Forget Everything You’ve Learned – 10 Financial Rules We’re Totally Breaking!

posted in: Investing, Personal Finances | 1
In the world of personal finance, you’ll find a number of written and unwritten “rules” about saving, investing, debt, retirement, etc.  While much of the conventional wisdom can be very helpful (i.e. “don’t take on too much high interest debt”), other traditional mandates may not always apply (i.e. “it’s always better to own than rent”).
My wife, Allison, and I have always tried to be savvy and astute when it comes to our finances.  We were able to successfully retire in our early 40s, and it appears that we could’ve retired even earlier if that had been our goal.
We accomplished this through hard work, dedication, and a lot of research into investing and finances.  We followed much of the popular advice, like maxing out our retirement accounts, dollar cost averaging, and diversifying our investments.
But since hitting our goal of financial independence and early retirement, we’re now re-evaluating our financial strategies going forward.  As we think through the best courses of action, we’re realizing we may not want to follow all the usual pathways.
Here are the financial rules that we have either already broken or are planning to break (Disclaimer:  As the kids say, YMMV (your mileage may vary).  Feel free to borrow any of our strategies, but make sure to tailor them to your specific situation)…


1 - Staying at the same job for most of your career

From the time we moved to San Francisco in 1996, I have worked at twelve companies until I finally retired in early 2015.  My longest tenure was five years at a company called Tickle.com.  My shortest tenure was about 6 months on a few different occasions.
While it would have been great to find one company that I absolutely loved for my whole career, the reality is that’s not always possible.  In the volatile tech industry, I experienced layoffs when times were bad, and when times were booming, it was usually more lucrative to leave a current job for a better one elsewhere.
I found that job-hopping mostly helped my career, as I was able to advance more quickly by taking roles at new companies and trading up for a better salary, title, or both.  And I got to learn more and make connections with a  lot more people along the way.


2 - Working until you’re 65

If you’ve been to my site, Retire By 45, then you know that I retired happily at the age of 43.  I never wanted to work until my mid-60s, but I figured I’d still be working until at least my early to mid 50s.
I was pleasantly surprised when Allison and I were both laid off from our last jobs and realized we didn’t have to get another job.  It took us a couple years to really embrace the FIRE (Financially Independent / Retiring Early) lifestyle, but now we love it.  
At first we thought maybe we were being overly confident in our calculations, or that we would get bored not working a regular job.  It turns out that neither of these was true.  Our numbers are much stronger than the 25X expense multiplier that is considered the barometer of retirement (see #4 below about the 4% Rule), and we’re rarely, if ever, bored with our lives.
You definitely don’t have to work until you’re 65.  If you are diligent with saving and investing, creating multiple income streams, keeping down debt, and minimizing expenses, you have a great chance to retire early!  Check out our Courses for affordable online courses designed to help you achieve FIRE.


3 - Buying a house and living there most of your life

Couple buying a house
The conventional wisdom has always been to buy your house, getting a mortgage to pay for it, so that you can earn equity as the housing market appreciates over time.  Allison and I bought into that theory when we purchased our first home in 1999.  
We figured at the time that this one-bedroom condo was a good “starter home,” and we’d probably sell and buy a bigger home once or twice before finding our dream home to settle down for the long haul.
We ended up buying and selling a half dozen more properties over the years.  I wrote a post about how we eventually turned that initial $20k down payment into a completely paid off home worth $1 million.  
While I don’t necessarily condone buying and selling that often to anyone, it ended up working out well for us.  Not having a mortgage was the final tipping point to helping us reach our FIRE threshold as quickly as we did.
Our next move is likely going to be to sell our existing home and rent for awhile.  We don’t plan on doing this right away, but when we do it’ll give us a lot more flexibility to travel and explore new locations.


4 - Adhering to the 4% Rule in retirement

The common rule of thumb for determining how much you need to retire is the 4% Rule (or inversely the “Multiply by 25” Rule).  This rule states that you can safely plan on retiring if you’ve saved up at least 25X your yearly expenses. It’s also sometimes referred to as your “FI number” (Financial Independence).
I wrote a blog post explaining more about where this rule came from and how to apply it.  Allison and I belong to several FIRE groups on social media, and this concept comes up frequently as people discuss how much they need to save in order to gain financial independence and/or retire early.  
As I mentioned in the blog, our FI number is over 50, and if we sell our condo it goes to over 80.  To look at it another way, our annual expenses are only about 2% of our net worth. So why are we being so cautious about this metric?  We have seen record-breaking highs in the stock market over the past several years, and it’s unlikely those gains will continue at this torrid  pace.  In fact, many experts are predicting a potential bear market soon and perhaps several years of much lower returns than we’ve been accustomed to recently.
Historical performance is an indicator but not necessarily a predictor of future performance.  We live in a world that is changing rapidly with plenty of uncertainty about the future.  I’d rather err on the cautious side just to be safe.   The more financial cushion you build up, the more peace of mind it gives you in case something unfortunate happens in the future.


5 - Using the 100 minus your age calculation for % of stocks vs bonds to hold

Another common financial suggestion is to subtract your age from 100 to determine what percentage of stock you should own in your portfolio (also known as “asset allocation”).  For example, if you’re 45, then your asset allocation would be made up of  55% stocks and 45% bonds.  That mix is really conservative, since people are living longer than ever before.
We’re currently in our mid to upper 40s, and we have about 85% of our portfolio in stocks.  This number is a bit high for us, so we’re planning on rebalancing to about 75% stock / 25% bonds this year.  But we want to be able to continue taking advantage of the more lucrative stock market over the long haul, so our overall asset mix will remain heavily weighted in stocks.
BTW, don’t forget about International stocks and bonds.  We make sure to keep about a third of holdings in non-U.S. funds.  This is for additional diversification.  Remember, the U.S. isn’t the only place doing business on this planet!


6 - Relying on a financial advisor or tax accountant

Bookkeeper / Accountant
We’ve spoken to several financial advisors over the years, and we have considered using them in the past.  But to be totally honest, they have not really told us anything we didn’t already know (or that we were able to find relatively easily on our own).  
The fact of the matter is, we just like working on our finances ourselves.  Allison has also been doing our taxes now for many years.  While I know she doesn’t necessarily enjoy doing taxes, it forces her (and by extension me) to better understand how our money decisions affect our taxes, both for the good and the bad.
Not to mention, professionals cost money; some charge a flat fee, others charge a percentage of the assets they are managing.  We definitely save a fair amount of money on advisor fees and accountant costs.


7 - Assuming you’ll get Social Security benefits when you retire

If you’re a U.S. citizen and have been working and been taxed on your earnings, then you are eligible for Social Security benefits when you retire (as early as age 62 and as late as age 70).  You can get all the details from the Social Security Administration.
And even if you retire early, like we did, you’re still eligible for these benefits.  You will have fewer years of work history, so your payout will likely be smaller than if you had continued working.  To calculate how much you can expect to receive, this blog post goes into great detail on how it works.
According to my calculations, I should expect to receive about $1900 per month if I start collecting when I’m 67 years old.  While I’d love to have that extra income, I don’t want to have to rely on Social Security being fully funded in another 20 years.  With longer lifespans and the large Baby Boomer generation moving into retirement, I’d be happy to get a fraction of that money when it is time to collect.
So for us, we are not including any SS earnings in our retirement calculations.  If we do get it, then it’s a cherry on top of our retirement sundae.  But if we don’t collect (or if it’s a lot less than expected), then it won’t totally upend our retirement plan.


8 - Not using credit cards

Using a credit card
Many financial pundits suggest you should avoid credit cards like the plague.  One example is Dave Ramsey, who feels that the evils of credit card debt far outweigh any benefits.
While I agree with Ramsey that piling up high interest credit card debt is definitely not a smart move, I disagree that they’re bad for disciplined and money savvy users.  Allison and I pay for everything possible with our credit cards; we just make sure to pay off the balance in full on the due date.  
Why?  There are two main reasons -- 1) we get cash back on all of our purchases (from 1.5% to 4% depending on the type of purchase), and 2)  we get fraud protection, so we can contact the credit card company and dispute a charge that we feel is bogus.  
They also provide perks like certain types of insurance (car rentals, travel, etc) and buyer protection, as well as the ease of use.  I usually carry a small amount of cash, but I’d rather not have to use it (it’s cumbersome, dirty, and I don’t like dealing with change).


9 - Keeping 6 months of cash in an Emergency Fund

Conventional wisdom says you should have an emergency stash of cash of 6 months.  We adhered to that rule for many years, but we’re now looking to hold more cash.  We’re planning to keep about 12 months of expenses in cash.
Why?  For one, we already talked about how the stock market is reaching bubble territory.  While we only get an interest rate of 1-2% APY with online savings accounts, at least it’s not a negative return.
And now that we have retired and don’t have a regular income, it’s just nice to have that extra cushion of liquid cash available for good things (spontaneous trips) or bad things (emergencies).


10 - Either totally avoiding cryptocurrency OR Investing aggressively

Bitcoin
Cryptocurrencies are all the rage right now.  You either love them or hate them, but most likely you do have some opinion on this new phenomenon.  
Personally, I land more on the side that thinks we are in a great big crypto bubble right now that’s going to bust and leave a lot of people in bad shape.  Could I be wrong?  Absolutely, because nobody really knows right now.
So our strategy is to straddle the fence on crypto.  We have “invested” a couple of thousand bucks into it, across Bitcoin, Ethereum, and Litecoin.  Our investment initially went way up, but lately it’s come back to about break even.   If it goes all the way down to $0, then we will have had fun playing in the field with not much of a loss on the balance sheet. It’s almost like a virtual trip to Las Vegas, but without the hassle of smoke-filled casinos and clinking slot machines.
If, however, it continues to go back up, then we’ll have fun riding the wave as long as it lasts.


Conclusion

When it comes to personal finance, there are a lot of so-called experts, gurus, and pundits out there writing articles, selling books, and teaching courses.  But if you do your research, you’ll find that not everyone agrees on most of the topics -- real estate, investing, cryptocurrency, etc.
You should take all the rules with a grain of salt.  Some rules are solid and should be followed to get the best results, but others can be tweaked or altogether ignored, depending on your personal situation (your risk tolerance, your net worth, your income & debt, etc).
So read all the so-called rules, but tailor your own financial plan to suit your needs, and you’ll likely find the best path for financial independence and success!

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