Posts Tagged ‘FinancialPlanning’


Daily Finance Article: 10 Financial ‘Rules’ You Should Start Breaking Now

Friday, September 19th, 2014

10 Financial ‘Rules’ You Should Start Breaking Now

By: Robert Pagliarini from Daily Finance

You should always max out your 401(k) and save for your kid’s college education in a 529 plan, right? Maybe not. Most experts have long touted a number of practices that may actually be working against you. These are the top 10 money rules you should break – and what you should do instead.

  1. You need six months of living expense in cash

This is the granddaddy of them all. Start to type “emergency” into Google (GOOG), and the first suggestion is “emergency fund.” The rule is to make sure you have six months of living expenses tucked away in cash in case you lose your job or suffer a financial setback. Of course it’s important to have a financial safety net, but when you earn virtually nothing on your cash, this rule can cost you. For example, if six months of living expenses for you is $25,000, you’d be sacrificing close to $1,000 of income a year by keeping this money in a checking or money market account.

For years, I’ve broken the mold on this financial rule by telling clients they shouldn’t have their emergency fund in cash. Instead, choose a short-term bond fund that pays 3 percent or higher for your safety net. If you need the money quickly, you can easily sell the fund and get access to the cash. If you don’t need the cash – and these emergency fund accounts are rarely used – you can still make money on the assets.

  1. Max out your 401(k)

Not so fast. There are many good reasons to contribute to a 401(k), such as tax savings, tax-deferred growth and a possible employer match, but there are also good reasons not to contribute as well. Don’t blindly dump money into your 401(k) if you don’t have an emergency reserve of some sort and there is a chance you will be laid off. It is taking longer for most to find a job, so if you think you may be out of work, make sure you have the resources to pay rent and buy food until you land a new job.

​Also, if your employer doesn’t provide a match and you are in a low-income tax bracket, it may make more sense to pay the tax now (since you are in a low tax bracket) and invest in a Roth individual retirement account instead. Use this 401(k) vs. Roth IRA calculator to crunch the numbers.

  1. They key to financial success is cutting expenses

You cannot cut your way to wealth. Too many people and financial advisers focus on trimming expenses when they should be focused on the other half of the equation – income. I’m a proponent for living within one’s means, but too often that creates an artificial barrier or ceiling. “This is what I make, so I have to cut back to save more,” is often the thought process. Rather than living within your mean, work on increasing your means.

There are many ways you can make more money, including asking for a raise, boosting your skills – your human capital – and getting a promotion, starting a side project in the after-hours or going back to school and starting a new career. What you make today is not necessarily what you can make tomorrow. Cut unnecessary expenses and then use your energy to increase your income.

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