Common Personal Finance Advice that Fails
4 min read •
30 sec brief
Not all advice is good advice when it comes to personal finance, so be aware of these few things to help you navigate.
When it comes to making the most of your money, not all advice is good advice. Steer clear of these personal finance traps to increase your long-term security.
Listening to what lenders say you can borrow. Nothing against a mortgage lender or car loan pro, but they don’t have your best interests at heart. All they care about is whether you will be a good bet to pay back the mortgage or car loan and are focused on telling you the maximum amount they are willing to lend you.
But that max loan amount doesn’t factor in if you are also paying off student loans, or have credit card debt, or are saving enough for retirement, or have an emergency fund that can cover three months or more of living costs. Ever run into a lender who asked you about your long-term financial goals? Didn’t think so.
Your goal should always be to borrow the least amount that will meet your needs (you may need a car, but you sure don’t need a luxury car) so you will have ample cash flow to put toward all your other financial goals.
Lease a car. Leasing is the auto industry’s tricky way to help (read: lure) you into a car you can’t afford. Unfortunately it is increasingly popular; three in 10 new car purchases last year were leases.
There’s no question that leasing looks so enticing. The monthly advertised lease cost will typically be less than what the monthly payment would be if you bought that car and financed it with a five-year loan. But leasing will end up costing you plenty more. Leasing is no more than renting; most leases are for three years. When the lease is over, you can buy the car, but what the vast majority of people do is to turn in the car and lease another new car. Do that and you are signing up for a life of perpetual car payments. For an “investment: that is guaranteed to lose value.
If you buy an affordable car –used cars just a few years old are a great deal –that you can pay off in five years (or less), you can then keep driving that car without owning a monthly car payment. Instead, you can take that extra cash flow and put it toward other financial goals.
Co-signing a loan. Regardless of how much you love the person asking you to co-sign, you need to carefully consider what this move can do to your financial life. Once you co-sign you are legally obligated to make good on the payments if the primary borrower doesn’t. Are you sure you have the cash flow for that? This isn’t just about trusting someone else to be responsible. What if they are laid off, or have a serious illness that makes it impossible to keep working. That loan payment still needs to be paid.
You also should factor in the impact to your credit score. When you cosign that debt will show up on your credit report, and impact any future borrowing you may want to do.
Aim to beat the markets’ average returns. Study after study after study shows that investors who use low-cost index funds and exchange traded funds that aim to track the market, earn more than investors who rely on actively-managed funds that try to beat the market over the long-term. It’s not that managers of so-called “active” funds are necessarily bad. It’s that they charge more to manage your money, and that hurdle is hard to for them to clear. And while a talented money pro may outperform in any given year, outperforming consistently over the long-term is an extremely rare talent. Focus on index funds that have low fees is the smarter move for your long-term investments.
Renting is throwing away your money. Sure, owning a home can be worthwhile over the long-term, but it’s not exactly cheap either once you factor in maintenance and property tax. Renting is typically the smarter choice if you have any inkling you might like to move within 5 or so years. If you buy now and decide to move soon your cost to move could be 8 percent or more of the sale price, after factoring in the agent’s commission, sales transfer fees and plenty of one-off costs for selling (staging etc.) Given that home prices typically rise at a moderate pace—at least in many parts of the country –you could find your net sale price after a few years is not enough to cover your remaining mortgage balance.
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