There are a lot of financial rules in the personal finance space, some of which are based on research and others which have been coined by so-called experts. In this article, I want to outline how important it is to go beyond financial rules such as:
- recommended investment types
- savings rates
- how much to spend or not spend
- retirement needs
- debt management
One of the most important issues to consider is that there is very little science regarding the economy. And no matter how thorough one’s research is, it’s based on historical or period-specific data, which means that it likely won’t relate to how the future markets behave.
Though my words above might create even more doubt in an already uncertain economy, in fact, they are meant to be liberating, knowing that you can blueprint your custom lifestyle based on your uniquely designed investment portfolio.
Retirement Rules: The Hotly Debated 4% Rule
I never put too much emphasis on this 4% financial rule because it is merely a tool for financial advisers to guesstimate the portfolio returns of their clients.
Instead, it has been used by personal finance enthusiasts to create a financial prison for themselves. Getting beyond the financial rules of the personal finance space means you’ll feel more in control of your finances.
If it’s an actual phenomenon, the markets would have gotten wind of it by now and tried to exploit it, cutting the spread by a lot.
I won’t get into the details of the 4% rule here; I have touched on it in numerous posts in the past. I would want my readers to graduate beyond such financial rules and understand that the securities portfolio they are building will always generate profits otherwise, it wouldn’t be called securities.
Financial independence has as much to do with the 4% rule as your body weight has to do with longevity. In the meantime, my former physician colleagues continue to chase that $5 million, plus the pension, plus the paid-off house to feel financially secure.
Saving Rules: Saving 15% Of Your Income
You can replace the 15% savings rule with any number. I have heard about different percentages one needs to save from income, 10%, 20%, 25%, and even 50%.
The numbers are, of course, arbitrary. The issue here is that a general statement is made, saying that if a household saves X% of their income, they will have a higher chance at something … what is this something? It’s not clear.
Having a savings percentage goal is better than having no savings goal at all. However, to think that you can reach your lifestyle goals with such ratios in an ongoing fashion seems quite elementary.
It won’t take much to throw such a savings plan right out the door, such as:
- divorce
- job loss
- major illness
- death of a loved one
- burnout
- economic turmoil
UCC readers would be better served by flipping the model of savings around. Not looking at how much they can save but how well they can optimize their spending to enjoy their most ideal lifestyle.
Think about the doctor who decides to go solo. Why would they be saving during a time when they should be investing almost all of their resources into the future earning potential of their business?
Retirement Rules
I have written several posts on head-scratching retirement rules. Some are a derivation of the 4% rule, such as the 300x rule for the monthly income needed or the 25x rule for the annual equivalent of that.
Then there is the 80% rule which states you need 80% of your current income in retirement.
I didn’t know what retirement meant to people until I claimed to be retired. According to the generally accepted definition of the word, I am anything but retired – I would be considered to have 5 jobs. This is fortunate for me. It means that I can still earn a sizeable income, be retired, and not have to explain to people why I have so much free time.
Healthcare professionals are a very productive group of individuals. We are hard workers. It’s inconceivable to imagine any such person flopping down on a recliner and providing zero value to their community upon retirement.
Therefore, in the context of the retiring healthcare professional, the retirement models and financial rules simply don’t apply and could be terribly detrimental if followed.
Debt Rules: Good and Bad Debt
There are several debt rules:
- If your student loans are at 2%, then you shouldn’t pay them off
- If you have a low-interest mortgage, then you are better off paying the minimum and investing the rest
- There is good debt, and there is bad debt
Just like there is absolutely no single good diet and exercise routine that everyone can follow successfully, there is no debt rule that can be applied to the masses.
I don’t know anyone who is kicking themselves for paying off their debt early. Yet, I can see how such an argument can be made for a particular situation. Your particular answer will be quite clear if you just spend time with a competent financial adviser to explore the topic.
Such rules are good communication tools between financial advisers and clients. However, they can be ruinous if consumers adopt them without collecting adequate data.
Housing Rules: Primary Home vs Investment Property
Some financial experts believe that your primary residence can be an investment. Or it’s said that it’s okay if you take on a mortgage that’s no more than 4x your annual income.
Sure, a house in Beverly Hills is likely going to outpace inflation. Numerically, it might even be a great investment. However, what hasn’t considered are the thousands of dollars that need to be spent to keep that house updated with the changing interior design fads.
And a home in Oakland hills certainly is an amazing investment until a massive fire takes out gorgeous homes. This was financially devastating in an area where most didn’t have fire insurance.
And no, just because you can pay cash for your house doesn’t mean it’s a good investment. In fact, with low mortgage rates and supplemental tax deductions, you might be better off leaving your money invested and taking out a mortgage. Simply put, your lifestyle and goals aren’t going to be bracketed well by specific financial rules.
Spending Rules: Budgeting Suggestions
Having control over our spending is perhaps the most powerful financial tool at our disposal. It can blow any rule out of the water. Budgeting… I never realized how valuable it could be.
A high-income potential can also offset any of the financial rules mentioned so far. If you are a healthcare professional who can intertwine your unique skillset with entrepreneurial skills, you will likely earn far more money with far less work.
However, if you think that massive income can save your financial ass, then you’d only need to look to high-earning movie stars and athletes to realize that it’s never a sure bet. Neither are millionaire investors protected from an unexpected economic landslide.
So is there a specific spending rule that could work? Probably not. You’ll burn out if you try to be uber-frugal right when shit is hitting the fan in your personal life. If you cheap out on adequately insuring your assets, you risk your net worth.
My spending habits won’t work for another person. However, it’s safe to say that current consumer spending habits aren’t sustainable. The world cannot produce more oil, mine out more minerals for gadgets, pay any less to laborers, or create more medications to fight lifestyle diseases birthed by excess.
A New Design: Integrative Personal Finance Approach
In medicine, we are putting an insane number of patients on statins even though the data shows that we are decreasing cardiac mortality by only a couple of percentage points.
I want to go beyond financial rules to think independently about my wealth, investments, and income streams. The personal finance industry cares as much about me as the pharmaceutical company cares about my health.
I have Individual Control Over Key Factors
Yes, there are many financial rules out there, but we have very little control over the underlying factors which enforce them. We cannot control rates of return of securities, real estate appreciation, economic trends, or legislative changes.
But I have key control over how much I spend and when I spend it. And I can bring down my cost of living simply by moving.
Diversifying My Investments and Income
True diversification has to do with so much more than adding some bonds to your equities portfolio. It’s less about the ratio of your real estate to securities investments.
It has everything to do with the factors you have control over, which I’ll list briefly below.
My Individual Control Factors
You aren’t at the mercy of the markets. You can combine some or all of the following to design the exact kind of lifestyle you desire for yourself and your family:
- work more hours
- earn money in retirement
- invest in annuities
- work just enough to vest in a pension
- invest in real estate
- learn investing skills
- minimize taxation
- increase your risk exposure
- move to a cheaper location
- increase your hourly income
- retire early and return to work if your plan fails
- reverse mortgage your home
- start a business
- consult on the side
- rent out extra rooms
- go against the norm
- rent out your car
- cut your spending drastically
It might feel safer or be the path of least resistance to follow oft-repeated rules. I believe such rules aren’t in your favor and will, at best, enslave you to your job and, at worst, financially ruin you.
My Personal Finance Journey from 2017 until 2022
I am updating this article in 2022. I have a net worth of over 1.2 million, and it’s far more than I’ll ever need or use.
I got here because I believed I needed to hit my “4%” number to be able to walk away from medicine.
I am living a wonderfully balanced life with some medicine mixed in. But mostly, I read, rock climb, and travel through Spain.
I am working on a Heart Health Coaching project and have done consulting for the past few years.