Common Financial Wisdom: Theory vs. Practice

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In the financial world, there are a lot of rules about what you should be doing. In theory, they sound reasonable. But in practice, it may not be easy, or even possible, to follow them. Let’s look at some common financial maxims and why it can be hard to implement them.

Build an emergency fund
Wisdom: Set aside at least three to six months worth of living expenses in an emergency savings account so your overall financial health doesn’t take a hit when an unexpected need arises.

Problem: While you’re trying to save, other needs come up that may prevent you from adding to your emergency fund and even cause you to dip into it. Getting back on track might require many months or years of dedicated contributions, leading you to decrease or possibly stop your contributions to other important goals such as college, retirement, or a down payment on a house.

One solution: Don’t put your overall financial life completely on hold trying to hit the high end of the three to six months target. If after a year or two of diligent saving you’ve amassed only two or three months of reserves, consider that a good base and contribute to your long-term financial health instead, adding small amounts to your emergency fund when possible.

Start saving for retirement in your 20s
Wisdom: Time is one of the best advantages when it comes to amassing a nest egg. This is the result of compounding (when your retirement contributions earn investment returns and those returns produce earnings themselves). Over time, the process can snowball.

Problem: Student debt is at record levels, and young adults typically need to budget for rent, food, transportation, monthly utilities and cell phone bills, all while trying to contribute to an emergency fund and a down payment fund.

One solution: Establish a budget and try to live within your means, or better yet below your means. Focus on putting money aside in your workplace retirement plan. Start by contributing a small percentage of your pay, to get into the retirement savings habit. Once you’ve adjusted to a lower take-home amount in your paycheck, consider upping your contribution little by little.

Start saving for college as soon as your child is born
Wisdom: Parents are often advised to start saving for college right away.

Problem: New parents often face many other financial burdens that come with having a baby, including increased medical expenses, baby-related costs, day-care costs, and a reduction in household income as a result of one parent possibly cutting back on work or leaving the workforce altogether.

One solution: Open a savings account and set up automatic monthly contributions in a small, manageable amount and add to it when you can. When grandparents and other family ask what they can give your child for birthdays and holidays, you’ll have a suggestion.

“Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.”

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