Updated on 03.01.12

Rules Versus Facts

Trent Hamm

Personal finance articles often state “rules” of various kinds for people to follow when it comes to their money…

You should be saving 10% (or 15%) of your pay for retirement.
Don’t buy a home unless you have a 20% down payment.
Don’t sell when the market is going down, and don’t buy when the market is going up.
You get what you pay for.
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 “rules” are easy ideas to swallow. You don’t 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’s 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’ 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’t match every single situation. They just match a lot of situations.

Let’s dig into the “you get what you pay for” rule.

Anyone who has read The Simple Dollar for a while knows that I’m pretty particular about my kitchen implements. I love to cook, and I love to do it well. I’ve 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’ve 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’s 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’s not the case.

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

For the majority of items I’ve owned or experiences I’ve had in my life, the maxim “you get what you pay for” is true. However, sometimes it simply isn’t true, and spending the time to learn whether or not it’s true for the thing you’re 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’re 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’re faced with and make a sensible decision. Many times, the “rule” and the facts will agree, and that’s great – you’re sure that you made the right choice. Other times, the “rule” and the facts will disagree, and that’s also great – you’re 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’ll make. The better the decision, the more likely you’re going to wind up with money in your pocket over the long run.

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  1. Jon says:

    Regarding knives, My wife and I received a Chicago Cutlery set of knives almost thirty years ago as a wedding present. I’ve taken good care of them, and the chef’s knife and slicer have been pretty darned good, the filleting knife spectacular, the paring knife serviceable. As a working chef, I spent a ton of money on knives that didn’t do too much better.

  2. Steven says:

    “The best paring knife I’ve ever used in my life is an ordinary $20 paring knife that is no longer made. The best paring knife I’ve ever used that can easily be bought is a $7 Victorinox paring knife.”

    Huh? This doesn’t make sense to me. And I have my doubts that you’ve tried using hundred dollar paring knives, so you’re probably just making that up.

  3. Misha says:

    How does it not make sense, Steven? There’s a difference between “the best I’ve ever used” and “the best I’ve ever used that is easily available”, particularly when “the best I’ve ever used” is no longer made and therefore by definition cannot fall into the category of “best I’ve used that is easily available.”

  4. Tamara says:

    I used to sell Cutco knives back in the day. I still have my demo kit & use them all the time (except the barbecue fork, I don’t have a grill). They’re excellent knives if you can afford them…my little 5-knife kit ran for about $300 10 years ago when I sold. I’m not trying to plug the product but they really are good knives!

    On the other hand, I just bought an $80 Hoover Tempo vacuum based on Consumer Reports. It was #3 or #4 on their list of best vacuums, scoring 1 point less than an $800 vacuum.

  5. lurker carl says:

    The wording is atrocious, a professional writer should know better. Those two knives can not both be the best he’s ever used; they are either equal or one is best but no longer sold and the other is second best for only $7 through Amazon.

  6. Misha says:

    The wording is bad, but he has placed them in different categories: “the best he’s ever used, period”, and “the best he’s ever used that is still available for purchase.” That’s a restrictive “that”, the kind that changes the meaning of what it’s modifying instead of just adding additional optional info, which is why it isn’t set off with a comma. Of course the leads in those two categories can be different, just as there can be a difference between the best movie I’ve ever seen, and the best movie I’ve ever seen that I own on DVD, if I don’t own my “best ever” on DVD for some reason.

  7. Angie says:

    #4 Tamara, my m-i-l has gotten me several Cutco knives as gifts. I actually had no idea they were that pricey, but they are excellent knives, for certain. Also I believe they will sharpen them for you for free, but you have to mail them in to them.

    I am in love with my serrated chef’s knife. I use it daily, multiple times daily actually.

  8. Kevin says:

    Cutco knives are expensive because it’s a pyramid scam (sorry, “Multi-Level Marketing”) that has to pay 8 layers of “uplines” who sit around and do nothing, leaving a fraction of a percent of profit for the poor schmuck who actually did the selling.

  9. Adam P says:

    The rule I get upset about is that one from Millionaire Next Door, that works great in your late 30s and 40s-50s but fails miserably once you’re retirement age (overstates your relative wealth) and when you’re in the early stages of our career (understates your relative wealth).

    Unless somehow 25 year olds are supposed to have no debt from school or mortgage but 5 times their current income saved up when they just started working a year or two before? Yeah makes sense! Ugh. Nevermind how many 60 year olds are maybe doing “okay” if they have 12 times their current income in net worth but I’d hardly call them super savers.

  10. Baley says:

    OH GOODNESS, will Kevin NEVER get off the MLM scam crap? Go bug people who care just a bit. You’ve run that one into the ground. Tamara and Angie were just talking about the quality of knives, they did not ask for your opinion on MLM schemes, nor did anyone else.

  11. Gin says:

    Geesh, tough crowd!

  12. Johanna says:

    Sometimes rules are only “overthrown” by facts because the rule was lazily stated in the first place. If, instead, the rule is “you can fund a decent retirement by saving 10% of your income throughout your career” or “don’t sell *just because* the market is going down or buy just because it’s going up,” the rules have a lot fewer exceptions.

  13. leah says:

    I just have to chime in that I have the $7 Victorinox paring knife too, and I agree – it’s the best paring knife I’ve used, not that I am a professional chef or anything. Got mine at Ace Hardware ten years ago and it’s still my go-to knife for many tasks. Small world.

  14. Mister E says:

    MLM scams should always be pointed out.

  15. Steven says:

    It’s confusing because I had to read it about 3 or 4 times before I understood what he was trying to say. A person shouldn’t have to stop mid-sentence to re-read the previous sentence in order to understand what the author is attempting to convey. It’s not that it isn’t grammatically correct, just that the differentiation is such that it isn’t easily understood. Hope that helps.

  16. Kevin says:

    @Baley: Huh? So, they’re allowed to offer their opinion on the quality of CutCo(TM) knives (a complete non-sequitur from the blog post topic), but “nobody asked” for my opinion on CutCo?

    Angie mentioned she didn’t understand why they were so expensive. I was simply explaining why. They’re expensive because they’re an MLM, and like every other MLM, they have to be grossly overpriced because there’s a massive pyramid of brainwashed lemmings to be paid from every sale. If you disagree, that’s fine, but don’t tell me I’m not allowed to share simple facts, but Angie and Tamara *are*.

  17. Tamara says:

    Kevin, I don’t see how discussing the quality of knives is a non-sequitur seeing as how it was one of the examples Trent used and the very first commenter discussed the quality of /his/ knives. I was using the example of an expensive product doing a great job and an inexpensive product performing as well as an expensive one.

    Additionally, I take great offense in being referred to as a ‘brainwashed lemming’.

  18. Icarus says:

    I have to agree with Steven, they aren’t the best worded sentences. I actually read that as he was deciding between two sentences or two ways to demonstrate his point and forgot to delete one of them.

  19. Kevin says:

    Tamara: Well then if your comments were relevant, so were mine. Baley implied my opinion on the topic (an MLM pyramid scam that sells kitchen knives) was out of place. I was merely pointing out the hypocrisy of such an assertion.

    And you’re only a brainwashed lemming if you still SELL CutCo knives (or any other MLM). It’s a scam business model that pushes the bottom level of the pyramid to do all of the work, while whoever recruited you sits back and waits to eat the lion’s share of the profits from any of those overpriced knives you manage to convince some sucker to buy. It’s a horribly abusive and unethical business model that should be illegal.

    If you don’t sell them anymore and merely use your leftover stock, then great – you’ve seen the light and my “lemming” comment doesn’t refer to you.

  20. Johanna says:

    I don’t think MLMs are the only businesses in which the people who do most of the work are not the same as the people who get most of the money.

  21. Angie says:

    Apparently whether you word things curiously as Trent sometimes does or clearly like I did people still misinterpret you.

    #16 Kevin said, “Angie mentioned she didn’t understand why they were so expensive.”

    Uh, no I didn’t. I said that I didn’t REALIZE they were so expensive.

  22. Andrew says:

    College may not be the right path for everyone, but in general those who complete a degree have better, more secure jobs than those who do not. See any breakdown of employment statistics.

    I don’t doubt that Trent knows people who make 6 figures without a degree. Bill Gates and Steve Jobs both dropped out of college. However, isolated cases and anecdotes are not evidence.

    I’m about to go into a rant about Rick Santorum, so I think I will just stop….

  23. jackie says:

    MLM aren’t the only businesses where people at the bottom make less money. But they’re certainly unique in that 1/4 of the bottom people make nothing or even lose money. (link caught in moderation. USA today October 15, 2010)

  24. Johanna says:

    @jackie: Are you sure there aren’t any companies where 25% of the staff are unpaid interns?

    I’m not saying there’s nothing wrong with MLMs. Just that the reasoning Kevin gives applies to a lot of other things too.

  25. Kevin says:

    @Johanna: Of course, there are many businesses where the work/reward ratio isn’t exactly equitable. However, my problem with MLM’s is that they’re such an extreme example of wildly disparate work/reward allocation. In addition, the entire industry lies shamelessly, spewing ridiculous fantasies about making 6 figure incomes and only working a couple of hours per week, while the reality for 99% of all recruits (you can’t even call them employees) is that not only do they never earn enough to even remotely live off of, they actually end up PAYING more than they earn. When you factor in joining fees, exam fees, certification fees, books and training material, web presence fees, cheque mailing fees, mandatory minimum inventory costs, travel expenses, and everything else, the vast, vast, VAST majority of MLM victims lose money.

    MLM’s have nothing to do with selling things, and everything to do with “recruiting” a downline you can leech off of until they wise up and bail out.

  26. Kevin says:

    You sell your soul when you join an MLM. You’re announcing to the world that you value money more than relationships.

    Here’s a little secret for any of you out there currently in MLM’s: Your friends and family cringe when they see you coming. They know you no longer see them as friends, but rather as a “warm market” whom they can emotionally manipulate into buying overpriced crap they don’t really want, because they’re afraid to hurt your feelings.

    If it actually paid off, I can see why people might do it anyway. But the worst part is, you’re not even making any money doing it. You’re burning bridges and ruining relationships to make a few bucks for the 8 people in your “upline” who don’t even care about you.

    Blech, it’s a horrible, despicable business. Completely shallow, full of lies, and it only attracts greedy sociopaths who don’t feel bad about selling their own grandmother $300 worth of worthless juice she can’t afford, while telling her it cures everything from cancer to baldness.

  27. Baley says:

    Kevin, my problem with your MLM comments is the fact that you misuse the term, calling legitimate companies MLM schemes when they’re not, and that you take advantage of every opportunity to point out how terrible they are and call people idiots (or worse) who are part of said businesses. It’s getting really old. I agree that actual MLM schemes are unethical, I’m just tired of hearing about them from you. But we’ve had this argument before.

  28. AnnJo says:

    I saw nothing wrong with Trent’s sentence about the two sets of paring knives, one of which was larger than but included the other. It seemed perfectly clear to me – Set 1, all paring knives he’d used, Set 2, all paring knives he’d used that are still available.

    Never thought I’d be defending Trent’s writing.

  29. henry says:

    Just Remember a Rule of Thumb is a Rule That Works Thumb of the Time :-)

  30. jim says:

    Like AnnJo, I didn’t have a problem parsing Trents meaning either.

    Most MLMs should certainly be avoided and are just scams usually selling lies. Some MLMs are much more legitimate businesses. I wouldn’t consider the Avon lady a greedy sociopath or brainwashed lemming.

  31. deRuiter says:

    Have to agree with Kevin’s remark #26, “Here’s a little secret for any of you out there currently in MLM’s: Your friends and family cringe when they see you coming. They know you no longer see them as friends, but rather as a “warm market” whom they can emotionally manipulate into buying overpriced crap they don’t really want, because they’re afraid to hurt your feelings.” I never buy anything from MLM schemes including the Avon Lady, the Jewelry lady, the Cutco lady, the Pampered chef lady, the soap lady, the home decor lady (think plastic picture frames which look vaguely like gold leaf but not really), the lingerie lady, the sex toy lady, you can always get a better deal by yourself, and most of this junk you don’t need anyway, and you would never have bought if you weren’t roped into attending a Tupperware party or the like and you have to buy “something” out of guilt. You do cringe when that relative or “friend” approaches with the slick catalog and the invitation to the “party.” Say “No thank you.” Don’t go and don’t be a sucker. The latest one making the rounds is the “utilities” MLM where you pay $500. for the priviledge of selling $500. memberships to the utility scam to your friends and relatives.

  32. Joan says:

    #26 Kevin: It sounds like you sold for a MLM at one time.

  33. Kevin says:

    Joan: No I did not, but I’ve seen a few of my friends get taken advantage of. And I’ve seen how these scumbags operate. During a period when my wife was between jobs, she got a call from one of these scam artists, saying they had a position they thought she’d be perfect for, and they wanted her to come in and “interview.” They said to bring me along too (red flag #1). The “interview” was in a hotel conference room (red flag #3). All 15 or so candidates were to be “interviewed” simultaneously (red flag #3).

    Of course, it turned out the “interview” was a recruiting sales pitch consisting mostly of braggadocio by fake-Rolex-wearing posers, boasting about how much money they make and how little they work, and how lucky we were to be offered this “opportunity.” We left disgusted and furious at the deception.

    As I said, I’ve had other friends who believed the nonsense and got sucked in, spending thousands of dollars attending mandatory “conferences” (read: pep rallies) in other cities, while cheques for $12.42 trickled in each month, before eventually wising up and cutting their losses.

    Everyone in any MLM is a horrible, horrible person.

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