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Americans are notoriously bad at math. When the Education Department assessed people's ability to grapple with real-world numbers, it found that one in five adults couldn't calculate a weekly salary when told an hourly pay rate and that only four out of 10 could pick out two items on a menu, add them and calculate a 10% tip.

That difficulty processing numbers poses real challenges when it comes to managing money, and I think it's why so many people fall for bad financial advice. They either can't do the math or they're doing the wrong math. That deficiency could leave them substantially poorer.

Here are five examples of bad financial advice -- and how you really should be looking at the numbers:

1. Pay off your debt before saving for retirement

It's not that people who stint their retirement accounts aren't doing the math. They're just looking at the wrong numbers. Here's a fairly typical e-mail:

"I know you say retirement should come first, but I'm paying about 18% on my credit cards versus maybe making 8% in the market, and that's not guaranteed. I'll stick with paying off my cards."

This guy has the 8% right, since the stock market has returned at least that much, on an average annual basis, over every 30-year period since 1928. It's not guaranteed, of course, but the returns have been pretty consistent.

That's not the only number to consider, however. People who contribute to 401k's, 403b's and other tax-advantaged retirement plans also get tax breaks. For most, the tax deduction is equal to their tax brackets; the federal brackets are 10%, 15%, 25%, 28%, 33% and 35%. In addition, many contributors can qualify for an additional tax break called the Savers Credit. Singles with adjusted gross incomes up to $27,750 or married people with adjusted gross incomes of up to $55,500 can get credits worth 10% to 50% of their contributions.

Liz Weston

Liz Weston

If your company offers a match, that's another instant return on your money. Think of a typical match -- 50% on the first 6% of your salary -- as an immediate 50% return on those funds.

Perhaps most importantly, money contributed to a retirement plan is money eligible for years of tax-deferred growth. You've heard of the miracle of compounded returns, right? That's where your returns earn returns, eventually leading to big leaps in your wealth. But your returns can't compound if your contributions aren't there in the first place. If you're in your 30s, every $100 you don't contribute to your retirement costs you at least $1,000 in lost future retirement income. In your 20s, the toll is twice as high -- every $100 you don't put in costs you $2,000 in the future.

You may think you can catch up on your retirement contributions once your debts are paid off, but that's not really true. Tax breaks and matches are use-it-or-lose-it. And the longer you put off saving for retirement, the more of your income you'll have contribute to make up for lost time. Wait until 35 or later to start, and you may have to devote 20% or more of your income to retirement just to have a hope of quitting work at 65.

So start saving for retirement, even if it means a slower pay-down of your debt. In the long run, you'll be richer for it.

2. Don't borrow for an education

I've chronicled some real horror stories about people who overdosed on student-loan debt, including one who racked up a quarter-million dollars in loans for a degree she didn't use and another who borrowed $40,000 for a two-year degree from a for-profit college. These people are really stuck, since this is debt that typically can't be discharged in bankruptcy.

Furthermore, default rates on federal student loans are distressingly high. One out of five federal student loans that entered repayment 1995 was in default 15 years later, according to an Education Department study, and default rates were 30% for community colleges and 40% for two-year, for-profit institutions.

Student loans that entered repayment in 1995
Type of collegeDefault rateType of collegeDefault rate
For-profit, two-year 40.0% Private nonprofit, two-year 29.3%
For-profit, four-year 30.4% Private nonprofit, four-year 13.6%
Public, two-year 31.3% Unknown 5.0%
Public, four-year 15.1% Consolidation loans 25.8%
Overall default rate 19.5%    
Source: U.S. Department of Education

That doesn't mean that federal student loans are intrinsically evil. Far from it. The interest rates are fixed and relatively low for unsecured loans -- currently 6.8% for unsubsidized loans and 4.5% for subsidized. Repayment plans are flexible and can be based on your income, and payments can be suspended for up to three years if you encounter economic hardship. There are also forgiveness options: Any remaining debt can be forgiven after 10 years of repayment if you work in public-service jobs or after 25 years otherwise.

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And most people don't overdose on student-loan debt. The median cumulative debt among graduating bachelor's-degree recipients at four-year undergraduate schools was $19,999 in 2007-08, according to financial-aid expert Mark Kantrowitz, who combed the latest National Postsecondary Student Aid Study. Median means half had more debt, half had less. About 25% borrowed $30,526 or more, and 10% borrowed $44,668 or more.

Overdosing on student-loan debt is bad, but not getting a degree at all may be worse. People with only high-school diplomas have twice the unemployment rate and significantly lower lifetime incomes than college graduates.

The key to staying out of trouble with student loans is to limit your borrowing. A general rule of thumb is to borrow no more than you expect to make during your first year out of school, and to steer clear of private student loans. Since the maximum in federal student loans that most students can borrow for an undergraduate education is $31,000, you're unlikely to get in over your head for a four-year degree -- as long as you get that degree. Your earnings won't rise enough to justify the cost of borrowing if you drop out.

The federal borrowing limits are higher for graduate school, so tread cautiously there and consider whether the jobs for which you're preparing will pay enough to allow you to easily repay your debt.