Break These 5 Money Rules to Mend Your Finances

by Emily Guy Birken · 15 comments

Ask anyone what the important rules of money are, and likely they’ll be able to give you several maxims that at least sound like they are good advice. Unfortunately, many people are walking around following rules that really don’t apply anymore — if they ever did. The subject of personal finance seems to attract old wives’ tales that masquerade as solid advice. If you follow any of these “rules”, you may be cheating yourself out of a fatter wallet:

1. Don’t use credit if you have the cash. This well-meaning advice assumes that you are not able to handle the purchasing power of a credit card. But when you have the cash is actually the perfect time to use credit. Your credit card can offer you any number of perks, and by charging when you have the money to pay off the card each month, you are earning those perks for free — not to mention the benefit of improving your credit rating.

This advice is especially troubling when you realize the flip side of the rule would be to use credit when you don’t have the cash. In that case, you would spend money you don’t have and also accrue interest. This rule should be rewritten to say “only use credit if you have the cash and a plan for paying it off.”

2. Make sure you get a big tax return each spring. For years, I believed that a friend’s philosophy of making sure Uncle Sam took as big a bite as possible out of each paycheck to avoid possibly underpaying taxes and to ensure a huge tax return was a sound idea. According to my friend, it reduced the tax headache and made for some nice “found” money each year.

Unfortunately, my friend is losing out by letting the government take what is — in effect — an interest-free loan of HIS money. Instead of letting the government use your money, use it for yourself! Figure out the difference between what you owe and how much has traditionally been taken from your paychecks and invest it. You’ll earn interest on that money and have much more to show for it than just a refund check.

David’s Note: The reverse is also a money rule that doesn’t always apply in every situation. Some people can save more if they get a lump sum, while others will save more if they get more from each paycheck. With the pittance in interests that you will earn if you got the money ahead of time, picking the right approach based on psychological benefits far outweigh deciding based on financial advantages.

3. Carry a balance on your credit card to build good credit. This rule comes from a long-standing misinterpretation of how credit works. In order to build credit, you must use credit. But that does not mean you need to carry a balance — and let interest accrue. Paying off your balance each month shows that you are a responsible consumer and will give you a great credit score. No balance necessary.

4. Your home is a great financial investment. We only need to look at the housing crisis to see that this one is not true. However, people still seem to think that they need to treat their home as an asset that they will eventually sell for a profit. Once you start viewing your residence as an investment rather than a home, poor decisions generally follow. This is what I often call the beige carpet effect. By treating your home as an investment, you never take the time to make it yours for fear of affecting the resale value. Remember, your home is where you live, first and foremost. If you make decisions about your home based on investment strategy, you’ll never feel like you’re at home and you’ll likely be disappointed by your house’s selling price, too. Buy a house you love and let the resale chips fall where they may.

5. Spend money to make money. People can use this “rule” to excuse anything from a risky investment to a new business start-up to gambling. But unless you can afford to lose the money you are spending, this rule is a recipe for disaster. You can make money in many different ways without having to lay out a dime — starting with working to earn more. So unless the cash you are spending is money you have to spare, spending money to make money is likely to bite you. Don’t use this rule as an excuse for poor decisions.

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{ 15 comments… read them below or add one }

Long February 10, 2012 at 7:44 am

Thanks for mentioning these common “rules.” I’m a big fan of using my credit card to pay for everything; even for small purchases. I guess the only reason why someone wouldn’t want to use a credit card is if they don’t have the discipline to pay it on time or in full every month, even if they have the cash.

Regarding homes, like you said, people should treat it as a home. A roof over their head, and nothing else. When selling a home, people always forget to calculate how much in interest they’ve paid as a result of having a mortgage. They need to remember that in order to profit from selling a home as an “investment,” they need to sell for more than their original purchase price, property taxes, insurance costs, interest expenses, improvements, and maintenance costs all combined.

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Ginger February 10, 2012 at 8:23 am

I disagree Long. My property taxes, insurance, repairs and minimum mortgage payment are equivalent to the amount I would pay to rent a comparable place. Therefore when looking at my profit, I would not include those because I have to live somewhere.

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Long February 10, 2012 at 8:45 am

I see your point, but when you’re looking at it that way it’s not really a “profit.” You may be selling your home for more than what your purchase price was, but in terms of an investment – there probably was little or no gain when you factor in all of the expenses.

My comment was really just based on a position of treating a home as purely an investment. When treating it as a place to live, like everyone should, the opportunity cost of living elsewhere should definitely be taken into account like you mentioned.

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Jean February 13, 2012 at 1:08 am

I can see both sides of the argument as being valid. Like Ginger said you have to live somewhere and living costs can be equated to rent more or less. In the end, it just comes down to which one suits your needs better.

-Jean

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billybob May 25, 2012 at 10:29 am

I believe Ginger and Bob are talking about two different things.

Bob is talking about an investment property (obv) but I’m unsure as to if Ginger is, as she is speaking about living there. It would not be an investment property in the latter case. If you live there so it would not be classified as an investment.

Bob is correct in saying you would need to manage all of your expenses to understand if you are actually making a profit on your income property as that is the main goal.

Marbella February 11, 2012 at 5:31 am

Good advice that only applies if you can manage your finances. To have a good house with a little loan is good for both your creditworthiness, credit opportunity and a long-term savings for the future.

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Alex February 11, 2012 at 11:49 am

Great post! I wholeheartedly agree with breaking these “rules.” I don’t think there is necessarily anything wrong with thinking your home is a great financial investment, although I do agree that you should also understand that you should live in it and treat it as a home.

I feel like 3 and 5 are kind of silly myths while 1 and 2 are more psychologically focused advice for people who may not have as strict a control over their spending habits.

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Sean H February 13, 2012 at 8:41 pm

Great article. I think the most important is #1 or #5. Keeping the monthly debt low and learn to spend your money on what makes money. Awesome article!

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Carl Lassegue February 14, 2012 at 8:39 am

Excellent article. I particularly love the #1. I have been using my credit card for everything and just paying it off at the end of the month. I have enough financial self control not to overspend every month.
As for #4 I think it is more practical advice. The way the market has been going the last 4 years it is hard for anybody to view it as a good investment but I do think the market is going to bounce back. It’s not going back to the days where your house gained 10% in value overnight but in 10 years, chances are you will probably sell your house for more than you paid for it today.

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Joe Morgan February 16, 2012 at 9:15 am

GREAT list!

I’m glad to see someone else point out that credit cards are not the Devil, but a tool that when used properly (i.e. when you already have the cash) can enhance your financial situation.

As for taxes and mortgage payments… I wish I could charge those on my card too – think of the points I’d rack up! :-D

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karen ho fatt February 18, 2012 at 1:51 pm

As the old adage says ‘never bite off more than you can chew” or just don’t spend more that you make, and pay yourself first (and stash that money away before you spend anything!). That is the basis of all saving and spending.

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Victor Rodriguez September 3, 2012 at 9:06 am

Perks for free?

There’s no such thing as a free lunch. Those perks don’t come for free. Everything is 3 – 6% more expensive than it needs to be because of all the transaction fees that credit card companies charge. So, everyone is paying more than they need to for everything. Furthermore, all the people that have credit cards that don’t have any perks are subsidizing the perks for those that do have perks credit cards.

Don’t get me wrong. We use our perks credit every chance we get, but I don’t fool myself into believing the perks are “free.”

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Mike October 11, 2012 at 2:18 pm

Re: home as an investment, it is difficult to say for certain that owning is a better investment than buying. The house that you live in generally doesn’t actually net you that much more money than just taking the principal and investing it, once you factor in everything including utilities, repairs, taxes, mortgage interest, etc and factor out whatever it would have cost you to rent something equivalent. Admittedly just one example, but here’s a case study from Toronto, ON, where, it is worth noting, real estate prices never dipped like they did in most of the United States (home prices are considerably above 2007 pre-crash levels…). http://www.moneyville.ca/article/1091881–over-112-years-this-house-a-so-so-investment

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Davd Ellis January 12, 2013 at 1:17 pm

Make and stay with the rules you make.

Saw this train wreck coming, and now i am in the mists of the wreakage.
Tried to be honest, and upgraded my 70 year home, and found
that everyone hands were in my wallet.

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Pfdeals May 19, 2013 at 7:26 am

I agree that going against conventional wisdom really helps, in particular on home ownership as an investment. The tax benefits from mortgage payment helps though, since the interest is tax deductible. Spend Monet to make money is an American classic, you never hear it elsewhere!

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