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When financial rules are wrong

Personal finance rules are rarely right in all situations. If the rules and the facts disagree, don't be afraid to buck the rule.

Personal finance articles often state 鈥渞ules鈥� of various kinds for people to follow when it comes to their money鈥�

You should be saving 10% (or 15%) of your pay for retirement.
聽Don鈥檛 buy a home unless you have a 20% down payment.
聽Don鈥檛 sell when the market is going down, and don鈥檛 buy when the market is going up.
聽You get what you pay for.
聽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 鈥渞ules鈥� are easy ideas to swallow. You don鈥檛 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鈥檚 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鈥� 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鈥檛 match every single situation. They just match a lot of situations.

Let鈥檚 dig into the 鈥測ou get what you pay for鈥� rule.

Anyone who has read The Simple Dollar for a while knows that I鈥檓 pretty particular about my kitchen implements. I love to cook, and I love to do it well. I鈥檝e 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鈥檝e 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鈥檚 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鈥檚 not the case.

The best paring knife I鈥檝e ever used in my life is an ordinary $20 paring knife that is no longer made. The best paring knife I鈥檝e 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鈥檝e tried does the simple job of coring a bell pepper quite like that $7 Victorinox knife.

For the majority of items I鈥檝e owned or experiences I鈥檝e had in my life, the maxim 鈥測ou get what you pay for鈥� is true. However, sometimes it simply 颈蝉苍鈥檛 true, and spending the time to learn whether or not it鈥檚 true for the thing you鈥檙e 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鈥檙e 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鈥檙e faced with and make a sensible decision. Many times, the 鈥渞ule鈥� and the facts will agree, and that鈥檚 great 鈥� you鈥檙e sure that you made the right choice. Other times, the 鈥渞ule鈥� and the facts will disagree, and that鈥檚 also great 鈥� you鈥檙e 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鈥檒l make. The better the decision, the more likely you鈥檙e going to wind up with money in your pocket over the long run.