There are many useful rules in personal finance that can help you successfully manage your money. But it's also useful to know when those rules can be broken.
Due in part to today's strange financial environment, there are a number of traditional guidelines that you may want to ignore right now. Here are five pieces of banking wisdom that you can discard as needed:
1. Savings accounts are best for short-term savings? Not with today's rates.
The liquidity of savings accounts has long made them the traditional choice for short-terms savings and emergency funds. But with today's low interest rates, you may be better off getting a longer-term CD and breaking into it when and if you need to. Yes, there would be a penalty involved, but this is generally a matter of losing a few months' worth of interest, which matters less in a low interest rate environment.
Do the math: When savings account rates are at 4 percent and five-year CD rates are at 5 percent, it only takes a three-month interest penalty to negate a full year's worth of the CD's advantage. However, with savings account rates at 0.15 percent and CD rates at 1.15 percent -- which is about where they are now -- it would take a 10-month interest penalty to negate the CD's 1 percent advantage. So, unless you are sure you need the money in a few months, consider a long-term CD -- if you can find one with a fairly low penalty for early withdrawal.
2. Debit cards make more sense than credit cards? Not if you are disciplined.
Yes, credit cards can cost you interest and put you at risk of building up debt. But if you are able to live by a budget and pay your bills on time, credit cards are a better choice for everyday spending than debit cards. Using a credit card in this way will result in one monthly payment from your checking account, instead of several day-to-day payments, which can make it much easier to keep your checking account records up-to-date. Getting in the credit card habit will also mean you'll be immune in case banks revisit the issue of debit card fees.
3. Consolidate your credit cards? It depends what kind of help you need.
Consolidating debt can help you get organized and concentrate balances in lower-interest credit cards. However, before you start cancelling any of your older cards, be advised that this may have two unintended consequences if you are trying to repair your credit status. Cancelling older cards can shorten your credit history, and eliminating some of the credit available to you can also increase your credit utilization ratio, which is the percentage of your available credit that you are currently using. Both of those changes can hurt your credit rating, so consider leaving these credit cards in your wallet, even if you use them rarely.
4. Let your bank protect you from overdrafts? Not if the price isn't right.
Everybody wants protection, right? Not when that protection comes at an exorbitant price. The latest MoneyRates.com Bank Fees Survey found that the average overdraft fee was $29.23 -- a steep price to pay for overdrawing your account by a few dollars. This price may be worth it as a form of insurance policy if you only overdraft your account once every few years, but if you do it frequently, you need to develop better banking habits. Opting out of overdraft protection can help coax you into developing those habits.
5. Keep money in savings instead of checking? Not if fees outweigh interest.
The idea traditionally has been to keep as much money as possible in an interest-bearing account. In recent years, though, savings account interest rates have fallen while checking account fees have risen. This means that you might want to leave more of a cushion in checking if you are in an account where maintaining a certain minimum balance will earn you a waiver of monthly fees.
As circumstances change in the future, some or all of the above rules might once again make sense. For now though, you'd be wise to treat them as flexible. This underlines what should perhaps be the ultimate rule: Finance is dynamic, so even the most venerable rules are subject to change.
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