Money advice — it’s available everywhere. But that doesn’t mean you should take it. The wise person knows how to separate the good from the bad. Here are a few timely examples:
Bad advice: Do not save money for yourself until you have paid off your credit cards. Direct every cent you can scrape together to pay down your credit card debt as quickly as possible. It’s not smart to earn 0.5% interest on money you save while you are paying 20% or more on your credit card debt.
Good advice: That bad advice sounds great, but let’s get real. If you do not have an emergency fund, what will you do next month when your car breaks down, or next summer when you lose your job? You will run back to your credit cards for a bailout. Unless you are aggressively building an emergency fund, you never will get out of debt because unexpected expenses always come up. Instead, you should pull back to making only minimum payments so you can start saving money now. You need to stash all the cash you can, to be used only in a dire emergency. Once you have that fund in place, you will be ready to tackle your credit card debt with a vengeance!
Bad advice: Purchase whole life insurance for children. The cash value will pay for college. It guarantees insurability should that child develop a health issue later that would make them uninsurable, and it will pay for the child’s funeral if that becomes necessary.
Good advice: The only purpose for life insurance is to replace income for dependents who would become financially destitute if the breadwinner were to die. If you want to save for college, life insurance is not the way to do that. Instead, set up a 529 savings plan or another type of savings or investment vehicle. If you are concerned about a funeral (statistically, the chances of a child dying are very small), create a funeral account. As for the insurability issue, chances that your child will become uninsurable for health issues are very slim. Unless you have money to burn, buying life insurance on non-wage-earning individuals who have no dependents is a terrible waste of money.
Bad advice: Do not pay off your mortgage, because you would lose a valuable tax deduction. Mortgage interest on your principal residence is a deductible expense on your federal tax return. Even if you can pay off your mortgage, don’t do it. If you don’t have a mortgage, get one so you can claim this tax advantage.
Good advice: Deductibility is not a wonderful thing. It’s a “consolation prize” to ease the pain of having to pay interest. If you pay $12,000 a year in mortgage interest and you are in the 22% tax bracket, you get to deduct $12,000 from your gross reportable income. That means a tax savings of $2,640 ($12,000 x 22% equals $2,640). You pay $12,000 to get back $2,640. Does that sound great to you? If so, I’ll give you a better offer. Send me $12,000, and I’ll double it and give you back $5,280. Deal?
Your 2 issues have contradictory responses. (1) If you have zero savings and lots of debt, put some cash aside anyway, despite paying interest on the slice of debt you won’t be paying down vs. (2) if you are able to payoff your mortgage, do so because the tax benefit is tiny compared to the interest expense.
Both situations share a common problem: the interest cost exceeds any benefit from holding cash, but you give opposite answers. And you denigrate the idea of re-borrowing cash in the event of an unexpected expense. What you DON’T address is the tendency of the poor to blow “emergency cash” on non-emergencies. I know – I used to be such a person. In 1985, I borrowed $10K from a bank and paid off all our CC debt, and then we paid off that loan as fast as possible, far faster than the payment schedule required. Since 1985, we’ve paid ZERO interest on anything except mortgages and car loans.