If you don’t know much about money, you don’t have to look far for advice. You can always learn from personal finance articles, books and videos ormoney-savvy friends and family.
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Although there’s no short supply of guidance, money rules can shift over time. For that matter, some old-school advice should be taken with a grain of salt.
Pay Off Your Mortgage Early
Most people need a mortgage to purchase a home. However, financing a house entails paying thousands of dollars in interest. To reduce interest charges, some borrowers come up with a plan to pay off their mortgages early by making extra payments.
This advice isn’t bad in itself, but according to Paul Moyer, the founder of SavingFreak.com, this advice doesn’t make the same financial sense in our current low-interest environment as it did when mortgage rates were higher, like 6% to 8%.
“Those extra payments can do more work for you by being placed in other investments,” Moyer said. “Even if you only get 6% over the life of the investment, you will beat the interest you are paying on your home mortgage.”
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You Can Buy a House You Can’t Afford — Just Get Roommates
Taking in a roommate or two can be a financially savvy way to save money, but never purchase a home if you can’t afford to make the mortgage payments yourself. Roommates come and go, so you can’t rely on them to pay off your home loan. And defaulting on a mortgage will ruin your credit and could result in foreclosure, making it hard for you to take out loans and buy another home in the future.
Prioritize Saving For Your Child’s Education
Some parents believe it’s their responsibility to pay for their child’s college education. The problem, however, is that some people save for their child’s college education at the expense of saving for their retirement. Rather than sock all your money away for college tuition, David Walters, a CPA and certified financial planner with Palisades Hudson Financial Group, encouraged prioritizing retirement.
“I often need to remind (parents) that you can finance your child’s education with college loans and other funding sources, but you can’t finance your retirement, so a balance is needed,” said Walters. “This is even more important for parents with children at or close to college age, as their time horizon for retirement is much shorter.”
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Use a Money Transfer Company To Send Cash
Some people immediately think of Western Union or MoneyGram when they need to send money to someone. However, this old-school way of sending money can be more expensive and less efficient than newer methods, said Britta Gidican, former communications director, North America, at Remitly, a digital money transfer service.
Instead, look for other services that allow you to transfer money with a tap in an app or a click on your desktop. Be sure to compare service fees for the cheapest way to send money. For example, Western Union’s fees start at $4.99 to send up to $20 online, or 99 cents straight from your bank account. But PayPal doesn’t charge transfer fees if you send to friends and family from your bank account or PayPal account. However, it charges 2.9% of the transaction if you transfer from a debit or credit card.
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Max Out Your 401(k) Contributions
Most people want a sizable nest egg, and to achieve this they contribute the yearly max to their 401(k). However, this is a long-standing retirement tip you should carefully consider. Instead, Marty Phelan, formerly of Phelan Financial Solutions, suggested only contributing up to the maximum that your employer matches.
“That’s free money, and it makes little sense to leave it on the table,” he said. “However, every dollar invested in tax-deferred vehicles like 401(k)s, IRAs, etc., creates a large tax liability that comes due during retirement. Get the free money from an employer match, but carefully consider the tax consequences of contributing above that level.”
Additionally, you might have other savings goals you need to achieve before maxing out your 401(k). For example, if you don’t have emergency money, you might want to prioritize creating an emergency fund before contributing the maximum to your retirement account.
Taking Out a 401(k) Loan Is a Good Idea
When you’re really strapped for cash, it can be very tempting to borrow from your 401(k). After all, the money is there, and it’s yours. However, this is a very bad idea. There’s a good chance your plan will ban you from making contributions to your account until the loan is repaid, putting your retirement savings on hold.
You’ll pay the price for taking out the loan. First, you’ll pay interest, albeit to yourself. In addition, you’ll lose any gains your money might’ve earned while the loan is outstanding. If that’s not bad enough, you’ll also have to repay your loan in full within a few days or weeks of departure from your job or else incur a 10% penalty. So if you get fired or laid off, you’ll have to pay up — and fast.
Cancel Credit Cards You Don’t Use
If you have old credit cards collecting dust, you might think it’s smart to get rid of these accounts. But consumers should think twice before closing accounts with a long, positive history, said Kevin Gallegos, senior vice president of new client enrollment for Freedom Financial Network.
“The longer you hold a card, the more valuable it is in determining your credit score,” he said. “If you have more than one card and only want to use one, store the others away, but do not close the accounts.”
Cash Is King
A credit card can lead to major debt, which is why some people hold on to the idea that cash is king. Although this notion helps control spending, a cash-only mindset can seriously limit your potential to build credit and take advantage of credit card benefits, according to Keisha Blair, co-founder of Aspire-Canada, an online platform with money and career advice for young professionals.
Not only does a credit card help build credit, but credit is also often necessary when booking a hotel room or airline ticket. Plus, carrying around too much cash has its risks.
“Getting robbed on vacation at gunpoint isn’t a great way to maximize your time off,” said Blair.
It’s Cheaper To Eat Fast Food Than To Buy Groceries
This ridiculous rationale is the mantra of those who hate to cook. But barring a few rare exceptions, it’s simply not true.
According to the Bureau of Labor Statistics, Americans spent over $4,600 a year on “food at home” — or groceries — in 2019, the most recent year for which food spending was unaffected by the pandemic. This is compared to $3,526 on food away from home, as most households eat out far less than they stay in. What’s more, at-home food spending grew twice as much from the year before — 4% vs. 1.9% for food away from home.
Buy More To Save More
Many people get carried away at stores like Costco and leave with a case of cereal instead of just one box — but that’s not always the best idea. Buying in bulk might seem like an obvious way to save money at first glance, but purchasing something at 50% off is still 100% wasteful if you don’t use it all. Plus, it’s easy to use more of these items than necessary, rather than pacing yourself, just because they’re right in front of you — ultimately resulting in zero savings.
Buy a House With 20% Down
There was a time when buying a home required a minimum 20% down payment. Today, down payment requirements aren’t as stringent, yet some people hold on to the outdated idea of needing 20% down to buy. However, this might be the worst money advice that’s keeping you out of a home.
It is possible to buy a home with far less money — and you don’t need perfect credit to do so. If you’re in the military or are a veteran, you might qualify for a zero-down VA home loan. Otherwise, a Federal Housing Administration home loan only requires 3.5% down with a minimum credit score of 580. Conventional home loans allow minimum down payments as low as 3% and a minimum credit score of 620.
The drawback is that you’re required to pay an annual mortgage insurance premium if you have less than a 20% down payment — 0.5% to 1% of your loan amount each year for a conventional loan, on average.
Just Take Out a Loan If You Want To Build Your Credit
Yes, there are loans out there that are geared for people who have poor or bad credit. For example, some credit union loans are easy to get if you have poor credit, as are peer-to-peer loans. However, taking out a loan if you have bad credit isn’t always the best idea if your goal is to increase your credit.
When you take out a loan, you’ll have to pay interest on it. Instead, consider opening a credit card. It could help you get the financing you need for a particular purchase. Just make sure you pay it off in full each month to avoid paying interest. This will allow you to establish credit without incurring any added fees.
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Don’t Talk About Money
Some people are taught never to discuss money with friends or children. Obviously, you wouldn’t divulge personal financial information to everyone you meet. Still, G. Brian Davis, co-founder and real estate and personal finance blogger at SparkRental.com, encourages open discussions about money. It’s especially important to teach personal financial habits to your children from a young age, he said.
“It’s also useful to talk to peers about budgets, savings habits and long-term financial goals,” he added. “If it makes you uncomfortable, then join a Facebook group that focuses on personal finance to exchange feedback with strangers.”
You Don’t Have Enough Money To Follow a Budget
No matter how much — or how little — money you have, it’s always important to be financially responsible. In fact, one could argue that the smaller your cash flow, the more important it is to follow some type of budget. Following a budget helps you monitor your finances regardless of the amount of money in your account. Plus, after following a budget for a few months — or even a few weeks — you’ll see an improvement in your spending habits and an increase in your savings.
Let the Bank Decide What You Can Afford
Another piece of questionable advice is letting a bank determine how much you can spend on a home purchase.
“Just because the bank approves you for a $250,000 loan doesn’t mean you should borrow $250,000,” Davis said. “Instead of buying the biggest, most expensive home you can possibly afford, look carefully for the least expensive home. If you spend 15% of your income on (a house) instead of 33%, you’ll save a lot more money.”
If You Can Finance It, You Can Afford It
This terrible reasoning causes many people to fall deep into debt. Just because you can afford to make payments on a new TV, flashy car or another expensive item, that doesn’t mean it’s a good idea. When you finance something, you’re agreeing to pay interest on it, which substantially increases the number on the price tag. Rather than wasting your money on interest, save up and purchase it outright.
Don’t Repay Student Loans Until After Graduation
Some student loan programs don’t require you to start making payments until after graduation. Although this is an option, postponing repayment often results in higher loan costs because interest might accrue while you’re in school.
Students should start paying off student loans right away and pay what they can — even a small amount — each month during school, said Joe DePaulo, College Ave Student Loans CEO and founder.
It’s Cheaper To Buy a New Car Every Few Years Than To Hold Onto an Old One
Sure, it’s tempting to buy a new car every few years, especially if you keep getting raises at your job and can afford to buy the latest and coolest cars. And yes — sometimes buying a new car and getting rid of an old one can reduce your overall expenses. But be aware that every time you buy a new car, you’re most likely going to face new monthly car payments, insurance payments, taxes and more.
Consumer Reports offers a good tip if you’re unsure if you should hold onto an old car or buy a new one: If your annual car repair bills exceed a year’s worth of car payments, it’s time for you to get a new a car. So, keep the clunker as long as you can — even if it is more than just a few years.
Just Pay the Minimum on Credit Cards
Some of the worst money advice you can get is that you only need to make minimum credit card payments. Keeping up with your minimum payments can prevent late fees and late payments, but it doesn’t benefit your credit score if you carry high balances from month to month — a practice that can cost you a small fortune in interest.
Since the amount you owe makes up about 30% of your credit score, rather than fall into a pattern of only paying the minimum, get into a habit of paying off credit card balances in full every month. For this to work, only charge what you can afford.
The Stock Market Is No Place for Average Investors
Timothy Weidman, a retired associate professor of management and human resources at Doane University in Crete, Nebraska, shed some light on the outdated myth that the stock market is too complex and dangerous for average investors to succeed.
“The reality is that U.S. government notes and bonds, corporate bonds, CDs, savings accounts and money market funds have had pitiful returns that could hardly match the rate of inflation,” said Weidman. “So while putting money in those fixed-income investments seems safe, the after-tax purchasing power of money invested will decline year after year.”
For investors under the age of 40, he recommended investing most of their money intelligently in the stock market. For example, putting 85% to 90% of their total investment funds in the stock market, perhaps in a stock market index fund that tracks the overall market, and allocating the remaining 10% to 15% in low-cost bond index funds.
Keep Cash Hidden in the House
Although some people hold the outdated idea of stashing money under the mattress, hiding cash in the house isn’t always the best solution. This is not only because of the risk of theft but also because you rob yourself of the opportunity to earn interest.
“Without investing your money in some fashion, the value of your money will decrease over time due to inflation,” said Krystal Rogers-Nelson, a financial security expert at ASecureLife.com. “There are plenty of safe investment options that will help your money grow over time rather than losing value sitting under your mattress. Explore your options and divide your money into different types of investments.”
You Can’t Take It With You, So Why Save Money?
A spend-happy friend or family member might use this excuse to chastise you for being frugal. It’s true that you can’t take money to your grave, but that’s an irrational reason for spending freely and worrying about the consequences later. After all, odds are your overspending habits will catch up with you long before you “cash out.” And while you can’t take your debts with you either, you can leave a mess behind for your loved ones to clean up.
You Need $1 Million for Retirement
One popular piece of investing advice is that you need to set aside $1 million for retirement, but this estimate doesn’t apply to everyone. In reality, the amount you’ll need for retirement depends on several factors.
For example: What age do you plan to retire? Will you pay off your house before retiring? Will you work part time after retiring? Does your spouse have any retirement income? How will your spending habits change? Based on these responses, some people need more than $1 million, whereas others can live comfortably on far less with careful budgeting.
Rather than arbitrarily setting $1 million as your benchmark, use a retirement calculator to help estimate how much you’ll actually need in retirement and aim for this target.
Everyone Should Buy a House
A home purchase can be an excellent investment and increase your net worth, and it’s often cheaper than renting in the long run. But this once-standard practice can lead to a risky series of investments and an inability to live within one’s means, according to Gallegos.
“Buying and owning a home isn’t for everyone,” he said. “It comes with sizable debt, responsibility and a need to constantly maintain and upkeep the property.”
Buying might be a sound decision if you want to take advantage of low mortgage rates and put down permanent roots. But renting might be the smart option if you frequently relocate, don’t feel stable in your career or don’t want the financial responsibility of ownership.
You’ll find good advice and bad advice about money, and it’s not always easy to tell which is which. However, the more you learn, the easier it’ll be to identify smart moves for your money.
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