While reading FreeMoneyFinance.com a few days back, He included a MSN Money online article called: five worst pieces of financial advice. It was so interesting that I thought I’d give my personal take on those 5 points.
My take on the 5 worst pieces of financial advice
1. Pay off your debt before saving for retirement.
This approach is too risky. While paying off both my house and car early, I also continued to put at least 10% of my salary into my employer’s 401k plan and I also put away money each month into a 529 plan for my kids.
For the last 5 years before my house was paid off, I bump up my saving percentage by an entire 1% each year. Then once my house was totally paid off, I did bump up my 401k yearly contribution to the maximum.
2. Don’t borrow for an education.
With a combination of having money from working as a teen, a decent investment portfolio created when I was very young with help from an uncle, working jobs through college, and going to a relatively cheap university, I was able to avoid going into debt to pay for college. I had to live very frugally, but it was a great financial accomplishment.
I guess in this area it depends on the overall potential return from the degree. Had I going into medicine, I would have borrowed to get the degree, but if I got a degree in the “history the french painters”, or something without an immediate financial gain, I wouldn’t have borrowed to get my degree.
3. Pay off your mortgage as fast as you can.
This is complex, and for me it was more than a simple math problem. I think I’m in a better position today by paying off my house early.
But even I didn’t pay off my house as fast as I could. I still put money aside for my employer’s 401k, a 529 plan, and was still able to save a little bit still for investments in my regular brokerage account.
Today more than ever, I wouldn’t pay off my house as quickly. While I might pay an extra $50 or $100, the interest rates are so low, and there are so many great opportunities now!
4. Buy a home as an investment.
I agree! A home is not an investment, it’s a place for stability to raise kid and have your own personal fort of solitude (at least when the rest of the family is away).
That said, it’s still wise to treat it as a financial asset! To have good finances with everything else in life, then go out and by a million dollar home on a middle-income salary wouldn’t be a huge financial mistake!
5. Make an emergency fund your financial priority.
I don’t have an emergency fund in the truest sense of the meaning, but I do have financial assets that serves as a financial buffer if a hardship was to ever hit me. So even thought I don’t flat-out declare that I have one, I guess I kind of have a stealth emergency fund.
So while I don’t totally agree with the MSN Money article, for the most part, I do.
What is your take on the MSN Money’s 5 worst financial advice points?
-MR
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1 & 2 aren’t practical for most folks, 3 – people should certainly have an urgency to pay it off, but not wait till the house is paid off before starting to save!
4 – nothing wrong with buying a home as an investment. If you are going to live in it, even better!
5 – Having an emergency fund is crucial. Need not be cash, but liquid enough. Having to sell my car to get to my emergency fund is bad!
All the points are certainly food for thought!
All good takes too!
I’m sure that the 5 worst pieces of financial advice above work for a certain percentage of the population.
I hope to hear other’s take on them.
With regards to #1, it depends on the type of debt. High-interest consumer debt should be terminated with extreme prejudice, above all others. At the same time, if the company offers a match in the 401k, it’s like free money. Both savings and debt elimination could be handled at the same time.
Ahh, that’s the path I chose! Why not get a great blend was my thinking 🙂
If I did carry a credit card balance, that would be my top priority to knock out though. Even above savings (unless it’s in a 401k, and/or a match is involved).
I don’t like any 1,2, and 5 either!
I lucked out by winning a condo while I was in college (see my link)! But I can see that 3 and 4 wouldn’t be that great either!
Very nice Bloggette! With some the rules don’t apply! You’re like Neo from Matrix (lol).
Pay off your high interest debts before doing ANY type of saving, even an emergency fund.
I don’t understand the theory behind paying off your mortgage before saving for retirement though. I think you miss out on years of compound growth.
And I don’t have a traditional emergency fund either, but have access to a low interest rate LOC.
Agreed! Double digit interest rates are wealth destroyers!
With respect to just paying off the mortgage first then starting to save for retirement, I agree too. I’ve contributed all along and have a healthy balance 🙂
I can see having an emergency fund if you were not investing in other investments. I guess this one would depend on one’s money management skills. If you lack them, then have an emergency fund. If you have them, invest…
If you have good credit and can get the lowest rates, many things change! Can you make more money investing the money than paying down debt? You home is an investment! It is an asset. The alternative is rent and that is an expense. I don’t have an emergency fund, however I no debt except for a small mortgage.
I have great credit, but higher interest rates because I choose to use reward credit cards. But even that is good since I don’t carry a balance…
I’m sure you are highly investing in other higher yield investments, so an emergency fund isn’t necessary in your case either :)!
1. I say pay off consumer debt before investing. I don’t count mortgage as consumer debt though.
2. I agree with you on that one.
3. I make extra payments, but I don’t plan to pay off my mortgage ASAP. I suppose I could sell all my investment and cash out 401k so I can pay off the mortgage, but like you said, the interest rate is low so why do this. With government subsidy, the rate is even lower than advertised.
4. Buying a home as an investment is a bad idea unless you’re renting out rooms.
5. I have an efund and I wouldn’t want to not have one. I hate selling assets when price are down so I try to avoid that scenario as much as I can.
Have a good weekend. 😉
On 1 I would follow the same route too, especially if I carried a consumer debt balance longer than 1 month.
On 3 I was tempted to cash out my investment, but I knew I made a much better return on them, so I bit my lip and stuck to my schedule.
On 5, that’s very true. So far I’ve been luck and haven’t really had to cash in my stocks. But I kind of let my dividends build up to a decent level, so they are always (in money markets) at my disposal. Plus I keep a decent buffer in my checking account. Good call on the efund though!
1) disagree – why not both?
2) depends – borrowing within limits, keeping ROI in mind is perfectly fine. isn’t that what traders/financial professionals do?
3) depends on the arbitrage opportunity and your personal situation
4) haven’t heard a more stupid statement than that. i am with you on that.
5) i agree – gotta have the safety net
Thanks Sunil, it’s always good to year what other think about these…
I disagree with #3 the most. Most people I know don’t pay extra on their mortgages not because they are investing all this money in other places, but because they are house poor.
I think if you’re in a financial position where can you can pay extra, then you can’t possibly be making your worst financial mistake.
Yeah, I agree with you.
When the stock market took sharp fall, I was still had money somewhat stable in my house. So it wasn’t a total loss (although it would have been hard to sell my house at that time).
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I would have to disagree with a house not being an investment. It depends on how you buy it. Buying the house of your dreams is obviously not an investment, because you will never want to move.
But i bought my house at the peak of the economic crisis and since then, the price has already gone up about 100k compared to the units in my complex.
If you search for distressed properties like REO’s and short sales, you can make money. You just have to be willing to wait for the right property and be willing to sell, when the time is right.