We all agree that 2020 was tough, uncertain, and strange. But 2021 is a New Year. It comes with an opportunity to get your life back on track. And if that includes putting your finances in order, you may be wondering how you will do it right this time. Here are some new money rules that may help.
For decades, financial experts have based their advice around money rules. But during the pandemic, some of these rules were put to the test and most of them may change forever. So before hitting the road, spare a few minutes and find out which of these conventional money rules need reconsideration.
Keep 3 Months' Worth Of Expenses For Emergencies
Let's face it. Having an emergency fund is fundamental for sailing through difficult financial times like when you lose your job or for medical expenses. And for many years, money experts recommended people save three months' worth of expenses in emergency fund accounts.
But the pandemic showed that the amount won't be enough. Many Americans were unemployed for more than six months and many businesses took financial hits like never before.
So don't follow this rule. Aim to save at least six months' worth of expenses. And if you're the sole breadwinner or self-employed, your target should extend beyond 9 months.
Keep Most Of Your Retirement Funds In One Foolproof Basket
Financial experts often suggested to retirees or those about to retire to keep their retirement funds in bonds. The interest rates were high and could be enough to support them during retirement.
But today those rates are low and lifespan has increased. Consequently, if your retirement portfolio is made up of 100% bonds, it may not earn enough money to support you.
So if you're preparing for retirement, it may be wise to diversify your portfolio. This will help you build up your investment and minimize any losses.
For instance, start saving and investing early by controlling your lifestyle. Also, maximize tax advantages by participating in an IRA or 401k as they enable you to invest your money on a tax-deferred basis.
Cash Is King
It's always wise to avoid getting into debt. That's why many experts advise people to always pay with cash whenever possible.
However, during the pandemic, many of us shopped online to be safe and we saw the benefits of using cards. This can therefore be one of the new money rules. When used wisely, cards can actually help you save money.
For example, some apps help you get some cashback when you shop at certain stores. This can be a great way to make some extra cash whenever you buy things.
Allocate 30% Of Your Budget For Housing Costs
When budgeting, a common rule of thumb is that you should not spend more than 30% of your income on housing plus other related costs such as utilities. But this rule doesn't take into account individual scenarios like other financial obligations and the housing market. So instead of following this rule, create a budget based on your financial position and goals.
Determine what you can spend on housing costs that will help you achieve other financial goals like saving for retirement and eliminating debt. This will help you avoid a lifestyle based on how much you earn and keeping up with the Joneses.
Have This Amount Of Money By This Age
Many of us are struggling to save enough money to retire early, buy a house, go on lavish vacations or own a luxurious car like our friends. And sometimes, we feel ashamed to face our financial fears because we think we're too old to achieve these dreams.
But in reality, the rule of having a certain amount of money by a certain age doesn't hold water anymore. Everyone is following a different path financially.
So if you want to succeed, don't look at your age and compare with your peers. Instead, focus on growing your net worth step by step or year by year. You can do this by increasing your assets like savings, emergency, and retirement funds and reducing or avoiding debts.
As you look forward to improving your financial life this year, revisit, reconsider and modify some conventional financial rules to suit your situation and propel you to succeed. We hope these new money rules help you achieve your financial goals in 2021. Good luck!