Pauline E. Ranger Sometimes Soundbite Financial Advice Can Be Problematic
You will hear financial advice repeated repeatedly, whether it is from well-known financial advisors or radio talk show hosts. They may sound logical but are often based on trite, easy-to-understand, if not accurate, dictums. Economic cliches may cause long-term issues and place some households behind other households in similar circumstances that make better choices.
Which of the following cliches are false about money
Cliches that tell an individual or couple to sacrifice long-term goals in favor of short-term objectives can create more problems than they solve. Focusing on the financial aspects of one household at the expense of other families can lead to problems.
These cliches are often used by professionals who have certifications or licenses. Too many consumers believe these cliches because they are uttered by professionals with certificates or requests (e.g., look at the four money cliches listed below. Find out why they’re so popular, how they could harm your household finances, and what to do instead.
Pay off Your Debt before Saving or Investing
This money cliche is a long-standing tradition. You’ll likely hear this cliche behind a CPA desk or your financial advisor. Many consumers believe that advice given by highly-qualified advisors must be accurate. Most households would be better off adapting the cliches to their unique circumstances and personalities.
Justification of Paying Off Debt Before Saving or Investing
Some advisors advise clients to pay their debts before investing or saving. This is because the interest rates on debts are higher than what you can earn in an investment or savings account. After the consumer is out of debt, they will be advised to begin saving and investing.
Delaying saving and investing until after paying off debts
These three activities are about more than just numbers. All three activities – paying off debt, investing in the future, and saving for emergencies – require commitments, habits, and mindsets. You may be able to begin a new activity if you finish another.
An Alternative to Delaying Savings and Investments Until Debts are Paid
Most households should commit to all three tasks simultaneously, even if they are unimportant. Although repaying debts is a priority, this should not come at the expense of saving and investing.
Imagine you have $400 left after paying your bills and living expenses. The cliche says you should pay off all your debts with the $400 and not contribute to savings or investments.
If you want to commit to all three at once, it might look like this: 80% of the money available to you ($320) should be used to accelerate your debt repayment. 10% can go towards building savings ($40), and 10% for investing in your future ($40).
Once you have paid off your debts, you will already be in the habit of saving, and you can transfer your debt payments into your emergency savings accounts and investment accounts. You would then send $200 into savings and another $200 to investments. Once you reach a certain level of protection, you can transfer all $400 to assets.
Never pay off your mortgage
Financial advisors, CPAs, or even mortgage officers often repeat this cliche.
Why You Should never pay off Your Mortgage
Current tax laws provide homeowners with mortgages with certain advantages. The law, though overly simple, says that homeowners can deduct interest from their income tax, lowering how much they pay in taxes throughout the life of the loan. These tax savings are significant.
Advisors often tell homeowners the tax benefits they can get from a mortgage outweigh anything else the homeowner might earn in a savings or investment account, on Wall Street, or through other means.
The Problem of Never Paying Off Your Mortgage
Homeownership is not all about a balance. The Great Recession should have taught homeowners financial freedom beyond tax deductions and write-offs.
You can achieve greater financial freedom by paying off your mortgage. Your home is not a mortgage.
It doesn’t matter if you have been paying your mortgage on time for years. All it takes is a few missed payments because of unforeseen circumstances like job loss or illness to cause your home to be repossessed.
You might think you can refinance your loan, but which lender would want to do so for someone with no steady income? If the housing market has declined, as it did in the Great Recession, you may be unable to refinance, even if you have a stable income, if your house’s value is below your mortgage balance.
Alternative to never paying off your mortgage
Ensure you know your options in case you lose your job. Imagine the worst-case scenario: selling your house in a down market. You could lose your home if you have a mortgage and no income. Granted, the government has instituted several programs and protections for homebuyers using a government-guaranteed mortgage, but even they have their limits.
In such times, homeowners who do not have a mortgage are only required to pay property taxes and insurance premiums. These premiums are paid annually or quarterly. Many taxing authorities will first place a lien against the property to cover back taxes rather than foreclosing.
Borrowing to buy a vehicle is always advisable if the APR is less than the inflation
This cliche is usually the work of a CPA or financial advisor. On paper, borrowing money and buying cars at low-interest rates makes sense. Like most others, this cliche fails to consider long-term issues and personal concerns.
Justification for Borrowing Money to Buy a Car
This cliche is easy to understand. You can think of it as the lender paying the difference between the APR on your loan and the inflation rate. Why would you not borrow money to buy a car in such cases?
