The title does sound ironic, isn’t?
To better your finances, you should not follow the rules listed below, but rather, break them!
1. Clear all debts before start investing for [insert your financial goals]
Although setting your debt is a prudent thing to do, there are a few justifications for breaking it.
First of all, personal finance isn’t an all-or-nothing practice. Good financial planning involves balance and attentiveness to your unique situation. If your debt is low-interest and of the good debt kind (mortgage for example, as opposed to consumer debt, like personal loan), it always make sense to pay it off more slowly in favor of saving money first (such as for retirement or major expenses). Remember: compound interest has immense value, so the more money you can invest earlier in life, the less money you’ll have to invest overall. .
The fact of the matter is, if you wait until you’re entirely out of debt, you may never ever be able to kick start investing. For various reasons, we are almost always in different type of debt at one time or another. Maybe your income is low and expenses too high, or perhaps you unexpectedly lost your job or had large, unexpected medical bills to contend with. If you’re one of these people, then it’s best to start setting aside a little money now and balance your cash outflows between debt payment and investing. If NOT (good news!), then using debt as a leverage to invest in properties is also wise decision.
2. Never borrow to invest
Borrowing money to invest is generally considered risky — if your investment declines in value, you’ve still got a full debt-load and a disproportionately low asset to show for it.
However if the item/investment is low-interest, and historically the yield/return gained could offset the interest repayment, then go for it. Just have to condition our mind to be comfortable with leveraging.
3. Save 10% of Your Income
This is a somewhat arbitrary rule, since 10% may or may not be enough for you to reach your savings goals. Everyone is unique, so concentrate on computing the amount of money you need saved in the end for any financial goals and work backwards from there; you may need to break this rule if you’ve waited so long to start saving that 10% won’t help you reach your goal, or if you need to save more money than 10% of your income will allow.
4. Get a Degree to Get a Good Job
Unless you’re tracking for a career that specifically requires a university degree, you could save the six figure expenditure of a university education in favor of something more practical and less expensive, such as trade schools or alternative forms of education. Then there is almost always student loan like PTPTN to contend with, you will be in the negative net worth before you even start earning your first dough. University education just gets you a head start in securing an entry level job in a (hopefully) good company, then career success subsequently depend on many other factors almost not directly related to how many A’s you have in your public exam.
5. Don’t Use Credit Cards
Using credit cards responsibly can be beneficial if you’re collecting frequent flyer miles, rebates or other credit card rewards that allow you to get extra value from charging expenses. The trick is to pay the entire balance off as soon as you receive your statement; that way you don’t accrue interest and you thus avoid the credit card debt trap. Just don’t be like some people who sign up multiple cards just to get rewards – the annual fee is not worth it. After all, no matter how much rebates you are getting (normally capped at a maximum amount anyway, per month), it still needs you to spend money.
6. Get the Biggest Mortgage the Bank Will Give You
What the bank will lend you and how much mortgage you can afford can be two very different things. The bank only takes your net income and existing debts (and sometimes assets) into account when calculating the mortgage you can qualify for. What about your own cash flow, expenditures, and the additional costs of home ownership, like maintenance, property tax, etc? You can’t just ignore those!
Depending on the area you live, real estate might be easily affordable or prohibitively expensive. Don’t let the bank lure you into a mortgage larger than you can truly afford, because ultimately banks win if you can’t make payments.
7. You Have to Spend Money to Make Money
Unless you have disposable cash to spend, this rule reeks of high-risk business offers, gambling, and scams. Justify for things spent. Although sometimes a prudent investment (in a business or financial vehicle) can reap rewards, don’t use this phrase as a rule of thumb for your personal finances.
8. A Budget Keeps Your Spending on Track
I wish it did, but unless you’re unnaturally disciplined, it often it doesn’t. Budgets are more often than not made of abstract categories with arbitrary amounts of money that don’t account for things like irregular expenses, quarterly payments, and other elements.
More important than a budget (and an essential first step to creating a workable budget) is keeping track of your expenses so you actually know what you spend. The longer you keep track of your expenses, the better you can understand and control your spending. By doing this, you can compare your original budget against what you spend – the difference in the form of Unallocated Expenses is important to fix where the leakages come from if actual expenditure doesn’t tally with budget.
9. Passively investing the couch potatoes way
Although index funds carry lower management fees than mutual funds, this is for a reason: They are not actively managed. Although active management doesn’t guarantee higher returns, it can help with asset allocation, re-balancing, and other investment activities you may not wish to undertake yourself.
When choosing investments, instead first focus on asset allocation (which is the biggest factor affecting your returns — not investment picking as you might suspect), then choose a basket of diversified investments that satisfy your asset allocation plan.
10. You Need to Have a lot of Money to Invest
How do you think people who have a lot of money got it (if they weren’t born into it)? They saved — and invested! Don’t belittle your own finances by thinking you don’t deserve to invest or don’t deserve the help of a financial planner because you don’t have money. You have start somewhere.
11. Your Emergency Fund Should Be Six Months’ Expenses
While this is an apt rule of thumb, depending on your situation it might not be suitable. Evaluate your expenses and what would need to be paid if you found yourself in an emergency situation; you may find you need more or less, depending on various factors, such as the quality of your insurance, level of regular cash outlays, and so forth.