4 Pieces of Bad Personal Finance Advice You Need to Know

4 Pieces of Bad Personal Finance Advice You Need to Know

People will receive a lot of personal finance advice throughout their lives, whether they are looking for it or not. Following all of these suggestions can lead to trouble rather quickly as not all advice is created equal. Furthermore, much of the conventional wisdom passed on does not take into account an individual’s specific situation.

People should always contextualize the advice they hear, apply it to their own lives, and recognize that the suggestion may not be the best for them. Following tips blindly can put individuals in situations that will take considerable time and discipline to escape.

Some of the bad pieces of advice that individuals frequently follow without consideration, but should think hard before accepting, include:

1. Buying a house is better than renting.

Home ownership is often considered a key part of the American dream and, beyond that, a smart financial move. According to conventional wisdom, buying a home means building equity and benefiting from increases in property value. Furthermore, individuals will no longer “waste” money on rent.

While home ownership is certainly a good decision for some people, not everyone will benefit from making this jump. Many people who bought during the real estate bubble of 2008 are still underwater. Some have even been forced to declare bankruptcy or lost their homes to foreclosure as a result.

Thus, it is essential to look at the larger context of the market before buying. In a buyer’s market, people can get a good deal that will serve them in the long run. Even then, however, individuals should also make sure they can afford the purchase without compromising other financial goals. Purchasing a home should never come before personal finance basics like creating an emergency fund, especially since an emergency fund is often needed to address property problems or upgrades.

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2. Save about 10 percent of income for retirement.

Many experts recommend that individuals save approximately 10 percent of their income in retirement funds. However, this approach will often leave people with insufficient funds when they retire. Predicting how much money individuals will need for retirement can be challenging. Despite this difficulty, it is important to do the math and figure out what kind of path is being forged.

Someone who starts saving at the age of 30 with an income of $35,000 who invests 10 percent of income with a 7-percent return would save nearly $441,000 by age 62, assuming an annual raise of 2 percent. Given inflation rates and the drive to maintain a similar lifestyle before and after retirement, this individual would likely run out of money by age 75, even with Social Security benefits.

People who earn more are not always in a better position since many will spend more in retirement. Additionally, this population will benefit less from Social Security as a percentage of their post-retirement income. A more realistic goal would be saving 15 percent of income for retirement, but really it is dependent on the person. Individuals who started saving earlier may be able to get away with a lesser amount.

Furthermore, most people should save increasing amounts as they get closer to retirement, especially since they can contribute more to their retirement accounts as they get older. People should also think about the standard of living they want during retirement. Traveling the world, for example, might require additional savings.

3. Prioritize debt repayment above other goals.

A frequent piece of advice is to pay down all debt before pursuing other financial goals. Sometimes, this tip makes a lot of sense, especially when people when it comes to high-interest debt, such as credit cards.

However, some debts have low interest rates, such as mortgages and federal student loans. Furthermore, paying on both of these types of debt comes with some tax advantages. Thus, prioritizing paying off a mortgage or a student loan does not always make sense.

Ultimately, people need to think about the interest rate versus the potential rate of return they could achieve by investing that same money. If the rate of return is higher, then it may make more sense to invest money than to make extra payments toward a debt.

Opportunity cost is also an important consideration. When people can get more value out of their money by investing, then it is not necessarily a good decision to focus on become free of debt.

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4. Avoid credit card use altogether.

Carrying high balances on a credit card is never a good decision, especially given the startling interest rates they often carry. However, avoiding them altogether can also have negative consequences.

Credit cards are a great way to build credit. They do not have bad ramifications as long as people keep their spending in check and pay off the balances in full each month or carry only minimal amounts over to the next month. Often, building good credit comes with benefits that are worth the risks inherent in credit card use, especially considering how a credit score plays into interest rate determinations.

The other consideration is the fact that people often need a line of credit open for emergency purposes. Closing cards out can cut off these lines in addition to decreasing a person’s overall credit history. Furthermore, many credit cards come with great awards to incentivize their use and people can get a lot for free when they use them wisely.