8 Common Money Tips To Re-Think (or Ignore!)
When it comes to money, it seems like everyone out there has advice – but not all advice is created equally. Is it really always better to buy in bulk? Should you listen to all of the voices telling you to stop renting in favor of building equity? Are you really doing yourself a favor if you completely turn your back on credit cards?
I thought I’d kick this month off with a closer look at some pretty common financial advice. Chances are you’ve heard at least a few of these before – and maybe you’ve even followed a couple of these less-than-helpful pieces of advice in the past.
On the surface, many of these sound reasonable and logical – and some of them are rooted in ideas that do make sense. But when you really take the time to think about them, they don’t all hold up so well.
- “You can start budgeting when you make more money.”
Okay, so this one is really more of an excuse than advice, but it’s something I’ve heard quite a bit from people who use their lack of funds to justify living paycheck-to-paycheck without any real sense of where their money is going. Yes, budgeting is somewhat easier when you have more money to work with – in the sense that more income means that you can potentially set aside more for budget categories like savings or debt repayment, and so on. But the truth is that when you don’t make a ton of money, budgeting is incredibly important: When you’re living on less income, it’s critical to know exactly how much money you can spend on day-to-day living expenses while still leaving room to save or chip away at debt.
- “It’s perfectly okay to borrow from your 401k.”
It’s your money, right? So why not dip into your 401K if you really need cash? That’s the typical argument, anyway. But there are actually a few pretty good reasons not to “borrow” from this fund. First, you’ll pay taxes on what you take – not just once, but twice: once when you borrow from your 401k, and again when you retire and withdraw the funds. That’s not the only reason to be wary of borrowing, though: 401k loans usually have to be paid back within a few years, and if you change jobs or get laid off, you have to pay them back pretty much immediately.
Bottom line? Yes, your 401k, is technically “your money.” But when it comes to borrowing, treat it as a last resort.
- “If you can afford the monthly payments, it’s okay to finance.”
No, it’s really not. If you can’t pay cash for an item, you can’t afford it – and you can’t afford to pay interest on it, either. Pay cash, or save up until you can purchase it outright.
- “Bulk buying is always a better deal.”
When it comes to buying in bulk, use common sense and ask yourself a few questions: Do I actually need this much XX? Will my household use all of this XX before it expires? Am I only buying this because it seems like “a deal”?
If you’ve got five kids, for example, that 20-pound industrial-sized tub of peanut butter might be a pretty sensible purchase. But if your household is just you and your spouse, that tub of peanut butter might spoil before you can possibly use it all. On the other hand, a family of almost any size can benefit from bulk-style purchases of, say, toilet paper or shampoo.
- You should trade in your car for a new model every few years.
This advice is usually based on two ideas: First, there’s the idea that newer cars require less spending on repairs and maintenance. Second, there’s the idea that cars lose value quickly, so it’s best to trade your car in while it’s still worth money.
If you’ve got a clunker that costs thousands of dollars in repairs every few months, then yes, by all means, it may be time to consider a trade in. But if your older vehicle is reliable and free of major issues, you may be able to save more by hanging on to it. With routine maintenance, it’s entirely possible to keep an older car in good working condition. And if you or someone in your household is handy, you can save a lot of money by doing minor repairs and maintenance work yourself. Also, consider that an older car is usually cheaper to insure and register. And if your car is paid off, you don’t have to worry about a monthly payment.
- “Don’t use credit cards – ever!”
As someone who works with folks who have struggled with issues related to credit cards and debt repayment, I understand the motivation behind advice like this. Out-of-control credit card debt can be difficult to pay off, and credit problems can wreak havoc on nearly every aspect of your life.
But credit cards have definite benefits: Used responsibly, they can help you build good credit, which is essential to finding a place to live, getting certain types of jobs, and getting approved for loans to purchase a home or a car. My advice? Instead of avoiding credit cards, simply use them responsibly. Treat your credit card like cash. Don’t spend more than you can afford. Pay your balance off in full every month. That way, you get all of the benefits of credit cards – without any of the risks.
- “Close unused credit cards.”
Again, I understand the reason behind this advice: If you close a card, you eliminate the risk of running up a balance and getting yourself deep in debt – and this is especially tempting to do after you’ve paid off a card with a large balance. But the problem is that closing a credit card lowers your amount of available credit – and part of your credit score is determined by your ratio of available credit to credit used.
If you’re worried that you’ll be tempted to use a credit card irresponsibly, it’s much smarter to take steps to make spending more difficult: Leave the card at home when you go shopping, and consider stashing it somewhere out of sight, like a desk drawer or on a high shelf in the closet. But whatever you do, don’t close it!
- “Renting is a waste of money.”
This is kind of like the “bulk buying” advice in that it’s different for everyone. While it’s true that renting doesn’t help you build equity or net worth, it also gives you a degree of flexibility that you don’t get when you own your home – and this flexibility is important if, for example, you aren’t 100 percent secure in your job or if you think you might move in the next few years. Renting also makes sense if you lack the available funds to cover the costs associated with home ownership, such as property taxes and unexpected home repairs.
Most money advice is well-intentioned – but not all of it is right for everyone. Before you follow any money-related advice, the best thing to do is think critically. Look at your own situation and goals. Ask yourself if the advice makes sense for your family and your finances. If it does, that’s great – you’ve found a new, helpful strategy in your quest for more savings, less debt, or a better budget. But if it doesn’t, that’s okay, too. When it comes to money, it’s very rare to find one-size-fits-all advice.