“Times are changing, society’s values are shifting, and the financial system is evolving. Are you still following 20th-century advice?” – Andrew Winnett
A rapidly-changing economy and constantly morphing financial systems have rendered much of the sacred canon of money advice incomplete, obsolete, or just plain wrong.
So, whether you are getting your financial wisdom from your parents, colleagues, or television pundits, you need to avoid these tarnished pearls of wisdom. Economic survival post-COVID-19 requires all of us to take a different approach to our finances, especially if we plan on ever being able to retire.
Here are a few nuggets of financial wisdom that are long past their expiration date. Unfortunately, these stinky nuggets continue to spread through the population like bad cat memes and ice bucket challenge videos. Check these out before you make an embarrassing and potentially costly money mistake.
1. You should buy term insurance and invest the rest.
Buying term and investing the difference, also known as BTID, is a philosophy developed by insurance advisor A.L. Williams. It is regularly spouted by financial entertainers such as Suze Orman and Dave Ramsey. Because tons of books already exist on this subject, let’s not get bogged down in details in this short article.
Succinctly stated, the problem with BTID is that you have to invest the difference for it to work. Most folks don’t, especially in perilous financial times. When their premiums start to go up, insureds tend to let their policies lapse and spend the difference. It’s a flaw in human nature that all the slick BTID marketing has failed to overcome.
Insurance does have a place in your financial health plan. But that place is not what you may think. Do yourself a favor and make an appointment with a financial advisor conversant in how smart people use life insurance to grow and protect wealth. Hint: They rarely buy term and invest the difference.
2. Find a great company and work there until you retire.
Back in the good old days (the 70s and 80s,) Dad donned his lime green leisure suit and headed off to work at ABC Widget Company. After 25 long years of ingratiating himself to his bosses and never missing a single sales meeting, Dad retired with a pension and a gold watch. He probably still believes that you will too.
Bureau of Labor Statistics reports make it apparent that a scenario of starting and ending your career with a single employer is highly unlikely. The Bureau says the average American changes jobs ten to fifteen times in their lifetime and spends under five years in every position.
This isn’t necessarily a bad thing, though. Because if you transition strategically, improving your salary and benefits each time, you have a chance to improve your financial situation dramatically. Staying at one job might give you a sense of stability and security, but the trade-off is less money than you might have earned elsewhere. Toss the gold watch and go where you are valued.
3. Your home is your biggest ASSET.
No, Virginia, it’s not. When you have something that puts money IN your pocket, it’s an asset. When you have something that takes money OUT of your pocket, it’s a LIABILITY.
Unless you rent your home out, it won’t be putting money into your bank account. Instead, your house will probably be a black hole that vacuums up every penny of disposable income you have. You’ll be paying for things such as roofs, HVAC, appliances, landscaping, and plumbing, to name just a few. Homes can be more expensive than you imagine.
Think long and hard before deciding to purchase one. If you’d like to own real estate, consider investing in a duplex or small apartment complex. Doing so will allow you to live in one unit and rent the rest to create cash flow for investing.
4. The correct asset allocation can be determined using your age
Your parents, siblings, or co-workers might have told you that you should invest your age (in percentages) in bonds and put the rest in stocks. The “60-40” rule means that if you are 40, you should have 40% in bonds and 60% in stocks. But, in an age of artificially low interest rates, bonds are no longer the profitable investment they used to be. Even government-backed bonds are sitting at deficient levels. You can and should do better.
5. A student loan is "good debt."
In the 1970s, only around 10% of the population had college degrees. Spending time and money to get a degree made sense because it helped set you apart from all those other job candidates. A degree demonstrated initiative and drive to prospective employers.
These days, thanks to a tsunami of student loan money, nearly everyone has a degree. From the Uber driver to the local barista to that guy walking around with a sign that says “Zombies Are Coming, ” we are now a population for whom degrees are a given.
In 2019, over 35% of Americans had at least a 2-year college degree. Yet, it is now evident that college is no longer the golden ticket to success.
The Economic Policy Institute identified this shift as far back as 2015 when it observed that “…
Workers with a four-year college degree saw their hourly wages fall 1.3 percent from 2013 to 2014, while those with an advanced degree saw an hourly wage decline of 2.2 percent.”
Our current higher education is a bloated, inefficient, and overpriced relic of bygone days. Having a student loan hanging over our heads has not proven to be synonymous with financial success.
6.You should always pay off your mortgage early if possible.
The keyword here is “always.”
You see, paying off a mortgage early, like many financial decisions, depends on your goals, risk tolerance, and current financial situation rather than some set-in-concrete rule.
Intuitively, getting out from under a heavy debt load seems like a great idea. But what if you have a low interest rate on your mortgage? What if you had a mortgage that was, say, 2.7%?
Would the extra dollars you use to pay off that mortgage early be better used to invest in an alternative investment where you might be able to earn twice as much? It’s something to think about.
The opposite is also true.
If your mortgage is locked into an uncomfortably high rate, paying it off early might make sense. Either way, you need to seek an expert’s advice before doing something you might later regret.
7. You should have an emergency fund to last 12 months.
You hear this a lot, especially during the pandemic. Overall, the concept is sound. You DO need an emergency fund. However, if you are financially stable with little debt, six months of emergency savings should be sufficient. Remember, unless you are following specific cash management strategies that allow your money to work more efficiently, emergency dollars become lazy money. That is, they sit around in low-interest money market accounts or CDs and do nothing.
Once used, you lose these dollars, along with the opportunity for them to work harder for you. The current financial crisis has made it clear that every dollar you have needs to do the work of three or four.
8. Retirement should be built on a three-legged stool
Personal savings, pensions, and social security are the legs of a formula for retirement bliss known as the “three-legged stool.” The 21st Century has rendered this strategy useless, however.
Less than 15% of Americans have or will receive pensions (defined contribution plans) when they retire. That’s because employers wanting to shift the burdens and costs of retirement from the company to the employees, eagerly embraced “qualified plans” like 401ks and IRAs.
Making fee-laden, choice-restricted plans work to their advantage is entirely up to the employee. To date, the results of this experiment in the transfer of responsibility have been less than spectacular.
A 2019 survey by Gobankingrates.com revealed that almost 65% of Americans will not have enough money when they are ready to retire. This includes those with 401k and IRA money.
To sum it up, times are changing, perhaps even faster than most of us are willing to admit. It makes sense to filter the advice we use to create better financial outcomes through an entirely new set of lenses. It also makes sense to build a team of trustworthy, competent financial advisors who have the training, tools, and skillsets to help you discover the truth about money.