How To Become A Money Manager

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Money is on my mind nearly 24/7. I spend hours picking apart the fine print on credit card offers, days surfing the Web for the best banking deals, and weeks test-driving the latest budgeting software. Why am I so obsessed with money? It's my job. Literally.

As a longtime financial columnist at The Motley Fool (Fool.com), I've seen just about every tip, trick and recommendation in the book. Still, even I occasionally stumble upon surprising information that challenges some of the most steadfast financial rules of thumb. And in these topsy-turvy times, it's a good idea to reexamine the conventional wisdom. So with the help of a few trusted money pros—with whom I regularly dish—here are five old-school money maxims that can be bad for your financial health.

Old Rule : Pay Yourself First

This old saw has been trotted out so frequently it's practically part of the canon. At the risk of public shunning, I must point out that paying yourself first—taking a portion of every paycheck and socking it away in savings just so you have it—isn't always your best bet. Sure, stashing cash in a savings account for emergencies seems prudent at first glance. That is, until you run the numbers and realize you're paying out 20 times more in interest than you're earning on your savings by letting an outstanding balance linger on your credit card.

A better rule: Treat every dollar as an investment. This forces you to objectively weigh your options and identify which ones will give you the best bang for your buck (or ROI, return on investment). Sometimes the best "investment" will be to pay off Visa first and pay yourself second. Other times you'll need to think about future dividends. For example, should you invest in home improvements to increase your house's resale value and your current enjoyment of it (a less tangible but still legit "payoff " to consider)? Or should you invest that renovation money in your IRA so you can afford a retirement pad with a beachfront view? When you treat every dollar as an investment, you define the goal that's best for your bottom line and peace of mind, knowing exactly what tradeoffs you may be making.

Old Rule : Pay Off High-Interest Debts First

In strictly dollars-and-cents terms, there's no argument: Wiping out any debts that carry double-digit interest rates will save you the most money in interest. But if your goal is to improve your credit score, you're better off paying down store issued credit cards (like those pitched at clothing store registers with the enticement of an immediate discount on your purchase) and "no money down interest for 1 year" financing deals (a favorite sales ploy of furniture, electronics and appliance stores). My buddy John Ulzheimer, president of consumer education for Credit.com, explains why: "If a store issues you a credit card with a limit equal to the amount of your purchase, then you have an instantly maxed-out credit card sitting stagnant on your record, dragging down your credit score until you pay off the balance."

If you must charge an item you can't pay off in one lump sum, avoid appearing maxed out: Use a card with a high limit, preferably one already in your wallet.

Old Rule : Sweat the Small Stuff

Yes, the small stuff adds up. If you skipped your daily latte from now until eternity and squirreled away the money you saved, you'd be a multi-thousandaire. A cranky multi-thousandaire, that is.

Why deny yourself life's little pleasures? That's right: Enjoy your lattes. Indulge in that monthly pedicure. Buy popcorn at the movies. You'll save your sanity and money if you stop penny-pinching and start sweating the big stuff instead. Before you cry heresy, do the math. To save $549, you can either eliminate 183 lattes from your budget (at $3 a pop) or spend about 20 minutes on the phone with your insurance company to lower your annual premiums (which you'll see how to do in a moment).

You can apply the same logic to the rest of your budget— concentrating your cost-cutting energy on the four-figure line items (food, transportation, apparel and travel tend to be the biggies). If you still need to trim your spending, that's when you can tackle the smaller-ticket expenses on your list.

Old Rule : Save by Switching to a Low-Cost Insurer

Sure, you can shop around and save a few dollars on coverage. But don't dash off a "Dear John" letter to your insurance company just yet. It could cost you more than what you'd save on premiums.

Insurers value loyalty, and they show it by giving longtime customers discounts for things like avoiding accidents or moving violations for three to five years and buying multiple policies (e.g., homeowner's and auto) from the same company. "The size of that discount generally increases every year you go without an accident, but it can be as high as 20% off your premiums," says my go-to insurance source, Kimberly Lankford, author of The Insurance Maze: How You Can Save Money on Insurance—and Still Get the Coverage You Need. Be particularly wary of dumping your homeowner's insurance company to save a buck. Besides losing earned discounts, you put your insurability at risk. "Insurers are generally less likely to drop you for making small claims if you're a longtime customer," Lankford says.

To stay in your insurer's good graces and hang on to more of your money, the new wisdom is this: Buy insurance and don't use it. You can actually save by staying put. To do this, raise your deductible to $1,000 from $250 and then pay for small claims out of pocket instead of submitting them for reimbursement (about a 15% to 30% savings), and purchase your auto and homeowner's insurance from the same company (usually 15%). "At the end of the day, you could cut the cost of your policy almost in half," says Lankford.

Old Rule : Max Out Your 401(k) (or Other Job Retirement Plan)

Despite the oft-sung praises of socking away money in an employer-sponsored plan, blindly adhering to this old nugget can be detrimental to your long-term financial health. "The tax benefits offered by a 401(k) plan can be completely eliminated if the plan's administrative costs and additional fees are even a percentage or two higher than investments you could make outside of your 401(k)," says David Loeper, a retirement-plan industry veteran and author of Stop the Retirement Rip-off!

Other signs of a subpar plan: limited investment choices (like only high-fee, underperforming mutual funds), absence of an employer match, and administrative costs that are put on participants' tabs. Ask HR how much your plan costs and who pays, or request the plan's "Summary Annual Report," "Summary Plan Description" and/ or any contracts that list fee arrangements to see for yourself.

Don't let your plan rob from your retirement. If your 401(k) charges fees in excess of 1.5% (FYI, that's 1.5% of your hard-earned money siphoned right from your savings), it's time for Plan B: Invest enough in your 401(k) to get the full employer contribution match (that is, if it's a dollar-for-dollar match, or close to it). If your company doesn't kick in anything (or too little), skip this step. Next, if you qualify for a Roth IRA (it's based on income, and the rules are changing), invest as much as you can. If, after that, you can afford to sock away even more for retirement (yay, you!), divert more toward your 401(k) to get the tax break (invest pretax money; it lowers your taxable income for this year).

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