13 Pieces of Old-School Money Advice You Shouldn't Follow Anymore
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, or money-savvy friends and family.
Be Aware: 10 Ways You're Wasting Money, Suze Orman Explains
Try This: Start Growing Your Net Worth With Smarter Tracking
Although there’s no shortage of guidance, money rules can shift over time. For that matter, some old-school advice should be taken with a grain of salt. Here’s what various experts believe is some of the worst money advice.
1. Always 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.
2. 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.”
3. 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.
4. 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. Misjudging your bulk buying can result in zero savings.
5. 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.
6. Don’t Talk About Money
Some people are taught never to discuss money with friends or family. 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.
“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.”
7. Budgeting Is Unnecessary If You're Poor
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.
8. 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.
9. 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.
10. 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.”
11. 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.
12. 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.
13. 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.
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. So again, see #12.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion:
