Saturday, 12 March 2011 15:39
Have you heard the one about houses being a sure-fire investment? Or the tip that you should close all your credit card accounts? Bad financial advice can circle the web faster than the latest e-mail scam from Nigeria, and some of it originates from personal finance gurus themselves (although their words are often twisted). Here are five popular financial tips you should ignore:
1. A house is always a good investment. The man who calls himself "Frank Curmudgeon" built a popular website around what he considers to be terrible financial advice. Ask him what the worst is, and he'll tell you it's the idea that "you should borrow up to your eyeballs to buy the biggest house you can, because houses are the magic asset that never lose value." Pre-housing crisis, he says, "just about every mass market personal financial guru out there" advocated some form of that advice. Many people who took it to heart later found themselves unable to afford the houses they had bought, he adds.
2. Avoid credit cards. Contrary to popular myth, credit cards do not spread the plague. In fact, people who take the "credit cards are evil" message to heart can find themselves in trouble when they want to borrow money for a house or car, since lenders want to see some experience with credit. Public relations professional Katherine Kilpatrick says she found it nearly impossible to get a credit card after she graduated from college since she didn't use one while in school.
My 25-year-old co-worker ran into the same problem when she tried to take out a mortgage earlier this year and lenders turned her down. The reason, they told her, was that her credit record was simply too light. Since she had paid off her student loans and didn't use much credit elsewhere, they had no way of knowing whether or not she would be responsible with a mortgage. The bottom line: You have to use credit to be able to take out loans, and responsible credit card use can be a good way to do that.
3. All student loan debt is good debt. Zac Bissonnette, author of Debt-Free U, calls this the worst advice ever: "Borrow whatever it takes to go the best school you can. It's an investment in your future." Instead, he urges college students (and their parents) to avoid loans, reject the hype of expensive, private schools, and instead pay for more affordable colleges through a combination of hard work and being savvy.
4. Never take out a 401(k) loan. It might sound blasphemous, but as a new paper from the Michigan Retirement Research Center points out, using 401(k) loans to pay off high-interest rate credit card debt can save money. And if more people felt comfortable using their 401(k) loans to spot themselves cash when they needed it, then they might be more likely to ramp up their savings rate, since they would know they could access the cash if necessary. If you know the rules surrounding 401(k) loans and have a solid plan to pay it back, then this can be a good move.
5. Use home equity loans to pay off credit card debt. In pure mathematical terms, this proposition can make sense, since interest rates on credit cards are usually much higher than home equity rates. But here's why it's a bad idea, as many people, including MSN's Liz Pulliam Weston and Jeremy Vohwinkle of GenXFinance.com, have pointed out: Home equity loans can not only enable a debt-fueled lifestyle, but they can also leave you more vulnerable to foreclosure, bankruptcy, and other over-spending problems.
(Kimberly Palmer is the author of the new book Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back.)
By Kimberly Palmer
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