When You Should Break Your Personal Finance Rules
You've heard them time and time again, from parents, teachers, TV pundits and even friends: when it comes to personal finance, there are rules that must be followed to be successful. Like most conventional knowledge, most of these "tried and true" tidbits no longer apply to many of us. You don't need to look back too far to remember a time when conventional knowledge suggested that real estate values would continue to climb, seemingly forever, or that the Great Depression was an isolated event that could never again be possible, considering how far the world's economies have come since the 1930s. All that being said, most people will continue to follow the same blueprint of financial rules as the generation before them. However, for those of you more interested in taking a more personalized approach to your personal finances, here are some rules that young adults are never supposed to break, but should consider breaking, anyway.
Saving or Investing a Set Portion of Your Income
I'm sure you've heard, more times than you can remember, that by saving just a small amount of your pay check every month you can retire at 60, with an astronomically sized savings. That's all well and good, when you're 60, but what about the 40 or so years of life from now until then? Usually the amount suggested is around 10%, and although the advice may be justifiable, your circumstances may not suit the strategy. For one, many young adults and students need to think about paying for the biggest expenses of their lifetime, such as a new car, home or post-secondary education. Taking away potentially 10 to 20% of available funds would be a definite setback in making said purchases. Additionally, saving for retirement doesn't make a whole lot of sense if you have credit cards or interest bearing loans that need to be paid off. The 19% interest rate on your Visa would probably negate the returns you get from your balanced mutual fund retirement portfolio, five times over. (For related reading, also see 8 Financial Tips For Young Adults.)
Also, saving your money to travel and experience new places and cultures can be an extremely rewarding experience, for a young person who's still not sure about their path in life. Most people cannot justify a year-long trip around the world when they are paying off a mortgage and car payments, not to mention putting away any extra money into their retirement savings. While being fiscally responsible at a young age is important, and thinking about your future in terms of a savings is crucial, the general rule of saving a given amount each period for your retirement may not be the best choice for young people just getting started in the real world. (For more, see Globetrotting On A Budget.)
Going to University
Although it may not be visible from afar, universities are a big business. Try to think of another industry where businesses can charge tens of thousands of dollars for their services, while at the same time receiving donations from happy old customers and receiving preferential tax treatment from Uncle Sam. Don't get me wrong, I am a big believer in the powers of higher education for individuals and society, as a whole. However, as the first-world shifts more and more positions overseas, and post-secondary enrollments continues to climb year after year, the laws of supply and demand are pointing to the contrary. More and more college grads are leaving school with no job prospects and thousands in student loans, and the importance of a college degree seems like a Catch 22. Employers are hesitant to hire applicants who don't have a college degree, however the number of qualified candidates can often far outnumber the positions needing to be filled.
For some, taking another path can pay off in spades. Looking into vocational schools that offer more specific job training at a much lower cost can get you started in the workforce years before your college counterparts. Jobs in construction, the trades and fire fighting can pay very well, be very rewarding and do not require a college degree. Before doing what the rest of your colleagues are doing, by heading off to university, think about what job you would like to do and whether or not you need to spend four years and $80,000 to do it. (For more, read Top 6 Jobs that Don't Require Degrees.)
Long Term Investing / Investing in Riskier Assets When You're Young
The rule of thumb for young investors is that they should have a long-term outlook on their investments and stick to a buy and hold philosophy. This rule is one of the easier ones to justify breaking. For one, investors who followed the rules of buy and hold are still stinging from the credit crisis that occurred during 2007 and 2008. Savvy investors find attractive entry and exit points for stocks and use volatility in the markets to their advantage. Being able to adapt to changing markets can be the difference between making money, or limiting your losses, compared to sitting idly by and watching as your hard earned savings shrink. Short-term investing has its advantages at any age.
Now, if you're no longer married to the idea of long-term investing, you can stick to less risky investments, as well. The logic was, since young investors have such a long investment time horizon, they should be investing in higher risk ventures, since they have the rest of their lives to recover from any losses they may suffer. However, if you don't want to take on undue risk in your short to medium-term investments, you don't have to. The idea of diversification is an important part of creating a strong investment portfolio; this includes both the riskiness of individual stocks and their intended investment horizon. Keep in mind that an investment should make sense for both aspects, and you'll no longer need to follow these old and tired investing rules.
The Bottom Line
The personal finance realm may have more "smart tips" and "healthy tidbits" than any other. Although these convenient rules of thumb are meant as general guidelines for the majority of people, remember that you are an individual. These were just a few personal finance rules that don't work for many young adults, there are countless others. Examine your own situation closely and do what makes the most sense for you financially, and chances are you'll end up in the same place these rules are meant for you to reach.
