equifax, and TransUnion) are offering free weekly reports through April 2022, and are likely to expand the option beyond that as well.
Maximizing Contributions for Retirement
While it’s a good idea to contribute as much as you possibly can to your retirement account, there are far more important financial obligations you should take care of such as paying off debt (or staying out of it), and even day-to-day expenses. As a rule of thumb, current expenses should take priority over future retirement.
“If you’ve accumulated high-interest debt over the year on credit cards or other types of loans, it might make sense to temporarily decrease your 401(k) contributions,” said Leslie Tayne, founder and head attorney at debt solutions law firm Tayne Law Group.
You can check with your employer to see what the maximum contribution they would match, if they do that at all, and decrease your personal contribution to that. This way, you will have more money to spend on current bills and other important expenses.
Pay Off Debt Before Investing
Prioritizing debt repayments over investments has been a common rule in the world of finances and it does make sense when you think about it. However, with the current state of the market, this advice can hurt your finances in the long run.
“As the student loan crisis grows, more and more people are saddled with debt for longer periods of time,” said money coach Delyanne Barros. In fact, the average student loan is said to take around 20 years to be completed!
“If someone waits that long to start investing, that is years of significant compound interest growth that they can never get back,” Barros said. She suggests setting aside a little bit of money to put towards investments if you can afford to do so while keeping up with debt payments. Your future will be a lot more stable if you do!
Real Estate is Always a Good Investment
Buying a house has always been seen as a major milestone and also a great way to invest and build wealth. While this is still true, focusing on real estate alone can be a grave mistake as it causes you to miss out on other, possibly more lucrative investment options such as stocks and bonds. Plus, being a real estate owner also comes with a number of additional costs such as maintenance, tax, insurance, and mortgage interest.
That’s why, says Robert R. Johnson, a professor of finance for the Heider College of Business at Creighton University, people should avoid “crowding out” other investment opportunities by spending too much on real estate.
“What they don’t realize is that from 1890 to 1990, the inflation-adjusted appreciation in U.S. housing was just about zero,” he said. “That amazes people, but … the decision to buy or rent a home is essentially a financing decision.”
Always Pay with Cash
Another piece of traditional money management advice says that you should always use cash to pay for things, unless absolutely necessary. The logic is that it prevents overspending. However, according to money-saving expert, Andrea Woroch, credit cards aren’t as evil as they are made out to be. She says that when used wisely, credit cards can offer a ton of benefits from fraud protection to purchase/price protection.
Plus, she says, since most of us are buying things online these days, credit cards are really the best way to save money and protect purchases. And there are a number of apps out there to help you find the best deals when linked with your card, including cashback. Why not save some money if you’re already going to spend anyway?
Housing Costs Should Be 30% of Your Budget
It’s a common budgeting rule that your housing expenses should be limited to no more than 30% of your total income, including other house-related expenses such as utility payments and insurance. However, this rule doesn’t reflect the current costs and standard of living.
“This is an outdated rule that dates back to 1969 public housing regulations, and fails to take individual scenarios into consideration such as the housing market someone lives in or their other financial responsibilities,” said Tonya Rapley, financial expert at My Fab Finance and spokesperson for Affirm.
“Determine what you can afford to pay for your housing costs while hitting your other financial goals such as debt elimination, savings, and investing for your future,” Rapley explained further.
You need a new budget that takes into consideration all your financial obligations. If you can take care of them comfortably and spend more than 30% of your income, then, by all means, do it. On the other hand, if you have lots of financial obligations, then even 30% may be too high to spend on housing.
Have A Certain Amount Of Money By A Certain Age
Putting too much focus on having a certain amount of money by a certain age, it is better to put that energy towards increasing your net worth every year – whatever it may currently be. Brittney Castro, a certified financial planner with Mint, suggests doing so by increasing your portfolio of assets such as savings, retirement funds, stock market investments, and even paying off your debts.
Speaking about the traditional advice, Castro, said, “Though I have never felt this money rule to be true, this year has highlighted that everyone is on a different financial path and comes from a different financial beginning.”
Focusing on your individual journey will help you stay on track, stay motivated, and celebrate your progress, says Castro, instead of being upset that you haven’t achieved some arbitrary number that someone thought up decades ago.