The Answer To Every Personal Finance Question: It Depends
Have you ever been given financial advice from a friend or family member? You would recognize it as sounding something like, "why haven't you...," "you know you should...," or "I can't believe you don't..."
I'm giving you permission to ignore this unsolicited advice.
You may even use a professional who says something like "We do this for all our clients," or "Everyone gets one of our six models."
I'm also giving you permission to reconsider working with someone who treats you exactly like everyone else.
I learned an old saying from Carl Richards that personal finance is more personal than it is finance. Off-the-shelf, one-size-fits-all, canned advice may be a good rule of thumb, but there is no such thing as universal advice.
What You've Heard
Here are some of the examples that you may have heard from friends, family members, articles, or even financial professionals:
• You need to have six months worth of expenses saved in your emergency fund
• You need to have 10 times your salary in life insurance
• Your asset allocation should have 120 minus your age in stocks
• You need to have a will
Not Universal
Admittedly, many of the above examples are excellent starting points or guidelines. But consider the following possibilities.
If someone is comfortable with interest rate risk and doesn't have all money in stocks, couldn't they sell some bonds if there was an emergency? If there are two earners in the household and they earn about the same, do they need six months of expenses saved? What if one of them is a high earner and the other doesn't work?
Life insurance covers your lost wages in case you die early. That means you need less insurance as you get closer and closer to retirement. Does an empty-nester who is 55 need the same amount of life insurance as someone who is 25 who just had a second child? What about a child-free single person; what kind of life insurance is needed there?
An equation of 120 minus age says nothing about how much risk an individual person can stomach. Someone who is young but very nervous about the markets doesn't need the same percentage in stocks as someone who is the same age but a very aggressive risk taker who understands market history. Someone who is old may have enough money to live on so their portfolio should be managed for their children or grandchildren, extending their time horizon to beyond their lifespan.
If someone without children has a complex situation where many trusts are required and the rest of their assets have beneficiary designations, what is the purpose of the will? What about a single person with little assets and no heirs?
We're Too Different
These are just a few examples of "hard rules" you may come across, along with some situations where the hard rule doesn't necessarily apply. No doubt there are many more examples than this.
We all come from different places, have different experiences, different relationships with money and developed different money scripts. Everyone has different knowledge and comfort levels. What works well for even 99% of the world may not work for you or me, and we shouldn't listen to people tell us otherwise.
So if someone comes at you screaming about something you should or shouldn't be doing, you can thank them for thinking of you, but confidently tell them their advice doesn't necessarily apply to you.
Keep Reading:
References:
Carl Richards: The Behavior Gap
Carl Richards: The One-Page Financial Plan
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