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3 Money Rules You Can Break
Most people manage their finances by using tried and true rules. However, these don’t always work for all the people all the time.
Break it: Pay off debt and build an emergency fund before saving for retirement.
Save three to six months emergency cash in case of a job layoff or unexpected health expense. Pay off credit cards with high interest rates before anything else and when you do you instantly save the interest. However, If your debt is of the low interest variety (less than 10%), or it’s in a mortgage or student loan, then it may be more prudent to start a retirement savings account, especially if your company has a matching plan. The benefits outweigh the drawbacks. You get free money with the company match and compounding interest over a longer period of time. Also, contributions to a pre-tax account lower your annual taxes.
Break it: Just save 10% of your income.
Contributing one dollar for every ten you earn is the gold standard. Still, the average person is only saving 3.6% of their earnings, and while 10% is certainly better, is it always necessary? No, in fact, it’s not enough. If you are one of those people who didn’t save during their youth (big mistake), you may need to save even more than 10%. People who begin saving in their 30s or 40s should look at 12-15% - or even more if your budget can tolerate it. The best way to know where you stand is to try a free online retirement savings calculator.
Break it: Always max out your employer –sponsored account.
Boost your contribution to your 401k to the maximum allowable whenever possible. This is a good idea, but there may be better tax management opportunities elsewhere. “If you don’t have a Roth 401k available, you may be better off contributing just enough to take full advantage of a match (if your employer offers one), but then sending additional savings to a Roth IRA, if you’re eligible,” said Scott Halliwell, CFP, at USAA. A Roth won’t lower your tax bill today, but you’ll enjoy tax-free withdrawals after the age of 59 and one half. To break this rule consider your tax savings now versus later. A Roth IRA for a young person in a low tax bracket makes a lot of sense.
Source: USAA
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