2/23/2011 2:58 PM ET|
When to ignore basic money advice
Some financial advice is considered conventional wisdom. But what's a good idea for one person could prove disastrous for another.
Even the most well-intentioned personal finance advice and the most standard, accepted bit of conventional wisdom on money matters can be bad in the wrong situation.
Of course everyone's situation is unique. What works for some is unwise for others, and vice versa. But some advice is so familiar that it's hard to keep that common-sense truth in mind.
Here are four usually savvy strategies that in the wrong situation can backfire and cause more damage in the long run:
Put as much as you can into your 401k or IRA
The mantra of many retirement experts falls into one of two camps: "save" and "save more." Deferrals of 10% and 15% of pay are often touted as ideal.
While planning for the future, it's naive to not at least consider your current reality. If all you can legitimately kick in is 2%, so be it. At least you are doing something and setting the stage for when times are better.
Another scenario in which pumped-up contributions may not make sense for everyone is when it comes to creating an emergency fund. Experts advise that having an emergency fund of at least three to 12 months of salary is important, to help in the case of disasters such as unemployment, an unexpected illness or the always poorly timed car breakdown.
On paper, your money will do better in a 401k, especially if your contributions are matched by or employer, or in an IRA. That's because you will probably get a far better return on your money than you would in a typical savings account. But if you have little or no emergency savings, that money can be costly to extract when needed -- a 10% penalty on top of additional state and federal income taxes. You also lose the future value of compounded returns.
Boost your deferral rate as high as you can
Even if you have an above-average salary, is a bigger deferral rate necessarily better?
Choosing how much to contribute isn't always so simple.
"If you contribute too little to your 401k, you may not get the full employer match," says Robert J. DiQuollo, president of Brinton Eaton, a New Jersey financial planning firm. "On the other hand, if you contribute too much too fast, you can shortchange yourself."
DiQuollo uses the example of an executive making $20,000 a month who contributes 20% to a 401k, with a 5% company match. He would reach the IRS' annual contribution limit of $16,500 in May and be unable to contribute for the rest of the year. In this example, the executive would get a match of only $4,500 at a company that frontloads contributions. If the executive chose a 7% contribution rate instead, he wouldn't reach the $16,500 limit until December and he would get the full company match of $12,000 -- or $7,500 more.
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The mere fact that this news agency sees this information as newsworthy speaks volumes for how ingnorant they must think we all are. Common sense financial tidbtis wrapped in a tasty, soft tortilla. Just like McDonalds is trying to do with ther burgers now!!!
Tomorrow's report: "How tying your shoes can prevent a nasty fall and keep your shoes on your feet"
This is insulting. How msn.com thinks this is good information is beyond me.
Would be really nice to lower payments towards debt by spreading it out a bit to a five to ten year horizon, trouble is Well fargo is just one of those banks that wont give you a loan to do that no matter how good your credit is, UNLESS you own a home!
You living in the past yourself? Like many, I lost my butt in a home, but I didn't foreclose or short sell. I was able to barely scratch my way through it.
No lender gives a damn about people when all they care about is how much of a bonus they will get for the year.
It all comes down to this, who has the money and who doesn't. You want to fix the problems in the United States? Start by breaking down huge corporations who don't pay a living wage.
Return to manufacturing here and proudly say.......MADE IN USA!
Is this article meant to be a joke? Don't save money in the bank! Don't save money in a retirement account! Don't Buy a Home! and max out your credit cards!
This has to be a joke or something.
Speaking about "investments" DJ is now the same 12,200 as when I retired (55) exactly 10 Years ago --so let us ask those people trying to sell me on investment a couple of questions!
DJ should now be about 25,000 just to brake even--watch out people, now you know why George Bush wanted the SS money invested in the stock market----to prop up all the junk--pure and simple, (they saw the crash coming)!--by having real cash from SS, but at least it would have had something unlike the SS System!!!!!!!!!!, I have paid 487 K adjusted for interest and inflation, when are they going to treat me as an "investor", and not as an "entitlement receiver??????
Donald Trump has declared bankruptcy 3 or 4 times.
If mortgage rates are 4%, you aren't going to 'easily' find safe bonds yielding 3.99%
gryphon68....none of that would matter if you were making $20,000 per month...but I guess that is the average salary...doesn't everybody make $240,000 per year?
I don't follow the logic of an 'emergency fund' over paying down credit card debt. Put every nickel into the high, non-deductible, interest charging credit card, and if there is an emergency that would require the fund, use the credit card!
The emergency may not happen. The high interest on the card is a certainty.
There is also a glaring contradiction about not worrying about not fully funding your IRA if you can't afford to. But then we are told to not ignore your retirement to pay off debt! Which is it?
I wonder if Morrison Creech, mentioned in this article, head of private banking and executive vice president of Wells Fargo Bank, might tell us which debt is "bad debt." The statement that not all debt is bad debt implies that some or maybe most debt IS "bad debt."
In my opinion, "good debt" is the oxymoron of oxymorons. It's only good for the banks!! Let's stop trying to make the banks richer by playing their games, and start using our money to our own individual advantage.
While this article probably does not apply to 90% of us who have read it, I agree with most of it for the 10% or less that are in unusual financial situations - just leave debt out of the equation. Thanks.
Debt Free At 43
I only agree with number 3. I avoided the real estate bubble of the 2000s. As a result, I was able to get jobs back and forth between west coast and east coast from 1996 to now with only a total six weeks of downtime between jobs and a very high hourly rate. Another two or three years of this and I will mothball my suitcases, job or not. I can afford to retire. My savings are diversified across stock mutual funds, metals, cash, bonds, and treasuries and I can afford downturns.
I think everyone under the age of 40 should maximize their 401K contributions. And after they are done with maxing, also invest fully into a Roth IRA or traditional IRA. After that, buy individual stock funds and then individual stocks outside retirement. Stocks do far better than ANY investment in the long run. People under the age of 40 can afford to wait 30 or more years before they should draw out. That is plenty of time to work through economic cycles.
The problem is that most people still do not get the fact that everything is cyclic in markets. Dollar cost average to take advantage of them and you will laugh at depressions and recessions! There have been several recessions since 1974. We had bouts of inflation, high unemployment, high gas prices, high metals prices, low metals prices, drops in fuel costs, deflation in some areas. So there is no reason to fear economics. Just buy stocks in the long run.
There are a couple of problems with this whole dialogue. First, home ownership is NOT an investment. It's an expense, like a car, a copier, etc. It doesn't have inherent value, except as a home. Investment, by definition means that the money is making money, ie, invested in something that generates cash-flow, or stands to appreciate in value. As Will Rogers said years ago, "buy land, they aren't making anymore of it....". He said it was easy to make money buying land....just go to where progress is headed and buy land there before they get there". Easier said than done. Gilbert, Arizona had lots for sale in 1985 for $300 that today get $25,000. That's 80 times growth in 25 years. Why didn't you all just buy that in 1985? Are you stupid? No, it's just that nobody knows all the details, and nobody can predict the future except in very broad swaths, ie, 20,30,40,50 years. But we want it to happen now. Make no mistake about it, 75% of America will NEVER retire, because they won't be able to afford to. It takes about 12 times your final 3 years average pay, in invested securities/stocks, etc. to retire. About 5% of America has that much at 65. Anybody that knows math understands that. The solution? Find work you enjoy and do it until you drop dead, or turn the clock back and buy real estate 35 years ago. I did, starting when I was 26 and averaged 14% compounded for 35 years. FAR better than stocks. But that's an exception. The surest way to die is to retire.
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