If financial rules affect your mental health, they may need to be broken. However, this doesn’t mean making bad decisions just for the sake of having fun. Instead, this is giving yourself permission to take a break from all the strict must-dos and figure out a healthier alternative.
Furthermore, depriving yourself entirely just to save money may be detrimental to your health. A little money spent on something you enjoy is an essential component of wellness. So, with that in mind, take advantage of these 17 financial rules to better care of yourself.
1. Invest and save for retirement only after you are debt-free.
It’s a generally good rule. But there are a few exceptions.
To start with, personal finance isn’t all or nothing. Your financial plan needs to be balanced and tailored to your situation. For example, in cases where your debt has a low-interest rate, you might benefit from paying it back more slowly so you can save money first, such as in retirement. Also, you’ll have to invest less money overall if you invest early in life because compound interest is so valuable.
Additionally, if your company matches 401(k) contributions, saving for retirement almost always makes sense — even if you’re in debt. While it’s tempting to skip 401(k) contributions when money’s tight, you’d be risking your future financial security if you did. Your tax refund can also go towards your debt if you contribute to a retirement plan.
Finally, if you wait until you’re totally debt-free, you might never invest. There are a lot of reasons why people can’t get out of debt. Perhaps you’re low on income and have high expenses, or maybe you’ve lost your job or had big medical bills. In this case, it’s best to start saving now and balance debt payments with investments.
2. Budget: Spend no more than half of your income on living expenses, keep discretionary items to 30%, and save the rest.
Elizabeth Warren, then a Harvard professor, presented the 50/30/20 rule in her 2005 book, All Your Worth: The Ultimate Lifetime Money Plan. “Under this rule, you allot 50% of your take-home pay to “must haves,” 30% to “wants,” and 20% to savings,” explains Patricia Mertz Esswein for Kiplinger.
Among the must-haves are housing, utilities, medical care, insurance, transportation, child care, and paying minimums on any legal obligations, such as student loans, child support, or anything else that’s a long-term commitment. Where does the 50% come from? “Warren says it’s sustainable, leaving you with plenty of money for the rest of your life, including fun and the future,” says Esswein. “When things go wrong, you may be able to cover the basics with an unemployment or disability check or, if you’re married, live on one paycheck for a while.”
You are directly debited from your paycheck for the 20% for savings-not a last-minute decision. Put the funds to use building an emergency fund, paying off debt, and saving for retirement.
As a result, you can avoid the cycle of binge shopping and crash-diet budgeting by leaving 30% of your budget for your wants (including charitable giving). This is the first category you cut if something goes wrong.
The problem with this rule.
According to credit expert Gerri Detweiler, 50/30/20 is a good guideline, but you need to be flexible as well. “If you live in a high-cost area, spending more than 50% of your paycheck on living expenses may be unavoidable, given the cost of housing, child care and health care,” adds Esswein. “Similarly, if staying within the threshold means buying a home that comes with a three-hour-a-day commute, you may choose to stretch beyond the limit to live closer to work and have more free time.”
Detweiler recommends paying off the high-cost, unsecured debt within three years to avoid digging yourself deeper into debt. To meet the savings goal, she recommends putting a portion of the 20% designated for savings toward debt repayment and reducing living expenses and discretionary spending.
“It’s also important to reevaluate your budget periodically as your life changes,” suggests Esswein. “For example, downsizing or moving to a lower-cost area could allow you to cut your living expenses below 50% and save more for retirement.”
3. Cancel your Netflix, Hulu, and Spotify accounts to save money.
What is the average monthly cost of all your subscriptions?
That’s rhetorical. What’s more important than a dollar amount is how much joy you get from your subscriptions.
Most likely, a lot. Think about the escape that Tiger King” provided us during the pandemic. What’s more watching nostalgia has psychological benefits. “When people are stressed, or anxious, or feeling out of control, nostalgia helps calm them down. It’s comforting. It’s analogous to a hug from your mom or dad or being cuddled,” Krystine Batcho, a licensed psychologist and a professor at Le Moyne College in Syracuse told TODAY.
Rather than saying “no” when Netflix asks if you’re still watching, find other places to save money. For example, you could cancel that expensive gym membership you never use or buy used clothing instead of new. Another idea would be to compare car insurance rates using tools like EverQuote.
4. Set aside 10% of your income for savings.
Most financial advisors tell you to save 10% of your income for retirement. However, it might not be a wise choice.
If people set aside 10% of their earnings, they will end up with too little investment for retirement. They are especially at risk if they don’t make much money or invest conservatively.
Setting investment goals and determining how much you should invest each month is a better approach than following this blanket rule.
5. Adhere to the 4% rule.
Retirement planning experts often recommend a withdrawal rate of 4% as a guideline for retirees, clarifies Catherine Collins Alford in a previous Due article. The idea is that 4% of an individual’s savings should be withdrawn in the first year of retirement. After that, they can adjust this amount to account for inflation every year.
Based on the assumption that the retiree will receive ongoing distributions from investments, the rule assumes the retiree has a diversified portfolio.
Despite the fact that the 4% Rule may not work in all situations, retirees who wish to protect their savings can find it a useful tool.
“Many people mistakenly think the 4% rule refers to withdrawing 4% of their retirement savings each year,” she explains. The reality is, however, quite different. “The rule refers to withdrawing a certain percentage of your total savings in the first year of retirement.” In subsequent years, this percentage would be adjusted for inflation.
“Another common mistake is assuming that the rule applies to all retirees,” adds Catherine. “However, the rule is actually based on historical data and market returns.” As a result, not everyone may benefit from it.
6. Pay off your mortgage before you save for retirement.
Mortgages are usually the biggest debt you’ll ever have. Wouldn’t it be great if you could pay off that debt early? In some cases, paying off your mortgage slowly isn’t the best option, especially if you intend to move out soon.
If you’re planning to stay in your home for five years or more after the debt’s retired, then that’s awesome. Otherwise, keep that money for yourself and invest it in your 401(k) or other growth assets.
According to The Tax Cuts and Jobs Act, enacted in 2017, homeowners who purchased their homes after Dec. 15, 2017, can deduct mortgage interest paid on up to $750,000 in mortgage debt from their taxes. It’s even more important to invest that money somewhere else for those living in expensive housing markets.
Rather than adding an extra mortgage payment, you should pay off other high-interest debt first, such as credit card debt. Identify your financial goals and prioritize them. For example, decide whether paying off the mortgage or investing for your retirement is more important for you, or if you would like to save for your children’s future. You can use that money in other ways if you can take advantage of the tax benefits or plan to move within five years.
7. Save money by making all your food from scratch.
You may think you’re saving money when you bake your parent’s birthday cake and make your own baby food. And, to be fair, this may be the case on occasion.
You could be spending time with your partner or reading a good book instead of spending hours making pasta, potstickers, or croissants from scratch. Do you really think it’s worth saving a couple of bucks?
Taking half an hour back every day is worth it to you, so pick up some pre-chopped onions and carrot puree in jars. I think you deserve it Also, you deserve a return on your investment. The free Fetch Rewards app, for instance, rewards you for shopping at the grocery store.
8. Be sure to max out your 401(k).
If you can, definitely max out your 401(k). However, following this rule might lead to less retirement money in the long run for some.
Your 401(k) contribution should always be at least as high as your employer’s match to maximize your earnings. After all, it’s free money when your employer matches your contribution. You may want to consider putting money into another account, such as an IRA, once you’ve done that.
In addition to 401(k)s, other retirement accounts may offer a broader range of investment options, such as IRAs. Instead of simply maxing out these workplace retirement plans, look into them when deciding where to invest your money.
9. Only use credit cards for emergencies.
You probably heard your parents warn you about credit card debt when you were a young adult. In fact, I was told that plastic was typically reserved for emergencies only.
However, credit cards have become an effective and diverse tool in today’s world. With them, you can keep track of all your spending in one place, protect your personal information, and even earn cash-back rewards. As a result, it makes more financial sense to use a credit card instead of cash to make purchases.
However, you shouldn’t swipe recklessly.
In order to avoid paying interest charges on your credit card balance, set up a monthly payment from your checking account.
10. Save money by buying in bulk.
Some people might be surprised to find out that buying in bulk can be expensive. And more importantly, extremely wasteful when it comes to perishable items.
In some cases, buying a jumbo size makes sense, but not always. Make sure you only buy things you will use or eat. As a result of scrimping and scrounging, making every meal becomes a chore that frustrates you over time. Additionally, buying large quantities of the stuff in advance can be very expensive.
Overall, if your budget is tight, skip bulk purchases.
11. Avoid wasting your money on non-essentials.
It’s often said that spending money on nonessentials is a waste. So, it’s no surprise that most financial experts advise against it.
Despite this, few people can stick to a spending plan that robs them of all their fun. As long as you spend responsibly, there’s no reason to deprive yourself.
Decide which splurges are most important to you and enlist that as part of your budget rather than avoiding them.
12. You should have six months’ worth of expenses in your emergency fund.
While this is a sound rule of thumb, you might not find it suitable for your situation. In the event of an emergency, calculate what you would have to pay. Depending on various factors, such as the quality of your insurance and level of regular cash expenditures, you may determine whether you need more or less.
13. Calculate your perfect investment allocation by subtracting your age from 100.
To calculate how much of your portfolio should be stocks, subtract your age from 100.
The rule says you should keep 75% of your portfolio in stocks and the rest in bonds and other relatively safer investments when you’re 25. If you’re 75, you should invest 25% of your money in stocks. As you age, you should gradually reduce your investment risk since you don’t have as much time to wait for the market to bounce back.
Allocating investments based on 100-minus age is a good way to get started, but it’s not perfect. In part, this is due to Americans living longer and retiring later. Despite the drop in life expectancy following the pandemic, a baby born in the US in 2021 can expect to live to about 76 years old. As a result, retirement savings strategies should be adjusted in response to the need for a higher nest egg, the potential for the money to grow more, and the possibility of recovering from a market decline.
Rather than focusing only on market performance, rebalance your investment portfolio annually. You should also consider your target retirement age, your plans for using the funds at retirement, and your risk tolerance. As a starting point for calculating your stock exposure, use 110 (or even 120) instead of 100 if you feel more comfortable with risk.
14. It’s a waste of money to rent.
Renting is often considered wasteful since you pay for a home without building equity. However, renting can be a better option in certain circumstances.
If renting is cheaper than buying and you rent and invest the difference, this could be the case. You may want to rent if you’re not in a position to purchase a home or won’t be staying there for a long time.
You are not throwing money away if you have to rent. Instead, you are using your money wisely to get housing in whatever way works for you.
15. Get rid of all your unwanted housewares, clothes, and toys.
It’s likely that you’ve acquired a lot of stuff during your lifetime. You’ve probably got piles of stuff you don’t need whenever you do a deep cleaning.
Purging gives you a sense of relief, but selling it all to make money quickly ruins it. How do you begin? A garage sale, Poshmark, Facebook Marketplace, OfferUp, or Craigslist?
If something isn’t truly valuable, you shouldn’t sell it. Right now, you might not need the stress of listing everything, arranging meetups, or figuring out shipping costs.
So, if you want to adopt a more minimalist lifestyle, donate it. Donate it all to your local donation center, post it on your Facebook Buy Nothing group, or even hold a free yard sale. As an added perk, you’ll also get a tax credit.
Another idea? Rent these items out to make some extra cash. For example, you can rent out your clothes on Style Lend or everything from your favorite camera to your favorite sports equipment on Fat Llama.
16. Pay off your debt ASAP.
There is a good chance you have heard you should repay your debt as soon as possible. However, depending on the type of debt you have, you might want to break this rule.
Although you should pay down high-interest debt aggressively, you may not want to pay extra on certain low-interest loans like your mortgage. If you invest your money in other ways rather than paying off cheap debt early, you can usually get a better return.
17. Get a side hustle.
Many people don’t have the capacity or flexibility to hustle on the side. If you are already overburdened with work, adding a second job may exhaust you, outweighing the benefits.
Aside from that, if you work all the time, how can you enjoy the money that you earn? The gig may also come with additional costs. Are you responsible for childcare or transportation? If you earn extra money, these things may significantly reduce it.
FAQs
What is a budget? Do I need one?
Basically, a budget tells you how much you make versus how much you spend.
It’s good to budget, but remember that budgets come in all shapes and sizes. Budgeting can be as strict or as lax as you want. For instance, automating a certain amount of your earnings into your savings account is technically a budget. You can also follow the rule of 50/20/30. In addition, you can have multiple savings and checking accounts based on your spending habits and goals.
In general, budgeting tends to help people feel more in control of their finances. It’s also a good idea to revisit your budget every once or twice a year, especially if your income or expenses have changed significantly.
Should I have an emergency fund?
The purpose of an emergency fund is to help you in the event of an unexpected event. An emergency fund will help you through tough times, such as when you lose a job or receive a large bill.
What is the recommended amount to save in an emergency fund? An emergency fund should cover your expenses for three to six months, according to some financial professionals, while others suggest covering expenses for a year.
At the end of the day, it is up to you after you have taken care of the necessary expenses and what you are able to set aside. It is better to have some amount available when something unexpected occurs than to have none at all.
Should I pay down my debts or save for retirement?
In order to answer this question, you must consider your financial situation. It is possible to gain insight from your budget. However, it’s a good idea to start building retirement savings through your employer’s 401(k) if you can. Then, examine your budget to find areas where you can make some savings so you can also pay down your debt.
For retirement savings and debt repayment, you may want to work with a financial professional.
How much should I save each month for retirement?
Financial professionals can help you create a plan that fits your budget here as well. Your savings strategy should take into account your current budget, retirement date, and retirement goals. You’ll want to think about retirement expenses, plus health insurance and long-term care costs as well.
What is good debt?
Depending on your situation, the answer varies. When it comes to assessing what debts are worth it, there are some general, personal questions you can ask yourself, but only you know what’s worth it.
For example, student loan debt should propel you into a career that pays more money. However, racking up $20,000 in personal credit card debt for jet skis won’t.
