6 Personal Finance Numbers that are Bullshit!

Times are tough, so here’s a set of 6 Handy little rules of thumb, that sound so smart but are so dumb.

4% (the 4% rule)

You could argue all day long about this (and people do!). Try reading the paper on which it was based. But how can you tell now what the maximum you can spend tomorrow and adjusted for inflation for the next 30/40/50 years with 100% certainty?

0% (APR or interest free)

Whether it’s cars or kitchens; there is no such thing as interest free credit. You are just paying for it up front and paying it back in installments. If you are a cash buyer you can often get steep discounts compared to those who can’t. But in some areas (like cars) all the money for the seller is in the selling of finance and not the product. And if you are the sort of person who needs to borrow to afford life’s essentials, you might want to save up before you splash out which brings me on to…

72 (the rule of)

Two investments that pay 4% and 8% respectively. Divide 72 by 4 (or 8) and find out how long it will take to double your money – 18 or 9 years. That’s handy but it’s also not true – the 8% investment may be riskier and return of capital is more important than return of capital. The maths of 72 are correct but don’t forget risk!

3 (month’s contingency fund)

This is often said to be the bedrock of FI to help you cover out of the blue bills – I’ve even heard that for retirees 2 years spending in cash be lying around. Whilst having money available if you need it is important, keeping cash is an opportunity cost. It might be better to invest your money and rely on an arranged overdraft when needed. For example, if you keep £6000 in cash earning 2% that is £120 a year. But that could be invested earning 8% per year (and we won’t even compound that) or £480 a year. If you do need £6000 in a hurry at a usurious 20% APR it would take you over 100 days in the RED before you start to lose money. It’s a question of cashflow at the end of the day.

25 (year mortgages)

When you sign up for a mortgage the typical term is 25 years but these days most mortgage terms last for as long as your mobile phone contract. 2 year teasers are the way to go to avoid being booted off onto the SVR – often doubling interest charges. Of course, if you house goes up in value, you can just remortgage to release your money to spend, just reset that mortgage to 25 years – bonus points if it’s Interest Only!

Half your age%

Pension pundits say that you should be investing in your stakeholder pension at a rate of half your age in percent. A 30 year old should stick 15% of her salary in an a 60 year old should put 30%. Whilst this is easy to remember, it’s too simplistic. First of all, it might be wholly insufficient to live off when you are old (assuming you spend every other penny). Also since pensions are a way of deferring income, maybe you want that money now!!! For lower rate tax payers, an ISA is not much worse than a pension and a LISA might be right. Remember, you can’t retire early off the back of pensions (as I know). Do your own research and work out what’s best for you.
Good luck, GFF

6 Comments

  1. 0% (APR or interest free). There is such a thing for the credit worthy, crafty or downright nefarious.

    The days of cash is king are generally over and often it’s potentially worth taking out finance and then swiftly paying it off.

    Some car dealers only give discounts if you take their finance.

    They don’t like cash as it triggers problematic money laundering checks.

    Liked by 1 person

    1. I agree with you on that.
      The big ticket items that no one can seem to afford are maybe best paid off over 24 months – even if it shoots your credit rating in the foot.

      Paying off a credit agreement early can lead to punitive charges in my experience. Some loans are free to repay at any time but most have a 30/60 day interest penalty charge

      Like

      1. I always ask the credit provider if there’s an early settlement fee and then decide accordingly.

        We live in odd times where you can be paid incentives for taking at 0% credit. The provider hopes to gain a return when you exceed the 0% period and the nefarious customer knows full well they will be clearing or flipping the balance before fees are due.

        However, I suspect I’m not a typical customer.

        Happy New Year and I hope your investments have rebounded somewhat.

        Liked by 1 person

  2. When cash flow isn’t in abundance, some of these rules are useful, eg the 0% APR and 3 months’ contingency fund. It was the lack of the latter that led to me to being massively of credit card debt (plus my own stupidity of course) and it was the 0% APR (credit cards) which saved me ultimately and helped me pay off my debts. I’m aiming to build up my 3 month’s fund again, it’s nowhere near £6k, so am happy to forgo any potential advantage I might get from investing.

    I do know of retirees who are sitting on a couple of years’ spending in cash – I’m sure they know that money should be invested but at least they can sleep at night, given the year we’ve had.

    Agree with you on those other ‘rules’ however.

    Liked by 1 person

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