There is no shortage of money advice. You have probably come across numerous “rule of thumb” guidelines, but as you might have realised, while the rules are a good place to start, there is no one-size-fits-all advice when it comes to personal finance.
Every individual has unique circumstances, needs, and goals. Therefore, blindly following every piece of financial advice might not lead to satisfying results.
There are basic rules in finance you are better off following. There are, however, some that you can bend without wrecking your finances.
Here are some of them:
Don’t borrow money to invest
You might have heard that relying on borrowed money to invest is a no-no. According to financial experts, although this tactic has been used by many professional investors for decades, it can be ruinous for the average individual investor.
In a 1991 speech at the University of Notre Dame, billionaire Warren Buffet reportedly said: “I’ve seen more people fail because of money and leverage – leverage being borrowed money.”
Financial experts agree that borrowing against an important asset, such as your house, to buy stocks is a bad move. However, there are instances where borrowing to invest makes sense. When the return on investment of the loan is high and the risk is low, then a loan is definitely a good move. A prudent investor also makes sure that the investment will mature before the loan is due. Certificates of deposit or bonds are great investments for someone who is using borrowed money.
Don’t use credit cards
Credit cards make it super-easy to spend money that you do not have, getting you deep into debt. No wonder most people feel that it is best to avoid credit cards.
But if used wisely, credit cards are not all that bad. Having credit cards can help you build a credit score, which can make you eligible for more credit. Credit cards also come with awesome incentives and rewards such as travel points and even cashback. Credit cards can be a tool to track your spending while also protecting yourself from the risk of cash payments.
Instead of using credit cards to go on crazy spending sprees, you cannot afford, stick to your budget and spend within your means. Focus on your credit card balance - not the card limit. Rather than just making minimum monthly payments, set auto payments from your checking account to pay credit card debts in full. By paying the entire balance as soon as you get your statement, you will avoid accruing interest and thus escape the credit card debt trap.
Save 10% of your income for retirement
Saving 10 per cent of your income is the golden rule when it comes to preparing for old age. However, with longer life expectancy and rising costs of healthcare, in many cases, 10 per cent is not enough. This is especially so if you start saving for retirement when you are already in your 30s or older. If your income fluctuates, saving 10 per cent of the cheque might also not cut it.
Think of 10 per cent as a good place to start. Any money saved is better than having no savings. However, to have sufficient funds for your golden years, you have to save more. If you have a short-term high-paying job, you might have to put aside as much as 50 per cent of your paycheck. By saving more when you can, you will have a cushion when you have major reductions in your income.
Another scenario where the 10 per cent rule does not apply is when you simply cannot afford it. You might have unforeseen expenses or loss of income. In that case it is better to put as much as you can afford to, even if it is less than 10 per cent, instead of being dissuaded from saving at all.
Spend no more than 30% of income on housing
Spending 30 per cent of income on housing is a common benchmark when it comes to budgeting. This idea comes from US housing regulations in the 1960s, where studies established a rent threshold of 25 per cent of family income because of the rising costs of living. In 1981, the rent threshold had risen to 30 per cent of family income.
But using rent standards crafted decades ago for a different society might not be realistic today. A 2012/13 study by Kenya National Housing Survey found that Nairobi residents spend as much as 40 per cent of their income on housing.
Consider affordability, instead of focusing on the 30 per cent rule. Considering factors such as how much you earn, your debts, where you live, rent can be more or less than 30 per cent of your income. If you live in an expensive city or neighbourhood, work on earning more. In the long run, that might be easier and more affordable than relocating. On the other hand, if you live in less expensive towns, you do not have to spend 30 per cent on housing. In that case, you have more wiggle room and can channel the rest of the money into your savings or investments.
Pay off mortgage before saving for retirement
A mortgage is a long-term loan, and you might feel pressed to pay it off before you start setting money aside for retirement. After all, not having a major loan hanging over your head, and having a home that is fully yours gives you and your family security.
However, financial experts say paying off your mortgage at the expense of retirement savings is not always a smart move. If you can pay off the house you plan to stay in for five years or more after the debt is paid, it makes sense to focus on paying off the mortgage as soon as you can. If not, you will be better off saving the money for retirement or investing it in assets that have potential for growth. The key is to prioritise your expenses.
Buy in bulk
Buying household goods in bulk makes sense, especially when you buy goods on offer or from wholesale shops. However, buying in bulk does not work for everyone, and it can even cost some people more money.
In studies, shoppers have confessed that they bought more than they needed when they came across “super deals.”
Additionally, perishable goods bought in bulk can go bad even before you have had a chance to get full value from them. Instead of buying in bulk, buy only what you need and can use within a specific period.
Article was first published in Sunday Magazine