Media Room | Financial News | Investors Group

Financial rules of thumb: One size fits some?

Rules of thumb can sometimes come in handy, but remember to use them as a general guideline only. Tailor your financial decisions to meet your unique goals, rather than adhering to a rule that may not work for you. Here, we’ll explore a few oft-repeated rules that may need to be bent:

Rule #1: You need X dollars saved before you can retire

Why this is a rule: Some people like to have a number they can strive to achieve during their working years.

When to break this rule: Examine what type of retirement you expect to have and compare that to your current expenses. Perhaps you plan to travel more, or maybe you’ll find yourself caring for aging parents. Adjust your expense expectations accordingly.

The bottom line: Put a plan in place as early as possible to ensure your current income and resources work for you and help you achieve your retirement goals. 

Rule #2: You need to have an emergency fund of at least three months’ worth of your income

Why this is a rule: Emergency funds are necessary, and can help you in the most critical times.

When to break this rule: If your disability insurance states that you must be out of work for a year before collecting, then you’ll need a 12-month cushion. These funds should be accessible, but invested, preferably in a low-risk environment for stable growth. When an emergency arises, you don’t want to have to wait for the market to correct itself before you can redeem.

The bottom line: It’s important to establish an emergency fund early in your financial planning.

Rule #3: Avoid debt at all costs

Why this is a rule: Consumer debt is easy to get into and hard to get out of – and it’s preventable with a solid financial plan, professional advice and discipline.

When to break this rule: Some forms of debt can help you achieve future goals, such as paying for an education that will lead to a higher-paying job and increased future earnings. Borrowing to invest may also be suitable depending on your current financial position, risk tolerance, stage in life and investment horizon.

The bottom line: Avoid consumer debt by paying off credit card balances in full, and seek professional advice when taking on debt.

Rule #4: Avoid renting if you can buy

Why this is a rule: Renting results in no enduring benefit – aside from having a roof over your head.

When to break this rule: Until you can confidently bear the costs of homeownership, renting may be a better option. Also, some retirees discover the benefits of selling their mortgage-free house. Buying an annuity with the proceeds can cover the cost of renting a new home, plus leftovers to fund other retirement dreams.

The bottom line: Whether you’re renting or buying, ensure your home meets your needs without exceeding your resources.

There is no such thing as a one-size-fits-all rule of thumb, especially when it comes to your financial plan. Talk to us to make sure you know when to follow the rules – and when to bend them – to meet your goals.

October 20, 2015

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.