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7 Money Rules to Live By – Except When . . .

... You might need to break them. Here’s how to recognize those times.

For most people, following basic money rules makes sense. But like everything else in life, there are situations when following tried-and-true advice might not work. Our experts weigh in on when to consider the exceptions.

1. Pay off debt and build an emergency fund before saving for retirement ...

Saving enough money to pay three to six months of living expenses will lessen the chances you’ll have to sell assets or go into debt in case of an unexpected big-ticket expense or job loss. Most financial advisors say building this emergency fund—in something safe and liquid, such as a savings account—should be a top priority, along with paying down any high-interest consumer debt.

... except when your debt is of the low-rate, tax-reducing variety, such as a mortgage or student loans, and your retirement plan at work offers a match.

Remember that contributions to a traditional employer-sponsored retirement account, such as a 401(k) or Thrift Savings Plan, reduce your tax bill. Add the free money from your employer match and you’ve got a hard-to-beat combination. If you don’t participate in these plans, you could be missing out on valuable benefits and tax savings.

2. Save 10 percent of your income ...

Contributing $1 to your savings (or 401(k) or TSP) for every $10 you earn—or 10 percent—is an old rule of thumb. And it’s certainly better than 5.8 percent, which is the current national savings rate, according to the Commerce Department.

... except when you’re getting a late start.

“If you’re in your 30s or beyond and just getting started, 10 percent is probably not enough,” says J.J. Montanaro, a CERTIFIED FINANCIAL PLANNER™ practitioner at USAA. Montanaro emphasizes that goals such as building an emergency fund or purchasing a home should not come at the expense of saving for retirement. To find out how much you need to save to meet your financial goals, use USAA’s online calculators.

3. Always max out your employer-sponsored account ...

If you need to increase your retirement savings, you might be tempted to contact your 401(k) provider and boost your contribution rate immediately.

... except when you may be able to create a better tax-management plan.

“If you don’t have a Roth 401(k) available, you may be better off contributing just enough to take full advantage of a match (if your employer offers one), but then sending additional savings to a Roth IRA, if you’re eligible,” says Scott Halliwell, a CERTIFIED FINANCIAL PLANNER™ practitioner at USAA. A Roth contribution won’t lower your tax bill today, but the possibility of qualified, tax-free withdrawals during retirement is a benefit.

“You’ll likely have control over future income tax bills by having money in pretax and Roth accounts,” adds Halliwell. What if your income exceeds the IRS limit for making Roth IRA contributions? Consider opening an after-tax traditional IRA and converting it to a Roth. Since 2010, income is no longer a factor in Roth IRA conversion eligibility. Conversions from a traditional IRA to a Roth are subject to ordinary income taxes. Please consult with a tax advisor regarding your particular situation.

4. Send your kid to college—it’s a great investment ...

Yes, the average college graduate earns $27,330 more a year than someone with just a high school education, according to the U.S. Census Bureau. As a result, most financial planners agree that getting a college education is important.

... except when it places an extreme burden on your finances.

The return depends on the price you pay and where that money comes from. reports that two-thirds of students graduate with debt, owing an average $27,803.

To avoid overpaying for a diploma, Montanaro suggests looking for cost-effective ways to get an education, such as spending the first two years at a community college, then transferring to a four-year college. For 2010 through 2011 enrollment, annual tuition and fees at a community college cost an average of $2,713, compared to in-state tuition of $7,605 for public four-year colleges and $27,293 for private universities, according to the College Board.

5. Buy a house if it costs 2.5 times your annual income or less ...

This rule is one of many metrics to determine whether you’re buying a home you can afford. And in many cases, it’s a reasonable guide.

... except when it doesn’t suit your circumstances.

What really matters is whether you can afford the monthly payment, factoring in taxes, insurance, maintenance, current mortgage rates and the size of the down payment. Plus, consider how long you’ll live in the house. If you plan to move in a few years, renting may be the better decision.

6. An annuity might not be right for you ...

Annuities get a bad rap, and not without reason. They can be expensive, complicated and unnecessary.

... except when it fits into your plan.

If you’re still saving for retirement, an annuity—which allows for tax-deferred savings—can be a good, conservative option if you’ve maxed out other tax-advantaged accounts or as an investment option within your IRA or retirement plan. When you retire, an income annuity, which pays guaranteed income for life, might make sense if your Social Security and pension don’t cover your core expenses. Annuity guarantees are based on the paying ability of the insurance company. So make sure the company is recognized, reputable and financially strong. Annuities do not provide any tax-deferral advantage over other types of investments within a qualified plan. There are costs associated with annuities, including surrender fees, early withdrawal penalties and mortality risk expenses. So, be sure to read the fine print.

7. When you retire, consider a withdrawal of 4 percent of your portfolio, and then adjust every year for inflation ...

Historically speaking, the so-called 4 percent rule has allowed a retiree to make annual inflation-adjusted withdrawals and be reasonably sure the portfolio will last thirty years. For most retirees, it’s a fine starting point to determine how much they can spend.

... Except when the timing isn’t right.

Retirees may prefer withdrawing more in good times and cutting back when times get tough. Also, adjustments should be made according to other sources of income. For example, Montanaro says some retirees may wish to withdraw more at first and delay taking Social Security, but then withdraw less once the Social Security benefit kicks in.