Are These Basic Money Rules Enough to Keep You Financially Secure?
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"If you’re putting off investing until you're debt-free (or earning more or understand it better), you're sacrificing potential investment returns."

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Back in June, my mother was admitted to the hospital with 105-degree fever. She was, quite literally, burning up with a nasty infection. But a few days as an in-patient and a week’s worth of antibiotics later, she was back home fussing over unwashed dishes.

Two weeks later, however, her fever returned because the antibiotics hadn’t killed off the infection. This time, the doctors prescribed a 14-day course of antibiotics. She’s been fine ever since.

When I first learned that her infection came back, I was angry with the doctors. Didn’t they know what they were doing? But while ranting to a nurse friend, I learned that a seven-day course of antibiotics is standard for kidney infections, and it works for most people.

Just like in medicine, there are general money rules we’re taught to follow if we want to be financially stable. But I’ve recently started wondering: Is it really that simple, or are there times when following the conventional rules may not work for our situation? I talked to Certified Financial Planner Kristen Euretig to find out.

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Rule #1: Save three to six months of expenses in an emergency fund.

It’s Money 101: Set aside up to six months’ worth of basic expenses in a savings account, and you’ll be okay when an unexpected expense (or interruption in income) comes. It makes sense. If you don’t have cash to cover an unanticipated bill, for example, you’d likely have to rely on credit.

The only problem? Worst-case scenarios vary for different people. "Six months gives most people plenty of runway in case of a lost job, for example,” Euretig says. "But in certain circumstances—say, you’re self-employed, the household breadwinner or working in a volatile industry—you may need more to make up for any disruptions in your income."

That said, Euretig says a year’s worth of expenses should be the upper limit. Any more, and you’re giving up potential investment returns by keeping that money out of the stock market.

Rule #2: Set aside 10 to 15 percent of your income for retirement.

You may have heard that if you set aside 10 to 15 percent of your annual income now, you’ll have enough in retirement. But enough for what exactly?

“As a rule of thumb, financial advisors estimate people will need 80 percent of their income to be comfortable in retirement,” Euretig explains. “That’s because you no longer need to worry about costs you typically experience while working—from dry cleaning to transportation and lunches—and you’re no longer saving for retirement.”

But that won’t work for all budgets and preferences. Maybe you want to travel extensively or expect to have higher-than-average medical bills. In that case, you’d need more robust savings, and probably a higher percentage of retirement contributions, as well, Euretig says.

In other words, your retirement goal is highly dependent on you. So instead of blindly saving a set percentage, come up with a real figure you think you’ll need to fund the kind of retirement you want, and work backwards to determine your personal contribution rate.

Rule #3: Pay off all debt as quickly as possible.

We’re often told that all debt is bad debt, and we should avoid it at all costs—or else make paying off outstanding balances a top priority. The instinct is reasonable, especially when dealing with high-interest credit card debt, but, again, it’s not always so clear cut.

Some kinds of debt afford us opportunities we couldn’t otherwise afford. Student loans pay for college, which is often a requirement for higher-paying jobs; mortgages can provide stability, somewhere to raise our families and the chance to earn money if prices rise before we sell (or if we opt to rent out part of our home). Avoiding these debts can save you dollars in the short run, but there’s a potential long-term cost.

Likewise, paying off these relatively low-interest debts before focusing on other goals can put you seriously behind, particularly when it comes to investing. If you’re putting that off until you’re debt-free (or earning more or understand it better), you’re sacrificing potential investment returns and decreasing the number of years your money has to grow.

I think of it this way: Although paying off my student loans would provide an added sense of security, I also expect a lot out of my future: a home, the freedom to travel more and a retirement plan that isn’t dependent on Social Security. That means I have to prioritize investing today—not in three years when I’m finally debt-free.

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