5 Outdated Pieces of Financial Advice You Should Ignore
By: Frankie Calkins
Tags: Financial Independence, Money Management, Financial Advice, Financial Freedom, Investing Tips

5 Outdated Pieces of Financial Advice You Should Ignore

Photo by Jurica Koletić on Unsplash

Most common pieces of financial advice are okay at best. Some are outdated, some are aggravating, and some are flat-out wrong. Unfortunately, this traditional financial advice is holding many people back.

Since most of us didn’t learn about personal finance growing up, we got our financial know-how either from our parents or traditional rules of thumb. Unfortunately, this advice has not dated so well.

Today, I’m going to cover a handful of commonly followed financial advice and give you my thoughts as to why I think it’s bad advice and what you should do instead if you want to achieve true financial independence.

1. The 50–30–20 Rule of Thumb

The 50–30–20 rule means you should spend 50% of your money on needs, 30% of your money on wants, and 20% of your money should be saved. Worse but simpler advice says you should save 10% of your income. 10% is not enough. Heck, 20% is not enough if all you do is “save it.”

Don’t “save” 20%. Instead, invest 20% and save 10%.

To do so, reduce your needs and wants by 5% each. I recommend 45% on needs, 25% on wants, 20% invested, and 10% saved. I call it the 45–25–20–10 rule of thumb. If only it had a ring to it…

Once you’ve built up your emergency fund or hit a savings goal like a downpayment on a house, then you could up your investing to 25% and reduce your savings to 5%, or even 30% and 0% eventually.

If there’s one thing I do like about the 50–30–20 rule, it’s that it forces you to think about savings as a saving rate. In other words, how much you save as a percentage to how much you earn.

Either way, focusing on your savings rate means you’ll always increase your savings as you increase your earnings.

I personally aim to save half. I’ve flipped the traditional rule completely backward. In doing so, I can retire in as little as 17 years.

2. You should have $X amount saved by a certain age

I’ve already dedicated an entire article to how damaging this exercise is, but here’s the gist:

There are many articles and videos explaining where you should be in terms of saving and investing by age if you want to retire on time. It can be an okay exercise in terms of benchmarking, but I don’t know many people that are actually where they should be.

Seeing how far off you are can be demoralizing and make you want to give up. If you can’t catch up, why even try? You clearly can never retire, right? Wrong.

You can change your financial life at any age, on any income. It takes education, commitment, and hard work. It takes small efforts, day in and day out.

Who’s to decide where you should be at by age anyway? Personal finance is personal and looks different for everyone. We all have unique lives and circumstances.

Honestly, I feel a bit bad when I share that my goal every year is to save half of my post-tax income. Save and invest half, retire twice as fast, I often say on YouTube. I realize this could make others feel bad about their 0%-20% savings rate.

I don’t want to discourage you. I want to encourage you. Three years ago, my savings rate was negative. So, if I can do it, I know you can too.

3. Don’t invest until you’re completely out of debt

On the surface, this is a really simple rule to follow and isn’t terrible advice, but there are so many kinds of debt. Instead, I would modify it to say “out of credit card debt.”

I don’t really buy into the idea of good debt personally — maybe I’ll change my mind as I get older — but I do know credit card debt is right up there with the worst debt you can have.

If you have credit card debt accruing interest, generally between 15–25%, pay that off before you invest.

While paying off your credit card debt, I encourage you to learn about investing. This could be far more lucrative in the long term.

Here’s a quick, semi-personal example. Let’s talk about student loan debt vs. investing.

If you have, $50,000 in student loan debt accruing 5% interest, you might hesitate to invest. However, if you invest in the total stock market or an S&P500 mutual fund, you should earn anywhere from 7–9% on average based on the last 50 years of market data to rely on.

Compounded over time with earnings reinvested, your investments should grow into a huge pot, especially if you start young. This would increase your net worth exponentially more than paying down a low-interest debt. (Note: If your interest rate is above 5%, focus on paying that off as a priority).

Final suggestions:

Contribute at least to the company match on your 401(k) while paying off your debts.

Always pay the minimum required towards your debt and create a debt payoff plan but don’t put off investing completely.

If nothing else, invest a small amount now so you can learn by doing.

4. Renting is throwing away money

This is understandably a controversial one to dispute, but I’ll offer food for thought.

First, a fun fact: CBS News reported that from 1890–2005, “inflation-adjusted home prices rose just 103%, or less than 1% a year.”

Despite that, I do know that real estate can be an excellent investment. In the long run, owning a home or rental homes is a great way to scale your net worth in many cases. The problem is, people forget that your home is also an expense.

I don’t want to harp on the cons of ownership. Instead, I want to offer the often-forgotten financial pros.

While renting doesn’t add to your net worth, it does:

Give you the flexibility to move and live where you want, including areas with a cheaper cost of living.

Provides opportunities to reduce your monthly payment by living with a partner or roommate (you can do this as an owner, but less actually do).

Allow you to live in a neighborhood you couldn’t afford to buy-in.

Prevent you from paying out of pocket when something inevitably needs repair or needs to be replaced.

Some newer apartment complexes also have great amenities like a gym (saving you on a gym membership), an office or coworking space, a rooftop with communal areas and barbecues, dog runs, fire pits, free community events, and more.

By buying, you’re likely sinking most of your life savings into a downpayment, money you could have otherwise used to invest.

If buying keeps you out of the market for 5, 10 15 years, or more, it may not be worth it as it could potentially delay retirement while you miss out on valuable years of earning compound interest.

As an aside, let’s stop using the phrase “starter home.” This does damage because most people don’t realize nearly all of the money you pay towards your mortgage the first 5 years goes to interest. If you are going to buy, please only buy if you intend to live in the house for 5 years or more to actually build some equity.

The truth is, owning and renting both have their pros and cons financially and otherwise. You shouldn’t feel shame if you rent.

To buy or to rent is a very personal and individual decision, so if you’re a renter like me, don’t feel like you’re falling behind your peers that are buying or disappointing your parents who tell you you’re throwing away your money.

5. You should keep a balance on your credit card

While this one doesn’t directly relate to retirement (or even early retirement), I have to bring it up because this is another damaging misconception.

I have no idea where this myth comes from, but it is flat out wrong. Many people think it’s good to have a balance on their credit cards because they’re heard it’s good for your credit score.

Here are the facts: amounts owed relative to limits available make up 30% of your credit score. That’s true. But the lower the utilization, the better.

A $0 balance across all your credit cards is best for 2 key reasons:

It means you aren’t accruing interest each month

It’ll help your credit score. In fact, paying down debt is one of the best and easiest ways to raise your score.

I love chasing rewards and points and use my credit cards to make the most purchases. But I always pay them off in full every month. Please, if you take nothing else from this article, take this point away:

Always pay off your credit cards in full each month.

Do you agree? Have anything more to add?

Let me know what you think of these rules of thumb I covered today. Are there other pieces of financial advice you think are outdated or any advice you follow that is less than traditional that works well for you?

Thanks as always for reading, and always remember: the more you learn, the more you earn.