Yesterday I was checking out after eating dinner at a local Mexican restaurant. I had enough cash to pay for my meal, but I commented that I rarely like to use cash when I could use my credit card, as it allows me to track and categorize all of my purchases. Every month I look over my credit card bill, checking accounts, and various investments so that I’m aware of my current financial situation. I’ve done this for years, but it’s particularly important now that I work for myself.
Whenever I go over my budget, I’m reminded of the various financial choices I’ve made over the years. Whenever I do this, I’m reminded of some of the advice I’ve been given over the years. I realized that there’s a pretty big gap between the soundness of some of this advice and the intelligence of the people who gave it to me, so I thought I’d make a note of a few of that advice here in case you’ve heard it too.
Keep in mind that I’m nowhere close to a financial expert, so I’m sure there are nuances to what I’m saying below.
Bad Advice #1: You Should Never Get a Credit Card
This particular nugget was taught to me in a high school home economics. It’s probably the piece of advice that leaves me the most incredulous, because I attended a fantastic high school with great teachers.
What the teacher was trying to convey was, “Don’t get into credit card debt” or “Don’t pay for stuff you can’t afford.” That’s good advice. But the blanket statement that you should never get a credit card isn’t accurate at all. Having a credit card and paying it off in full every month can help to improve and solidify your credit score over time. You can get points and cash back from credit cards. And as I mentioned in my preface, it’s an easy way to track all of your expenses.
Bad Advice #2: You Should Pay Off Your Student Loans as Quickly as Possible
I’ll never forget a friend telling this to me. She was very proud that she has drained her bank account to pay off every penny of student debt within only a few years of graduating from college.
It’s not a bad thing to pay off loans in general, but certain student loans offer some of the best interest rates of any loan. That’s the type of loan you actually want to pay off as slowly as possible, as it’s a way to bolster your credit score. Also, the general rule of thumb is that if the cash you have has more earning potential than the interest rate, you want to keep that cash on hand to invest elsewhere. Hold onto that 2.3% loan as long as possible.
Bad Advice #3: You Should Always Buy Cars for Cash
A very smart, successful friend gave me this advice years ago. His logic was that most car loans are crap, so if you have to buy a car, you should only buy one that you can afford to pay for in cash.
The notes I mentioned above about improving your credit stand here too, but not quite as much, because most car loans are indeed crap. However, the advice has a key flaw: What if you need to buy a car, but you only have enough cash to buy a really crappy car that will end up costing you a ton in repairs over time? Also, what if the expense completely drains your checking account, leaving you without much money for other unexpected expenses, like cat diabetes?
So here’s my variation on this piece of advice: Starting today, set aside $100-$200 a month to prepare for the day when you need to buy a car. When you finally need to buy one, do your research, find a good used car (not new!), and empty your car savings account as a down payment. Pay for the rest on a monthly basis.
Bad Advice #4: You Should Own a HomeCondo, Not Rent an Apartment
Ugh. This is the bad advice that got so many people in trouble when the economy collapsed 6 years ago. We’re fed this advice by all sorts of people throughout our lives: As soon as you can, buy a home or condo, because otherwise you’re throwing away money every month.
There are so many other factors in play here, like the current state of the economy, how long you want to live in the home, how much you will have to spend every month on condo fees or neighborhood association fees or property tax or maintenance, etc.
Imagine these two scenarios:
Owning a home isn’t some magical way of saving money. Yes, if you buy low and sell high, you could be fine buying a home. If you plan to live somewhere or own the property and rent it for a long time, it could be a good investment. But I think that owning a home is a bit of a romanticized idea–it certainly was for me. That doesn’t make it a good idea.
Have you ever gotten terrible financial advice from a really smart person? I’d love to hear about it in the comments.