Money is kind of scary.
Unless you’re a professional financial planner — or paying top dollar to work with one — understanding the ins and outs of even basic personal finance can be tricky.
Unfortunately, tons of bad advice muddies the waters even more. Outdated, ill-thought-out, or just plain wrong financial “rules” plague conventional wisdom and make most of us feel like we’re never doing anything right.
Worse, trying to follow these rules could actually cost you money.
We tapped into some of our favorite money experts to find out which rules money tips you can let go — and what to do instead.
1. Retirement Savings Should Be 70% of Your Income
This rule says your goals for retirement savings should be to have about 70% of your former annual income. So, if you make $50,000 a year, you’ll want $35,000 a year for retirement.
But J.D. Roth at Money Boss points out, “estimating your retirement spending from your current income is ludicrous.”
What if your income is $50,000, but you save half of every paycheck? Your annual expenses are only $25,000. Following the 70% rule would mean you’re setting aside way more money than you need.
“You run the risk of saving too much,” Roth warns, “meaning you’ll miss out on using money to enjoy life when you’re younger.”
Instead, base your retirement needs on your expenses, not your income.
2. Keep Three to Six Months’ Salary in an Emergency Fund
Using the same logic as the retirement rule, conventional wisdom for building an emergency fund is flawed, too.
Don’t base your emergency fund on what you earn. Base it on what you spend.
“Focusing on expenses ensures that the emergency fund covers its intended purpose, which is paying the bills, not replacing lost paychecks,” explains Chuck Jaffe at Market Watch.
Keeping too much money liquid in an emergency fund — accessible in, say, a savings or checking account — reduces its earning potential. You might benefit more from adding that money to a retirement account or investing elsewhere.
3. The One-Third Rule
Accepted advice says to set aside about one-third of your earnings for taxes, another third for living expenses and the last third for savings.
“As guidelines go, this is catchy,” says Jaffe. “In real-life application, it’s sloppy, and its success is more likely dumb luck than sound thinking.”
The rule can hardly apply to everyone, making it a dangerous one to follow.
If your earnings are very high, Jaffe points out, this would mean you’re probably spending too much when you could be saving. If they’re very low, one-third may not be nearly enough to cover living expenses.
Instead, look for reasonable opportunities to reduce your living expenses, and save what you can. If you can only save a few dollars at a time, consider an app that will help you automate it, like Digit.
4. Always Use Credit Cards for the Points
At The Penny Hoarder, we love to recommend rewards credit cards, and with good reason.
If you manage your spending well, pay off your balance every month and earn more in rewards than you pay in fees, points or miles are like found money.
However, a 2010 study by the Federal Reserve Bank of Chicago showed using a rewards credit card tended to increase both spending and debt, the Wall Street Journal reports.
If you overspend in the name of accruing points, you’re not doing yourself any favors. Instead, use your rewards credit card strategically to get the most out of it, and make sure you’re not carrying a balance month to month.
5. Carry a Credit Card Balance to Improve Your Credit Score
On that note: No, it’s not a good idea to carry a balance on your credit card. This doesn’t improve your credit score.
“Probably the thing I hear the most from folks is the misconception that one should carry a balance on credit cards, that only paying the minimum payment is a good thing to do in terms of one’s credit history,” Financial Resource Center counselor Kerri Cook told Time.
I’m not brilliant when it comes to credit histories, but this one hits me in the gut when I hear it. Who is perpetuating this awful — debilitating — advice?!
Maybe this is misinterpreted, telephone-style, from the advice that using credit cards helps your credit score. In any case, let’s set the record straight.
“A much better strategy is this one: Use a credit card with a good bonus program and pay off the balance in full each and every month,” says Trent Hamm at The Simple Dollar.
On a similar note, while the math also shows having and using a credit card, taking out and repaying loans, and other forms of well-managed debt increase your credit score, Hamm debunks the myth of “good” and “bad” debt.
“Simply put, there is no such thing as good debt,” he says. “There are occasionally good reasons to borrow money, but as soon as you have that debt around your neck, it becomes a weight holding you down.”
6. Go to College
Hamm makes a smart, perhaps controversial, argument against the conventional advice that college is a necessary step for young adults.
“My advice to my children is this,” he says, “Unless you have a real reason to go to college that you can articulate and understand, strongly consider going to a trade school instead.”
If it’s not a fit for you, skip the four-year degree and related costs. Maybe an alternative certification is more your style?
And don’t worry. You can, in fact, earn an impressive income without a college degree.
7. Renting is Just Throwing Money Away
Hamm challenges this conventional belief that renting is a waste of money compared with owning a home, with some updated advice for the modern day.
“Homeowners ‘throw away’ a lot of money, too,” he points out. “Mortgage insurance, property taxes, homeowners insurance, homeowners association fees, and home and property maintenance costs all just disappear into the ether when you own a home.”
And he echoes my own reasons for not owning: “A home is fairly hard to liquidate,” and, “There’s also the factor of permanence. If you end up needing to move for work or for some other reason, it’s easy to move out of a rental.”
Owning a home is a big commitment, and it might not be for everyone.
Hamm recommends two simple guidelines for buying:
- You should plan to live in the same place for at least five years, and/or
- Your monthly mortgage payment should be at least 25% less than what your rent would be.
While there are exceptions and you should always make the decision that best fits your lifestyle, don’t be pressured into buying because of this scary advice.
8. Increase Your Tax Withholdings for a Bigger Refund
This popular hack is effective, but short-sighted.
Regardless of the lengths we’d go to avoid filing taxes, most of us are excited to receive a tax refund check each year from the IRS — more than $2,800 on average in 2015. Families count on these to make home repairs, purchase new cars, take vacations and more.
So it seems to make sense to let the IRS withhold as much as possible from each paycheck to ensure a big payout in April, right?
Most financial experts agree that’s wrong.
The layperson will point out your tax withholding is an “interest-free loan to the government,” an offer many Americans don’t feel like extending once it’s in those terms.
More importantly, though, the money you set aside via the IRS is unavailable to you for saving or investing, which means lost money every year.
Statistical website FiveThirtyEight created a calculator to show how much difference your withholdings could make if you used them throughout the year.
For example, that average refund of $2,800 could have earned $223 if invested in stocks. If you used that to pay off average credit card debt throughout the year, you would pay $309 less in interest than paying all at once in April.
If you’re only receiving a few hundred dollars back each year, FiveThirtyEight says you’re fine.
But if you’re consistently receiving four-figure checks — i.e. overpaying thousands of dollars in taxes every year — the experts recommend you make adjustments to your W-4 and pay closer to what you actually owe.
Your Turn: What financial rules of thumb do you disagree with?
With research from Kaitlyn Perta, an editorial fellow at The Penny Hoarder.
Dana Sitar (@danasitar) is a staff writer at The Penny Hoarder. She’s written for Huffington Post, Entrepreneur.com, Writer’s Digest and more, attempting humor wherever it’s allowed (and sometimes where it’s not).