Don’t take the risk of generalizing your financial situation. Your life and other variables play a role in the best solution for your financial situation.
Your fingerprints … your voice … your eyes … these are all things unique to you. So are your hopes, dreams, and goals. If this is the case, why would you follow financial advice that is designed for the masses?
The risk of generalizing your financial situation is that you may end up following advice that doesn’t apply to you. Or, even worse, you may allow yourself to think you’re in a good position based on the current state of the average population when you should personally be striving for more to reach your unique goals.
Below are some examples that may lead you to believe you are doing well financially when you could actually be doing better for yourself.
Credit Card Debt
As of March 2021, the average credit card debt for the American household was $6,270. Your debt is probably higher or lower than the average. If your debt is lower, you may be thinking to yourself you’re doing better than most, so paying off credit card debt will fall lower on your list of financial priorities. If your debt is higher, you may start to panic about the need to pay it down and put too much focus on credit cards.
The reality is you should not respond either way to a generalized statement until you completely understand your own unique situation. You need to ask specific questions to determine what response is best for you. Should you save money or should you pay down debt? You won’t know until you examine your finances closely.
Retirement Savings in Your Financial Situation
Retirement planning often falls in the risk of generalizing but how you want to retire and when is an essential and very personal question that must be answered.
Now, there is no doubt “pay yourself first” is good financial advice but just how much you should be paying yourself first towards your emergency fund and retirement goals is another question. And what you should be paying into is debatable. So many factors of your unique situation come into play: your age, your debt level, your savings level, your other investments, etc.
If you’re going to “pay yourself” a certain percentage of your income, ask yourself:
- How much goes into a 401K
- How much goes into a Roth IRA
- How much goes into easily accessible savings?
- Do you even need to save that much if you are going to have income from other investments, such as rental properties?
There is no correct generalized recommendation.
You may not even be in a situation to sock away part of your income, as with 62 percent of Americans who have no savings at all. If this is the case, you may need to focus on getting other aspects of your finances in line.
Risk of Generalizing: Mortgages
The general rule of thumb in finance is housing costs should never be more than 30 percent of your income. If this is the case, then why do millions of Americans live in houses they can’t afford? Because this generalized rule isn’t a one-size-fits-all answer. If you have large student loans, major credit card debt, spousal support, child support or any other large drain on your finances, 30 percent is not the rule for you to follow.
Homeownership is part of the American dream, and success is often judged by the size and quality of a dwelling. People tend to buy a house at their max budget instead of playing it safe. Will the quality of your life really suffer if you buy a house that is only 20 percent of your income? Playing it safe can mean purchasing a fixer-upper and adding value through improvements over a long term.
And for some, house hacking is a good alternative to own a home with roommates who help pay down the mortgage.
Education Costs ad Your Financial Situation
Whether you are dealing with your own student loans or saving for your child’s future, your financial plan must be as individual as you are. For instance, the risk of generalizing your student loan situation can often lead to overlooking options like student loan consolidation and loan forgiveness.
Google is full of ideas for paying your student loans off faster, but if you have higher-interest debt such as credit cards or car payments, putting extra money toward your student loans may not be the best decision. Before you jump on generalized advice, examine all your debt and make the plan that best suits you.
If you’re a parent planning to pay for your child’s education, the path to savings is as varied as the plot of a Choose Your Own Adventure book. Savings plans such as a 529 or Education IRA have different tax breaks, so you must choose the plan that is most beneficial to you.
A financial services company like Collegebacker helps you find the right 529 plan with a simple interface.
Or if your children are very young and you are worried more about the cost of education increases in the next 10 to 15 years, you can prepay for college now at today’s going rate. Additionally, it’s possible to contribute to both a 529 and an IRA, so chose your own education financing adventure.
Risk of Generalizing: is average good enough?
The median household income of America is $68,703 per year. The average outstanding debt for credit cards is $7,630. The average mortgage debt is $208,185 while student loan debt comes in at an average of $29,900. The vehicle debt average is around $8,163 per household.
Where do you fall in each of these categories? Are you average? Is average good enough or do you strive for something more? What are your goals? Do you want to be a millionaire by retirement? Do you want to be debt-free now? Do you want your children to be debt-free in the future? Your unique goals need to be what steer your financial plan, not some generalized advice for the “average American”.