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Graduating Beyond Financial Rules

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. There are:

  • investing rules
  • savings rules
  • spending rules
  • retirement rules
  • debt rules

 

One of the most important issues to consider is that there is very little science when it comes to 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.

 

The 4% Rule

I never put too much emphasis on this 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.

Perhaps the most ominous statement I can make about the 4% rule is that if it’s an actual phenomenon then the markets would have gotten wind of it by now and tried to exploit it and hence cut 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 for 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.

You cannot hang your hat on a percentage rule because the markets don’t care about the 4% rule. Financial independence has as much to do with the 4% rule as your body weight has to do with longevity. In the meantime, the my former physician colleagues continue to chase that $3 million, plus the pension, plus the paid off house in order to feel financially secure.

 

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 their 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 then 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 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

There are several debt rules:

  1. If your student loans are at 2% then you shouldn’t pay them off
  2. If you have a low-interest mortgage then you are better off paying the minimum and investing the rest
  3. There is good debt and there is bad debt

Just like there is absolutely no one single good diet and exercise routine that every single person 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 the 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 adopted by the consumer without having collected adequate data.

 

Housing Rules

Quite a few 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 isn’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. In an area where most didn’t have fire insurance, this was a financially devastating.

And no, just because you can pay cash for your house it doesn’t mean that it’s a good investment. In fact, with low mortgage rates and the supplemental tax deductions, you might be better off leaving your money invested and taking out a mortgage. Simply put, your lifestyle and your goals aren’t going to be bracketed well by specific financial rules.

 

Spending Rules

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 then 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. If you try to be uber frugal right when shit is hitting the fan in your personal life then you’ll burn out. If you cheap out on adequately insuring your assets then you put your net worth at risk.

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.

 

Integrative Personal Finance Approach

In medicine we are putting an insane number of patients on statins even though the data is showing that we are decreasing cardiac mortality by only a couple of percentage points. The existence of healthcare professionals and statins has given patients a false of sense of security. Both parties have forgotten that lifestyle modification would be far more effective and far cheaper than taking statins.

Yes, there are 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.

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 and it has everything to do with the factors that you have control over as I’ll list briefly below.

You aren’t at the mercy of the markets. You can combine some or all the following to design the exact kind of lifestyle you desire for yourself and your family:

 

It might feel safer or be the path of least resistance to follow oft-repeated rules. It’s my opinion that such rules aren’t in your favor and will at best enslave you to your job and at worst financially ruin you.

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