There are people out there who swear that if you’re lucky enough to see the first flower of springtime on a Friday, it’s a sign of impending wealth.
I know. I don’t buy it either.
Still, let’s assume these folks know what they’re talking about; what happens if that first flower is found on Friday the 13th? Is the wealth omen officially null and void?
Can somebody take an action item and get back to me on that?
Of course, I’d expect such confusion from an old wives’ tale masquerading as a fact.
Beware of Financial Old Wives’ Tales
A while back I presented my initial list of 10 misleading financial rules of thumb — popular bromides that are essentially just gussied-up old wives’ tales.
Yes, I realize that there are some money rules of thumb that can make sense at times, most are simply financial old wives’ tales. In other words: More often than not, they’re completely bogus.
Here are a few more examples to help drive the point home:
1. Your emergency fund should have three months of expenses.
If You Buy This You May Also Believe: You can determine how many children you’ll have by cutting an apple in half and counting the seeds inside.
Reality Check: While three months may be good for some folks, that may not be enough — especially in tough economic climates where it may take longer than that to find a new job.
2. Never refinance a fixed-rate mortgage unless you can cut your existing rate by at least 1%.
If You Buy This You May Also Believe: You’ll have bad luck if you don’t pinch your nose immediately after seeing an ambulance.
Reality Check: If you’re carrying a relatively small balance on your fixed-rate mortgage, that’s probably true. But no-cost refinancings may make it worth while even if the spread is less than 1%.
3. Buying a car is always cheaper than leasing.
If You Buy This You May Also Believe: It’s bad luck to close a pocket knife unless you were the one who opened it.
Reality Check: While buying is cheaper if you plan on keeping your car until the wheels fall off, folks who insist on getting a new car as soon as the old one in the garage is paid off may actually be better off leasing.
4. It’s smarter to pay off your credit cards with the lowest balances first.
If You Buy This You May Also Believe: Three seagulls flying directly overhead means death isn’t far away. (Odds are another unpleasant fate isn’t far away either.)
Reality Check: While the so-called “snowball method” of paying the lower-balance card first and then working on up — without regard to interest rates — may be psychologically effective, you’ll get more bang for your buck by paying off credit cards with the highest interest rates first.
5. For the best deals, always buy the largest-sized packages, or buy in bulk.
If You Buy This You May Also Believe: Those who sing before seven will cry before 11.
Reality Check: Consumer Reports found that larger packages were more expensive about 25% of the time. And bulk purchases may actually end up costing you more too if you fail to use them all before their expiration date.
6. Save 10% of your income annually.
If You Buy This You May Also Believe: It’s bad luck to say “pig” while fishing at sea.
Reality Check: While setting aside 10% of your income is probably a good figure if you’re a twentysomething, it may not be enough for those who started saving later in life. Regardless, if you can afford to save more, you should do so.
7. A $1 million nest egg is a reasonable retirement goal.
If You Buy This You May Also Believe: If you wear new clothes on Easter, you’ll have good luck throughout the year.
Reality Check: Reasonable for whom? For many folks, especially those who live a modest lifestyle and plan to retire relatively late in life, $1 million may be overkill. Instead of striving to reach some random benchmark, your retirement goal should be based upon your anticipated monthly expenses.
8. Buying a home will keep your tax bills low.
If You Buy This You May Also Believe: It’s bad luck to take an old broom with you when moving to a new house.
Reality Check: While this may be true in the short term, as you pay down your mortgage, income tax deductions for mortgage interest diminish over time. And as the standard deduction increases with each passing year, those tax benefits are mitigated even further.
9. Over the long term, home ownership is a terrific investment.
If You Buy This You May Also Believe: An itchy nose is a sign someone is coming to see you. If it’s the right side, the visitor will be female; the left side, male.
Reality Check: A lot depends on when you enter — and leave — the market. According to the Washington Post, between 1975 and 2008 homes appreciated an average of only 1% after inflation.
10. An engagement ring should cost two months’ salary.
If You Buy This You May Also Believe: If you knit your fiance a pair of socks, he’ll walk away from you.
Reality Check: Relax, guys; the two-month salary bromide is solely based upon a very successful marketing campaign by the De Beers diamond company. The size of an engagement ring should only depend on what you can reasonably afford — not your salary. Sheesh. Talk about a ridiculous proposal.
Photo Credit: Phil and Pam Gradwell
great article!!!! (but i still <3 the snowball method!)
If you’re comfy using the snowball method, tracee, and it’s the only way that credit card debt would ever get paid down, who am I to argue? 🙂
I love your examples. I certainly think 3 months emergency fund is too little too. I also think it doesn’t have to be in liquid cash. It could be tied up in other things (like Roth IRAs or bonds, etc). I’m a big fan of dual purpose investments.
Although I don’t do it, I know several folks who use a Roth IRA as their de facto emergency savings account. Personally, I like having a separate dedicated emergency fund, even though I could probably make my emergency fund money work a little harder if it were in a Roth.
The best way I’ve found to keep your emergency fund invested is to save.
Buying a home may keep your tax bills low at the inception of the loan, but people forget that a deductible expense still means that you’ve got to spend the money in the first place. The tax benefit is good, but if you can’t afford to make the payments and continue to fund a retirement plan or meet other monthly expenses then it’s still not a good move.
Reminds me of the old Seinfeld episode where Kramer talks about a write-off, not realizing what a write-off means.
Yes, it’s the classic case of spending a dollar to save a dime.
Speaking of rules of thumb, one I’ve heard is, the percent of your investments in stock should be approximately 100-(your age). If you are 25, have about 75% of your portfolio in stocks, at age 50 it should be down to 50% stock, etc. What do you think of that one?
Hey, you’re a great straight man. I covered that one in my first edition of this post a year ago, DC!
http://lenpenzo.com/blog/id1499-financial-rules-of-thumb-that-are-really-old-wives-tales.html
Like most rules of thumb, it depends. The folks at CNN money think that is not aggressive enough. I’m going to take the cop out answer and say “it depends” on your particular situation. For example, if I had a healthy nest egg already built up at, say, age 60 — I’m not sure I would want to still have 40 (or 50 or 60, if I follow CNNs advice) percent of my portfolio in the stock market. Then again, if I was way behind, I’d most likely have to be more aggressive.
Too funny! I wasn’t reading your blog a year ago, and missed it.
Next up: How sheep bladders may be used to predict earthquakes.
and where would you place this on your list of old wive’s tales?
Obama’a budget
Ha ha! I’ve seen that before.
We spent our tax refund on my engagement ring years ago. It is nothing fancy but dear to my heart. Who cares that it was not expensive? Happiness in marriage is not determined by the size of your ring.
I agree. My wedding band cost $85, but it’s priceless to me. 🙂
We bought ours on the cheap at WalMart. We hurried to get them because a strong West wind was blowing, which means price increases are coming. Sure enough, gold went from $700/troy ounce to 1.700, shortly afterwards
Good stuff! And you say I march to a different drummer.
I guess we both do, Dr. Dean. Maybe that’s why I didn’t make the marching band in high school.
Well, it kinda depends on your break even point and where you are in life. For one:
1. A three month emergency fund is not enough. I put 18 months in my “bare bones” EF long ago. I do not follow the “crowd”;
2. A one point drop in interest..well, I just refinance from a 15 year, 5.5 percent fixed, with 12 yrs left, to a 10 year, 3.25% percent loan, with a savings of $160 per month. I also shopped for the lowest refi costs, to make my break even point as short as possible…but I admit, I am a weirdo. It was good for me.
The rest of this article is not good for me, but I am a weird nut…
Kinda like having a credit card is a good thing! Not my bag.
Spedie
Whaaa? “The rest of the article is not good for you?” 😉
Spedie! I failed you … Say it ain’t so!
I have always heard minimum 6 months worth in emergency fund. Three months is too little.
I agree, Spedie.
HA! I totally agree about the engagement ring thing, and I’m a girl. It’s just so not necessary. Some other women may want a ring that expensive, but being a personal finance geek, I think it’s just too much. I’d much rather spend the money on a rocking honeymoon anyhow! 🙂
I never did understand the two-months salary thing…if my husband had bought my engagement ring based on his college student transit system earnings , I’d have one tiny diamond! (We got engaged before our senior year of college). That rule of thumb puts unnecessary pressure on everyone. I say buy her the ring that will get her to say yes! 🙂
7. ” … your retirement goal should be based upon your anticipated monthly expenses.”
For some of us, expenses are very low and non-money income is lifelong, e.g. farmers, who can (and some do) produce their own heating fuel (firewood) and diversified foodstuffs,
Years ago, some famous celebrity (Zsa Zsa Gabor, Elizabeth Taylor, maybe Joan Collins?) was asked about the 2 month salary rule for an engagement ring. She said that a man should buy as nice a ring as he can afford, because being broke isn’t sexy.
Ha! I love it …
For the best deals, always buy the largest-sized packages, or buy in bulk.
Yeap, this one always bugged me. I hate buying bulk. We don’t have room for these huge packages and they aren’t always cheaper. Usually the generic brand or store brand are cheaper. Those don’t come in bulk.
Happy New Year & good luck in 2018!
Good article. Friendly suggestion: Old wives tales is a bit of a sexist slur that weve inherited from past generations. Ive used it myself, but am now making a conscious effort to use better alternatives, in case you want to consider the same…
Thanks, SRH … but I refuse to buy in to that kind of political correctness. Sorry.
Maybe think of it as smart vs dumb rather than a PC issue. Its probably dumb to assume older wives tell more fallacious tales than other kinds of people do. Your article is about questioning taken-for-granted myths, yet your title contains a myth within itself. So perhaps its about developing the ability to think self-critically, which is what you are advocating and modeling for your readers very well.
I could be wrong SRH, but Len’s only crime was failing to use the official villain of big education, big media, and big government. If his title was “10 Stupid Financial Rules Pushed by White Men,” would you have engaged in such petty virtue signaling? If you would have, then I sincerely apologize.
In my opinion, what’s truly dumb is taking the term “old wives’ tale” literally. Or trying to change the language for the ridiculous notion of “virtue signaling” which, sadly, is something a large segment of the population is wont to do these days.
Do you really believe the term “old wives’ tale” is to be taken literally, SRH? Honestly?
Just curious why you refuse. Seems like a pretty easy change to make, especially if its one that would avoid potentially offending half (if not more) of your readers / the population.
Im always amused when people use the argument of refusing to believe in political correctness as they are often the first ones to complain when they feel slighted.
Dismissing SRH’s suggestion as “political correctness” and therefore unworthy of your attention seems a little at odds with the “personal responsibility” theme espoused on your “About” page. Agree with JL – I was interested in your post (that I found via Rockstar Finance) but feel kind of put off by your response to SRH, so probably won’t return to your blog… just sayin’
LOL. No, it isn’t, Gemma. Please explain the connection between “personal responsibility” and a willingness to ignore the truth (i.e., in this case, that “old wives’ tale” is a term that’s not to be taken literally) and/or compromise one’s principles to avoid offending someone. (Assuming you aren’t so offended that you actually choose to come back and read this.)
One thing this blog is not — and will never be — is a “safe space” for easily-offended people … just sayin’.
@JL: Why would I compromise my principles to avoid offending someone who takes a common, innocent, everyday term like “old wives’ tale” in the literal sense? Do you take everything in life so literally? If so, why? (Of course, the answer is almost always because of the need to “virtue signal” others — and the reason people feel the need to do that is a another matter altogether.)
As for your last throw-away comment (actually, a passive-aggressive snipe) … that is a brash unsubstantiated assumption that actually appears to be psychological projection on your part. I base that assertion upon the fact that you obviously felt slighted enough to add a comment of your own on this ridiculous thread. Look in the mirror, Bub.
Wow touchy much!! I didn’t take the headline literally, nor was I offended by it (did I say I was?). Actually, the tone of your response to someone else’s friendly comment was what put me off…
That said, I think of language as a dynamic thing, much like many other social constructs. A phrase that was inoffensive 10, 5 or even 1 year ago may take on a different significance as society moves and changes in that fluid way it has. Dismissing such notions as “political correctness gone mad” seems short sighted and a bit out-dated to me but that’s just my opinion.
That’s OK though, I’m clearly not part of your target demographic. No hard feelings, I won’t miss you as I am discovering that there are plenty of personal finance blogs more suited to my interests, and you won’t miss me as you clearly have plenty of readers.
All the best
Hmm. Not sure what, exactly, made the tone of this comment unfriendly: “Thanks, SRH … but I refuse to buy in to that kind of political correctness. Sorry.”
Was it where I thanked the reader for the comment? Or my one-word apology for why I refused to take another reader’s friendly (albeit unsolicited) advice?
And yet I’m the touchy one? You’re the one who felt compelled to insert yourself into this completely off-topic thread! Unbelievable.
Anyway … To answer your question: You weren’t offended by the headline, but you were offended nonetheless by my completely respectful response to someone else, which you deemed “unworthy.”
While you dismiss those who call out — and refuse to buy-in to — political correctness as being “short sighted and a bit outdated,” I have a different POV: I see people who are offended by innocent words or phrases like “old wives’ tales” as being hypersensitive and petty. I feel the same way about “forward thinking” folks who insist that we should all call manholes “personholes” too. But, hey … that’s just ol’ knuckle-draggin’ me! (My apologies in advance if I’ve offended any gorillas or chimpanzees out there with that remark.)
As for this blog’s demographic, it’s stated plainly in the big green title header at the top of the page. I’m sorry if you don’t consider yourself a part of that of that group.
Kindest regards.
> Buying a home will keep your tax bills low.
With the tax changes this year, this one could now completely become useless – which is still crazy to me. I just looked at how this one would impact me, and it wouldn’t reach the point where it mattered unless I contributed a huge amount to charity or somehow had a few kids.
I always felt like buying in bulk wasn’t as great as I’ve heard. Can’t walk into Costco/Sam’s without dropping $100 for just a couple of household necessities.
I think the moral of this post is: it depends. LOL. This boils down to personal finance being personal. Our goals will differ just like our lives do.
Close … the moral of the story is: Rules of thumb are never to be trusted because personal finance is personal.
Do the folks who have a problem with “old wives tale” also have a problem with terms such as:
“Devil’s advocate”
“Old Boy’s Club”
———————-(Fill in the blank(s)
Latest “victimhood” fashion is downright silly IMO, when it purports to expunge old-timey folk sayings …
Yeah!!!!!!!
While we’re at it, I think “senior moment” needs to be abolished too as it is “offensive” to people older than 50. Or maybe even 40.
What?
Do I hear 30?
The world has truly gone mad, RD.
Well, Len, as you know, a great deal of the tranquility I enjoy in my life is because I have largely absented myself from the world gone mad.
“How about okay boomer”? I don’t even speak to most people in public, and have had it directed it at me. People have “okay boomer” themselves out of large tips and inheritances.
I am drawing up a new will. I think I will include clauses for two relatives. I leave my niece and nephew a copy of Amy Vanderbilt’s Everyday Etiquette with an inscription, “You have just been okay boomered … Gotcha!”.
Ouch.
“In fact, in the grand scheme of things, the annual change in ones net worth is a much more important indicator of financial health. Yes, folks, even more important than an itchy palm.”
That was funny, Len! This kind of article is what makes your personal finance blog stand out from all of the others. Not easy to do!
I recall an odd interaction between two stewardesses on Virgin Atlantic. One refered to the others as “you guys”. The lady from the islands took offence. “I am not a guy!”
Coming from Philly we grew up saying “you guys”, just like my Pittsburgh cousins said “yinz”.
Anyway, I’m and old wife, and don’t feel offended by your title.
Thank you, Olivia. Last year during a podcast I got raked over the coals by someone for using the term “gypped”. Apparently, I was told, the word is offensive to gypsies. Give me a break. The faux outrage was palpable – and I didn’t care. In fact, I continued to use the term, much to the chagrin of the “offended” party.
Consumer Reports found that larger packages were more expensive about 25% of the time. And bulk purchases may actually end up costing you more too if you fail to use them all before their expiration date.
Kids: Green beans for breakfast?
Mother: There are starving people working out at the gym right now. Eat them.
LOL!