Do you ever experience an acquaintance who says something so confidently it feels like it must be true?
It usually goes something like, “Oh, you must absolutely do…” and then they finish with something that sounds logical.
Then, you think, “Wait, I’m not doing that. I should probably do that now.”
That exists in personal finance, too. People will often impose personal rules to live by as if they know your individual situation.
Unfortunately, they often sound reasonable, get picked up by others, and spread around.
I’m here to talk about some of those personal finance “rules” people spew as truth. I’m here to tell you 5 strong personal finance opinions I don’t necessarily agree with.
You Can Have More Than 3-12 Months of Living Expenses in Cash in Your Emergency Fund
Rules of thumb often go terribly wrong in personal finance, and they are often very wrong when it comes to emergency funds.
You’ve probably read somewhere that you should have anywhere between 3 and 12 months of living expenses in cash as an emergency fund.
For example, if you spend $4,000 a month, that would mean having cash of anywhere between $12,000 and $48,000.
That’s quite a difference.
And, I’m here to tell you that you can actually have more. It will be okay. No personal finance gods will cause wrath to rain down on you.
I find fault with people who say you have to have a certain amount of cash available as an emergency fund and no more.
Not only does it depend on your job, the stability of your earnings, what other assets you have, and a variety of other factors, but it also depends on your feelings toward how much cash is appropriate.
First, let’s talk about what you risk if you have too little cash. Then, I’ll talk about what you give up if you have too much cash. Finally, you can decide on a framework for what is appropriate for you.
What Could Happen if You Have Too Little Cash?
If you have too little cash as an emergency fund, you risk the possibility that if an emergency comes up, you may not have the ability to pay for something.
That something could be your home, car, taxes, food, education expenses, etc.
Maybe you have credit cards with a high-interest rate you could use or lean on a friend or family member, but you never truly know if any of those resources will be available for you.
Personally, if I can avoid it, I don’t ever want to be in a situation where I even have to wonder if I have enough cash to pay for the roof over my head, food in the fridge, or transportation to get me somewhere to earn a living.
Plus, when you need cash, you usually really need cash. Those are the times when your backup plans for cash may not exist anymore. When things go wrong, they often go very wrong together.
What Could Happen if You Have Too Much Cash?
On the other side of things, what happens if you have too much cash?
You usually give up returns, which could add to your net worth. If you hold too much cash that could be invested in a 401(k), brokerage account, or Roth IRA, you may progress more slowly to your financial independence goal.
That could mean working longer or spending less down the road.
It can be frustrating watching people earn a certain percentage in the market while your cash gets eaten away by inflation, but for some, that’s an okay tradeoff.
I know people who have more than three years of spending in cash. They likely have less money than someone who had invested some of that cash, but they sleep incredibly well at night knowing they can pay for anything they need for the next three years.
Despite not following the general rule of thumb to have six months of cash in an emergency fund, they are still comfortable, have a solid financial plan, and are happy about their decision.
Framework for Deciding How Much Cash To Hold
While I think 3-12 months of spending in cash is reasonable for most people, each person is unique.
If you ever feel worried during a recession or a major life event about how you are going to pay for something, that may be an indication that you don’t have enough cash.
Going back to March 2020 when the pandemic happened, I noticed people who had more than the general rule of thumb of how much cash to hold were calmer and less likely to make changes to their investment portfolio.
The key is to pick a level of cash you feel confident in during good and bad times.
You Don’t Have to Buy A Home
I wish I could scream, “YOU DON’T HAVE TO BUY A HOME” from a rooftop in every city in the United States.
Renting is not throwing money in the garbage. Wealth is not only built through homeownership. Owning a home isn’t the only path to financial security.
Owning a home is expensive.
Most people say to set aside approximately 1-3% of the value of the home each year. For example, if your home is worth $500,000, you’ll want to save $5,000-$15,000 each year.
You may not spend it every year, but when you factor in major replacements, such as roofs, fences, and siding, as well as the small stuff that adds up, you probably come close to that 1-3% rule.
The other thing to be wary of is that homes have appreciated significantly, particularly in certain geographic areas, over the past decade. If you look historically, homes have appreciated slightly above the rate of inflation.
In other words, they aren’t a great investment.
What can make them appear as a great investment is the use of debt, or leverage, and above average appreciation recently.
For example, if you put $100,000 down on a $500,000 house and it appreciates 10% in a year, you gained $50,000 in home value on a $100,000. In other words, you produced a 50% return in one year.
Don’t forget it can go the other way.
Also, buying and selling a home can be expensive. Although buying costs are somewhat hidden, they often amount to 3-5% of the home value. When you sell, closing costs are often 8-10% of the home value.
Owning a home also requires extra responsibility. If something breaks in a rental, you call the landlord and that something magically gets fixed.
In a home, you have to research and find a repair person, you have to coordinate with the repair person, and then you have to pay for the repair.
Homeowners insurance tends to be more expensive than renters insurance, too.
You may look at a monthly mortgage payment and think that is the total home cost, but there is more involved.
Remember, a mortgage payment is the least amount of money you will pay per month.
A rent payment is the most amount of money you will pay per month.
In other words, a mortgage payment is the floor and it can only go up from there. A rent payment is the ceiling.
Renting allows for flexibility and a certainty in cost for the length of the lease. If you want to pick up and move at any point, you can do it easily without selling a home.
You don’t have to be in a rush to buy a home. Although it’s important to be prepared financially, I think it’s equally as important to be prepared for the lifestyle change.
You may be ready in one area before the other.
You Don’t Have to Own Mostly Stocks When You are Young
I may catch a lot of grief for this one, but I’m going to say it anyway – you don’t have to own mostly stocks when you are young.
Yes, time is on your side. Historically, stocks have outperformed bonds and cash over longer periods of time.
Do I think younger people are generally better off owning more stocks?
But, you have to be comfortable with your allocation.
If you aren’t comfortable with your allocation, go through a stock market decline, decide to sell while stocks are down 30%+, and don’t get back into the market, you had the wrong allocation to begin with and probably hurt yourself more than if you had just chosen a more conservative allocation with less stocks to begin with.
We haven’t seen an extended decline in over a decade. The decline in March of 2020 during the pandemic was a quick recovery – one of the fastest on record.
I think many people are going to be in for a surprise if (more realistically, when) we see an extended decline of a few years in the future.
While you should align your allocation with when you need the funds, you also need to be comfortable with the fluctuations you could experience.
Nothing is guaranteed when investing. Stocks have historically rewarded investors for taking risk, but we could see an extended period again in the future where that is not the case.
You Don’t Need a Side Hustle
Despite what the entire personal finance space seems to shout, you don’t need a side hustle.
I’ve seen many people start businesses only for it to be slightly profitable and take a lot of time away from friends and family.
You can build wealth through a W-2 career, saving, and investing consistently throughout your career.
Unless you have an extremely high paying job or get equity through your company, it probably won’t be like the wealth you see in movies, but it will be enough for a comfortable retirement.
After a certain point, more isn’t always better.
If you want a side hustle because it’s fun and you have a plan for it to become your full-time work, I don’t want to dissuade you from doing it.
I strongly believe people should live their ideal life.
I just don’t want you going into it because you feel like you need a side hustle. There are many employers who exist and pay well for great talent.
Experiences and memories with loved ones are also really important. A side hustle is going to take work – on top of your other work. Consider whether you are willing to trade more of your time for the chance to earn more through a side hustle.
You Don’t Need to Budget
I should clarify – you don’t need to budget regularly.
It helps to budget early in life to get a feel for where your money is going. It also helps to budget during major life events, such as big pay raises, starting a family, etc.
Outside of that, I take the reverse budget approach.
Pick your big goals. Fund them the moment your paycheck hits your bank account.
If you are achieving the big goals, the rest of it doesn’t matter as much.
Spend what you want, and if you are ever curious, design a system so it’s easy to go back and check. I use Mint for this purpose.
For me, tracking what I spend on food, travel, electronics and other things doesn’t matter. As long as I can pay for my housing, save enough for retirement, and accomplish my other goals, I don’t feel the need to budget.
If you aren’t achieving your big goals, then I strongly recommend budgeting.
But, otherwise, feel free not to budget.
Summary – Final Thoughts
Although these are my personal finance opinions, remember, they are personal.
You can have a different opinion and that may work well for you.
I wanted to provide a different way of thinking about common suggestions you’ll hear about on the internet or when talking with friends.
- You can have more than 3-12 months of living expenses in cash as your emergency fund.
- You don’t have to buy a home at a specific time, or really, any time.
- You can pick your own allocation. It doesn’t have to be mostly stocks if you are younger.
- You don’t need a side hustle.
- You don’t have to budget, at least not regularly.
Now, go live your life and enjoy it!