There are some investment rules you can break if you want. Some of these rules are outdated, and some don’t apply to everyone’s individual financial circumstances. So why bother follow a rule that makes no sense?
Here is the list of 5 financial rules you can consider breaking:
1) Use your age to determine asset allocation
Rule: Subtract your age from the number 100 and that is the percentage of your portfolio you should have invested in equities, with the remaining percentage in fixed income, adjusted each year.
Advice: Rebalance your portfolio each year, look at your target retirement age, what you plan on using your funds for in retirement and your risk tolerance.
2) Pay off your mortgage as fast as possible
Rule: The mortgage is usually the largest debt a household has got. From a risk tolerance point of view, you pay down the debt as fast as possible, if you can.
Advice: This only makes sense when interest rates are outpacing the stock market. But interest rates are lower and the stock market produces even higher returns the7% p.a. So it’s better to make your payments on time, take your mortgage interest deduction on your income taxes and have more money invested for higher returns.
3) You’re throwing away money if you rent
Rule: Renting means flushing money down the toilet.
Advice: Owning a house is part of a dream. It is your own and nobody can higher your rent or even throw you out. In the long run, it should increase in value. But all comes at a price. Renting offers you a life free of many of the unpredictable expenses homeownership offers. Not having to pay mortgage interest, property taxes, maintenance and repairs can be a big plus if there are good opportunities to put your money to work elsewhere. Renting also means flexibility. You can move to where opportunity exists while a house might tie you down. Obviously, there are advantages and disadvantages to owning a home or renting. You decide!
4) Spend no more than 30% of your income on housing
Rule: This 30% rule is a common budget benchmark for housing costs that tells you to put a lid on your rent or mortgage at under 30% of your monthly income.
Advice: This is an old rule. But this old rule may not be realistic for a lot of people today. Rather than think 30%, think what can I afford? Look at how much you earn, how much debt you owe, and where you live, your rent could be more or less than 30% of your monthly income. If rental expense is too high, consider ways of making more income or consider moving somewhere with lower costs.
5) Withdraw 4% of your savings in retirement
Rule: You should start withdrawing 4% from your portfolio in your first year of retirement, increasing withdrawal each year enough to cover inflation.
Advice: Another old rule that does not consider life’s up and downs. Be flexible! Revise your spending rate based on your needs and portfolio performance. Early retirees might have a smaller nest egg, and need to withdraw less than 4% to make their savings last. And someone with major health concerns and a shorter horizon might want to enjoy more of their savings with the time they have left.
Rules do not fit everyone. Use personal finance rules as guidance and consider your personal situation. Use your best judgement on whether or not a rule should be broken.