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The New Rules of Personal Finance?

rules of personal finance

I was going through my Twitter feed the other day and came across an article titled “The New Rules of Personal Finance” (link) that caught my eye.

My first thought was that, could there be “new” rules to personal finance?  Are there any hard and fast “rules” to begin with?  Maybe a better word instead of “rule” is “assumption”.

As per usual, I digress!  The rules in the article revolved around personal finance hot topics like:

  • Renting vs buying a home;
  • Investing vs. paying off debt;
  • Required savings rates; and
  • What is considered good and bad debt.

All very relevant topics with varying opinions depending on perspective.  Here are some of the old and new rules of personal finance with some of my own opinions.

Old and New Rules of Personal Finance

Old rule: Buying a home is better than throwing away money on rent.

New rule: Renting can be a smarter money move, if you do the math.

Being from a more affordable area to own real estate, I’m a homeowner.  I’ve written in the past that I believe in home ownership providing that it’s affordable and it’s for the long-term.  What do I mean by affordable?  Hint – it has to do with the amount of mortgage debt.  My personal rule is to never obtain a mortgage for more than 2x gross household income.  For example, with our new build, the price was well over our annual incomes.  However, with our large down payment, we managed to bring the mortgage balance to a little over 1X gross household income. 

I know what you’re thinking “it’s impossible to buy a house in Toronto or Vancouver with a mortgage of just 2x family income!” I can’t really argue with you as real estate valuations in those cities are astronomical.  In this case, owning is not the only option!  If you don’t have a large enough down payment to bring the mortgage down to 2x family income, maybe it’s a sign that you should look for a lower cost home, or not own at all.  In other words, rent!

One thing to point out is that owning a home doesn’t just come with a mortgage payment, it comes with a number of other expenses that renters do not have to handle.  Expenses such as: maintenance when stuff breaks down (and it will – in the past 10 years, we’ve already replaced kitchen appliances, washer, HRV motor, hot water heater); property tax (we pay 1% of property value plus a water tax); home insurance ($1k+ for us); lawn care and snow clearing; and a new roof every 15-20 years.

Now it’s not all bad if you own a home. Real estate is known to keep up with inflation over the long-term, and once the mortgage is paid off, you have a nice lumpy asset that could be used to help fund retirement or to pass onto the next generation.  

To summarize, if a house is outside your affordability range, renting a place and investing your savings is a sound strategy.  Investing the difference allows the renter to essentially “build equity”, and over the long-term, will go a long way in paying for retirement.

Old rule: Before you even think about investing, pay off all your debt.

New rule: Pay off high-interest-rate debts, then consider investing.

I’m a bit old school on this topic as I believe in paying off debt before investing for most people.  However, with extremely low-interest rates this past decade, there is merit in the “new rule” where you pay off high-interest rate debt, then start investing.   Essentially, this would mean paying off all consumer debt such credit cards, student debt, line of credit, and car loans, before attempting to invest. 

I would consider investing while carrying a mortgage balance if you are locked into an ultra-low-interest rate that is essentially free money after inflation.  However, there is an intangible benefit of paying off debt which is purely psychological.  It’s really freeing when you don’t “owe” money to someone else – at least it is for me and I’m betting some of you as well.  (for full disclosure, I have a tax-deductible investment loan that is used for dividend stocks).

Most people would benefit by aggressively paying off consumer debt, but at the same time, learning about how to invest properly.  The bright side is that it’s getting easier and cheaper to invest. Here are 6 ways to start you off on your investing journey.

Old rule: Save 10 percent of your salary for retirement.

New rule: Calculate how much you’ll need in retirement, then save accordingly.

Ah yes, the old “Wealthy Barber” strategy of saving 10% of your salary.  In my opinion, 10% is a great start and may provide a comfortable retirement for a couple who can receive old-age benefits (~$28k/year on average for couples who have lived and worked in Canada all their lives).  But as with anything personal finance related, there is little that is one size fits all.  That’s why they call it personal finance after all!

Related: 7 key sources of income during retirement.

I also believe in calculating your retirement expenses and working backward.  I’ve written a number of articles on the topic, and for most, you need much less than you think to retire.  For the details check out my article “how much do you need to retire in Canada, not as much as you think!”, as a summary:

Figuring out how much you need to retire is not as complicated as some make it out to be.  It’s pretty much a four step process:

  1. Work out a budget of expected expenses during retirement.
  2. Calculate how much the Government will provide you during your retirement years.  You can use the Canadian government calculator here.
  3. The difference between 1 and 2 is how much income from savings (and/or company pension) that you will need.
  4. Take the number calculated in step 3, and multiply by 25.  That is the amount you will need to have saved (in todays dollars).  If you have other sources of income, like from company pensions or rental properties, then reduce step 3 by the other income amounts, then multiply by 25.

Note that this is an extremely simplified version of approximately how much you will need to retire.  To get an accurate picture, you will need to account for taxation (which depends on how you structure your investment accounts).  In addition, there is uncertainty in the availability of government programs when looking at drawing from them decades away.  In my opinion, it’s best to be as conservative as possible when estimating your “number”.  In a future article, I will review how much you need to save today to hit your future “number”.

Related: 5 Retirement Calculators

Old rule: Student loan debt is always “good debt.”

New rule: Calculate the ROI of your degree.

This rule makes sense.  You hear and know of so many students who have gone to College/University, racked up lots of debt, just to get a degree without any plan associated.  For students out there, try to think longer term and do the education required to get you where you want to be.  If you don’t know what you want to do in the future (like most of us), sit down and figure out what subjects and topics that you like (and naturally skilled) today.

From there, review career paths that emphasize your interests and skillsets.  Once you’ve narrowed it down to a top 3-5 list, ask around to see if you can interview or job shadow people in that career field.  Asks questions about their work, career progression, compensation, lifestyle, and if they feel fulfilled in their work.  Like personal finance, careers are not one size fits all.  And while calculating ROI is one metric, it shouldn’t be the only metric.

What are your thoughts on some of these old and new rules of personal finance?  Do you agree with them?  Why or why not?

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 5 comments… add one }
  • Laura November 12, 2018, 1:09 pm

    Great sumary of the new ‘rules’! I would overall say people have to think for themselves. Blanket advice to buy a house or pay off debt before investing are genaric advice. For the amount of time we spend at work to earn money it is well worth the time to think and research your options.

  • FT FT November 18, 2018, 12:10 pm

    Thanks for the feedback Laura!

  • GYM November 19, 2018, 3:45 am

    2x gross annual income for a mortgage! Lol :) This is a good benchmark but like you said, difficult to achieve in HCOL like Vancouver and Toronto.

    What about all the students and housewives who have under $0 in annual income who have their houses paid for in CASH in Vancouver? ;)

    • FT FT November 19, 2018, 10:17 am

      I figured Vancouverites would find the 2x mortgage rule comical. :) Are housing prices continuing to appreciate over there? Or have the new rules caused appreciation to slow down a bit?

      • GYM November 22, 2018, 3:04 am

        It’s slowed down but prices are still ridiculous :)

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