If you don’t know much about money, you don’t have to look far for advice. You can always learn more from personal finance articles, books and videos, or from money-savvy friends and family.
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. Take a look at some of the worst money advice you should avoid, according to financial experts.
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 SavingsFreak.com, this advice doesn’t make the same financial sense in our current low-interest-rate environment as it did when mortgage rates were higher, like 6 percent to 8 percent.
“Those extra payments can do more work for you by being placed in other investments,” said Moyer. “Even if you only get 6 percent over the life of the investment, you will beat the interest you are paying on your home mortgage.”
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 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, head of global market communication 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. But PayPal doesn’t charge transfer fees if you send to friends and family from your bank account or PayPal account. However, it charges 3.4 percent of the transaction if you transfer from a debit or credit card.
Max Out Your 401k Contributions
Most people want a sizable nest egg, and to achieve this they contribute the yearly max to their 401k. However, this is a long-standing retirement tip you should carefully consider. Instead, Marty Phelan 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 401ks, 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 401k. 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.
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, vice president of Phoenix operations 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, credit is often necessary when booking a hotel room or airline ticket. Plus, carrying around too much cash has its risk.
“Getting robbed on vacation at gunpoint isn’t a great way to maximize your time off,” said Blair.
Buy a House With 20 Percent Down
There was a time when buying a home required a minimum 20 percent down payment. Today, down payment requirements aren’t as stringent, yet some people hold on to the outdated idea of needing 20 percent 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 payment VA home loan. Otherwise, a Federal Housing Administration home loan only requires 3.5 percent down with a minimum credit score of 580. Conventional home loans allow minimum down payments as low as 5 percent and a minimum credit score of 620.
The drawback is that you’re required to pay an extra monthly fee for mortgage insurance if you have less than a 20 percent down payment.
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, Brian Davis, co-founder and lead 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.”
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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 percent of your income on [a house] instead of 33 percent, you’ll save a lot more money.”
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.
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 this practice doesn’t benefit your credit score if you carry high balances from month to month.
Since the amount you owe makes up about 30 percent 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, Neb., 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 seem 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 percent to 90 percent of their total investment funds in the stock market, and allocating the remaining 10 percent to 15 percent 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 Need $1 Million for Retirement
One popular piece of investing advice is that we 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 retirement income? 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 you 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.