By Leslie Albrecht
Sometimes we need to check our assumptions about the so-called rules of personal finance
Financial Literacy Month spotlights the financial literacy that Americans are supposed to know and often don’t. But what about financial knowledge that we think we know but should reconsider?
When it comes to money, we take lessons from a hodgepodge of sources ranging from parents to TikTok videos to high school classes. Along the way, we can form strong opinions about the best ways to manage our finances. People can cling to these ideas and even come to regard them as financial commandments that should never be broken. But sometimes these so-called rules are based on outdated thinking or wrong assumptions.
“There are a lot of people who have made what they call cardinal financial planning rules, and they really aren’t rules,” says Jack White, a certified financial planner at Fidelis Financial Planning in St. Charles, Mo. “The one cardinal rule you can’t break is that you can’t spend more than you earn.”
Even that can break down for a while, he noted, but “if you do it consistently, the results aren’t pretty.”
In honor of National Financial Literacy Month (or Financial Fitness Month, as MarketWatch has dubbed it), we talked to financial planners about personal financial “commandments” that people sometimes blindly follow, and why it may be OK to bend or even to break .
1. You are not allowed to use credit cards
People sometimes have a knee-jerk rejection of credit cards because they believe they are a path to financial ruin. “I think that’s the No. 1 myth out there,” said Jeff Brown, president of BWM Financial, part of Stratos Wealth Partners, in San Diego, California. high fees, but there’s a lot that credit cards have to offer.”
If you can afford to pay them off, credit cards can be a great tool, especially during times in your life when you’re waiting to make money from a new job or business. Brown relied on credit cards himself when he started his business.
Unlike a debit card that takes money from your checking account, credit cards offer benefits including points and cash back rewards. They often include robust fraud protection and insurance coverage. Most importantly, credit cards — when used correctly — help you build your credit score, which can open financial doors later on.
2. Thou shalt always be thrifty
It’s true that you should start building your savings as soon as possible in life, but there comes a time when it’s permissible to spend the money you’ve worked so hard for, said White, who is 74 is.
“People my age spend a lot of time being frugal and accumulating money,” he told MarketWatch. “Part of collecting for retirement is saying it’s okay to spend it.”
You can go ahead and spend – within reason – especially if you worked hard to save this money. It’s not frivolous if you’ve wanted to go to Europe all your life and you’re spending $5,000 of your savings to do it, White said.
3. You pay off your mortgage before you retire
Financial planners interviewed for this story repeatedly mentioned clients insisting they have to pay off their homes before retirement. “They think this is the golden rule, the 11th commandment that Moses had that is not in the Bible: You will have a paid-off house to retire,” says Jeremy Shipp, a certified financial planner who specializes in retirement planning with Retirement Capital Partners in Richmond, Va.
While financial gurus like Dave Ramsay preach getting out of debt at all costs, not all debt is bad debt, Shipp and other experts noted. There’s no point rushing home with money from your savings if the return on your portfolio exceeds the interest on your mortgage.
“I tell people, if you have a 3% 30-year fixed mortgage, why are you paying that thing off? Keep it forever. It’s free money,” says Ken Waltzer, a certified financial planner at KCS Wealth Advisory in Los Angeles. Angeles. “If you earn 7% on your investments and you pay 3% on your mortgage, that’s 4% a year on that money you earn for free.”
The drive to pay off a house as quickly as possible is based on Great Depression-era thinking, says Shipp. Mortgages were structured differently back then and it was easier to lose your house while you were still paying it off. But he advises clients that “they could really be shooting themselves in the foot if they pile up extra cash to try and pay off this liability, when it’s a very beneficial liability to have.”
Once you put $1,000 in extra payments into the walls of your home, you lose access to that money, when you’d still be monitoring and managing it if you held it and put it in an ancillary account, Shipp said. “People don’t understand that they don’t really own and control the equity in their homes,” Shipp said. “It’s not like a piggy bank.”
The only way to access that equity is to sell the home or get a home equity loan from a bank. Instead of putting extra money into your home, it’s a better bet to keep that money handy, he said.
“The intangible benefit of liquidity, the use and control of your money, is so hard to quantify because as life changes and situations arise, we just can’t quantify how much it could mean for you to have a sizeable amount of money whenever you want, with no penalties or associated taxes,” Shipp said. “That’s just one benefit that’s really being overlooked.”
4. You will send your children to the best college money can buy
Higher education is seen as a golden ticket, and parents often tend to try to pay for their children’s college or graduate school, mainly because they want to save them from the burden of student loans. But this can derail parents’ financial futures, said Niv Persaud, a certified financial planner at Transition Planning & Guidance in Atlanta.
“The best college for your child is the one you can afford,” Persaud told MarketWatch. “Many parents go into debt so their child can attend a top university or sacrifice their retirement savings. It is easier for your child to get a student loan. But there is no loan to retire.”
Clients of hers, a successful lawyer and her husband, paid for their children’s school and then saw their dreams of early retirement disappear. “She was very annoyed because she thought she had more than enough,” Persaud said. “She wanted to retire at 58, 59, but that wasn’t going to happen. They didn’t even have an extravagant lifestyle. They only have one house; they didn’t travel much. People are always surprised.”
5. “Retirement” is the Holy Grail
We’ve learned to work hard and save money so that one day we can hopefully flop down on a beach and relax for the rest of our lives. The idea of leaving the workforce later in life was popularized in part with the advent of Social Security in the 1930s, Brown said. At the time, people only started receiving their retirement benefits a few years before the typical American reached their life expectancy. The financial services industry “jumped all over” the idea of retirement, Brown added, and he says his industry has strongly promoted the idea that people’s primary financial goal should be to save enough money so they can retire and withdraw from active life.
But he’s seen many clients go into full retirement — essentially, they’ve stopped doing anything useful with their time — and he’s alarmed to see their cognitive abilities decline soon after. (There’s also a lot of research backing up this idea.) “People think there’s something magical about ‘I’m going to grind it up’ [and] work 60 hours a week, and then I have a magical day when I don’t do it anymore,” Brown said. “It’s had a huge negative impact on people.”
A better approach is to reframe your thinking about retirement and make plans for later years that are purposeful and engaging, whether through work or other activities. Think carefully about how you will spend your time during this period, because some people, especially men, get lost when they suddenly switch from non-stop work to endless free time. “What a successful retirement means is that you’re done working for your money and it’s time for your money to start working for you,” Shipp said.
6. You will achieve financial success by owning a home
People often see buying a home as a necessary milestone that means they have reached maturity and security. Homeownership is also seen as a way for Black and Latino families in particular to secure a rung on the financial ladder, but some research suggests that homeownership is not necessarily effective in closing the racial wealth gap.
That’s because homeownership — aside from whether you can scrape together enough for a down payment — is an expensive ongoing expense.
“What people never seem to include in the cost of homeownership is maintenance and repairs,” Waltzer said. “It’s always much higher than you expect. I always tell people to add at least 1% a year to the cost of the house for maintenance, and if you’re going to remodel, add that in as well. It’s not the gold mine that people think it is.”
While real estate is considered a solid investment because home prices generally increase over time, it does not typically outperform the stock market over the long term.
7. You will buy and sell individual stocks because that’s what smart investors do
Popular culture tends to glorify stock market traders, and there is no shortage of celebrities and social media influencers touting cryptocurrency and other investments as get-rich-quick schemes. But buying and selling individual stocks, or stock picking, is risky and volatile, not to mention it takes time to research companies and track stock performance.
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