When financial rules are wrong

Personal finance articles often state “rules” of various kinds for people to follow when it comes to their money…

You should be saving 10% (or 15%) of your pay for retirement.
 Don’t buy a home unless you have a 20% down payment.
 Don’t sell when the market is going down, and don’t buy when the market is going up.
 You get what you pay for.
 If you want to get a good paying job, you have to go to college, and preferably the right one.

Those are just five examples, but you get the idea.

These kinds of “rules” are easy ideas to swallow. You don’t have to think about them very much at all. You just have to follow them and, in theory, your finances will turn out just fine.

Here’s the catch: rules are rarely right in all situations. A person who is 50 needs to be saving more than 15% for retirement. A 10% down payment can be the right choice in some situations. Buying and selling often has more to do with personal situations and diversification than market timing, and there are many examples where buying during a market increase and selling during a market decrease can work out. Some bargain products are the best in their class, and other items are way overpriced. I know two people who make six figures with less than an associates’ degree of college education.

Rules exist to summarize the vast majority of situations and turn them into an easy-to-understand statement. They can be really useful for general guidance for many of the decisions you make in life, from buying a car to choosing life insurance.

However, rules tend to be summaries of a lot of facts and observations. They don’t match every single situation. They just match a lot of situations.

Let’s dig into the “you get what you pay for” rule.

Anyone who has read The Simple Dollar for a while knows that I’m pretty particular about my kitchen implements. I love to cook, and I love to do it well. I’ve gone to many cooking demonstrations and lessons, tried countless techniques and recipes, and read about a thousand articles and magazines and cookbooks.

Over time, I’ve come to realize that I really only use three knives in the kitchen. I use a paring knife for coring and peeling, I use a bread knife for cutting bread, and I use a chef’s knife for everything else.

One might think that simply getting the most expensive of each of these would be the best solution, right? Well, that’s not the case.

The best paring knife I’ve ever used in my life is an ordinary $20 paring knife that is no longer made. The best paring knife I’ve ever used that can easily be bought is a $7 Victorinox paring knife.

Superbly constructed paring knives sell for hundreds of dollars. They feature unbelievably sharp blades and are artisan-crafted out of incredibly pure metals. But, in the end, none of them that I’ve tried does the simple job of coring a bell pepper quite like that $7 Victorinox knife.

For the majority of items I’ve owned or experiences I’ve had in my life, the maxim “you get what you pay for” is true. However, sometimes it simply isn’t true, and spending the time to learn whether or not it’s true for the thing you’re interested in is usually worthwhile.

These kinds of rules are sometimes overthrown by the facts. No rule is set absolutely in stone, and the reality of different situations often leads to different conclusions.

Use rules when you’re in the heat of the moment and have to make a snap decision. Otherwise, spend the time learning the real facts of the situation you’re faced with and make a sensible decision. Many times, the “rule” and the facts will agree, and that’s great – you’re sure that you made the right choice. Other times, the “rule” and the facts will disagree, and that’s also great – you’re going past the rule and making the right decision.

The key is to spend some time really learning about every decision you make, from the enormous ones like choosing a career path to the little ones like choosing a blender. The more you know, the better decision you’ll make. The better the decision, the more likely you’re going to wind up with money in your pocket over the long run.