6 Money Rules You Can Break

Contributed by USAA

September 11, 2013

For most people, following basic money rules makes sense. But like everything else in life, there are situations when following tried-and-true advice might not work. Our professionals weigh in on when to consider the exceptions.

Rule No. 1: Pay off debt and build an emergency fund before saving for retirement.

Saving enough money to pay three to six months of living expenses will lessen the chances you'll have to sell assets or go into debt in case of an unexpected big-ticket expense or job loss. J.J. Montanaro, a CFP™ at USAA, says building this emergency fund —someplace safe — should be a top priority, along with paying down any high-interest consumer debt.

When to break it: If your debt is of the low-rate, tax-reducing variety, such as a mortgage or student loans, and your retirement plan at work offers a match, you might be better off contributing enough to receive the full company match before focusing on building your emergency fund and eliminating debt, says Montanaro.

Remember that contributions to a 401(k) or Thrift Savings Plan, may reduce your tax bill. Add the money from your employer match, and you've got a hard-to-beat combination. If you don't participate in these plans, you could be missing out on valuable benefits and tax savings.

Rule No. 2: Save up to 10% of your income.

Contributing at least $1 to your savings, TSP or 401k for every $10 you earn — or 10% — is an old rule of thumb. And it's certainly better than the current national savings rate.

When to break it: If you didn't begin saving for retirement until you were in your 30s or older, it may take more effort to achieve your retirement goal.

To find out how much you need to save to meet your financial goals, use USAA's online calculators.

Rule No. 3: Always max out your employer-sponsored account.

If you need to increase your retirement savings and are not already contributing the maximum amount allowed to your TSP or 401(k), a reasonable reaction is to immediately boost your contribution rate.

When to break it: To create a better tax-management plan, you may need to look beyond your employer's plan.

Rule No. 4: Send your kid to college — it's a great investment.

Yes, the average college graduate earns $26,618 more a year than someone with just a high school education, according to the U.S. Census Bureau. As a result, most financial planners agree that helping your child get a college education is important.

When to break it: If helping pay for your child's four-year college degree places an extreme burden on your finances, you should consider other, more affordable ways to accomplish this goal.

The return depends on the price you pay and where that money comes from. The nonprofit research group Project on Student Debt reports two-thirds of college seniors who graduated in 2011 had student loan debt, with an average of $26,600 per borrower.

Rule No. 5: Buy a house if it costs 2.5 times your annual income or less.

This is a reasonable guide when determining whether you can afford to buy a home.

When to break it: If it doesn't suit your circumstances, disregard this guideline.

What really matters is whether you can afford the monthly payment, factoring in taxes, insurance, maintenance, current mortgage rates and the size of your down payment. Plus, consider how long you'll live in the house. If you plan to move in a few years, renting may be the better decision.

Rule No. 6: When you retire, consider a withdrawal of 4% of your portfolio, then adjust every year for inflation.

Historically speaking, the so-called 4% rule calls for a retiree to make annual inflation-adjusted withdrawals and be reasonably sure the portfolio will last 30 years. For most retirees, it's a fine starting point to determine how much they can spend.

When to break it: Your plan for retirement is not a smooth glide path.

Retirees may prefer withdrawing more in good times and cutting back when times get tough, or varying distributions based on their investment results. Also, adjustments should be made depending on other sources of income.  For example, you might want to withdraw more at first and delay taking Social Security, but then withdraw less once the Social Security benefit kicks in. "Whatever your plan, it should be monitored and adjusted as necessary," says Montanaro.

Tip of the Day

  • Written by Guest Blogger | May 2, 2014

    33% of Americans spend more than they earn. The first step to eliminating #debt is to stop borrowing & make a budget.

Saver Stories View all »

One Sailor's Course to Financial Freedom

Written by Super User | November 26, 2010

We all know its not easy to get out of debt once you in over your head. But it can be done with the sound advice and support that the Military Saves program offers. I am a testament to that. I was a recently divorced, single mother. Like many people I had credit card debt, a car loan, bad credit, and a low income job that never seemed to be enough to put food on the table.

Then I decided I'd had enough of living paycheck to paycheck and worrying about money all the time.

Read more...

Making Savings a Part of Marriage

Written by Super User | November 26, 2010

Capt. Rob Eckhardt is the first to admit that he hasn’t always been responsible with money. But less than 10 years after a rocky start to saving, Eckhardt reports that he and his wife are free from credit card debt, have a down payment on a home, and are saving regularly for retirement. And, as the Military Saves representative for his Air Force squadron, he’s helping others make similar progress.

Read more...

Regular Savings is the Key to Success

Written by Super User | November 26, 2010

My name is Chris Strong. I joined the Air Force on 25 March, 1985. On that day, my financial life changed forever. I was introduced to saving bonds in Basic Training. Savings bonds were the big thing back then just like the Thrift Savings Plan is today. A Colonel gave us a briefing. I cannot remember his name but I can remember the 100 savings bonds he had posted to a piece of card board. He gave us a speech on the importance of saving money and how it can change your life. He inspired me to save.

Read more...