This post 5 Financial Rules of Thumb You Need to Break appeared first on Daily Reckoning.
One of my favorite Seinfeld episodes is when Kramer storms into Jerry’s apartment and starts complaining about another golfer who picked up his ball in the middle of the fairway to clean it.
Kramer goes on to say that he penalized his friend a stroke for breaking the rule.
Elaine then asks, “What is the big deal?” and Kramer replies, “Hey, a rule is a rule, and without rules there’s chaos.”
The same can be said for personal finance.
Without money rules, chaos can ensue. However, there are some rules of thumb I believe you should be breaking if you want to get ahead.
Some rules are outdated, and some simply don’t apply to everyone’s individual financial circumstances. So why bother follow a rule that makes no sense?
Here’s my list of 5 financial rules of thumb you should consider breaking:
1) Use Your Age to Determine Asset Allocation
During the 1980s and 1990s, it was standard to give the following asset allocation advice:
“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 as you age.”
Under this rule, at age 30, for instance, you should keep 70% of your portfolio in stocks and the rest in bonds and other relatively safer securities. At age 65, you invest 35% of your assets in stocks.
The idea behind the rule is to gradually reduce investment risk as you age. But that doesn’t always work. Americans are living longer and retiring later.
Your retirement savings strategy should be adjusted to meet a bigger nest egg. At the same time, the yield on a 10-year Treasury Bill is roughly 2.5%, down from a peak of nearly 16% in the 1980s.
And with the stock market soaring over the past decade, it might not have made a lot of sense to dump a large portion of money into fixed income when you could reap greater gains.
My 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
For most, a mortgage is the largest debt they’ll ever owe. So from a risk tolerance point of view, it makes sense to want to pay down the debt as fast as possible.
Although this really only makes sense when interest rates are outpacing the stock market. If interest rates are double digits and investment returns average 7%, yes, it makes sense to pay down your mortgage faster.
But, the majority of homeowners today have a mortgage rate of less than 5%, and are seeing average annual returns above 7%.
So it’s better to make your payments on time, take your mortgage interest deduction on your federal income taxes and have more money invested for higher returns.
3) You’re Throwing Away Money If You Rent
Owning a home is part of living …read more
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