5 Pieces of Financial Advice to Avoid at All Costs
Find an hour or so a month to peruse a personal finance Web site or a magazine like Money or Kiplinger's, which will keep you up-to-date on the basics. The blog at Mint.com is also a great resource, with posts on everything from choosing a mortgage to spotting medical bill errors. By educating yourself in these simple ways, you'll sidestep all sorts of traps. Here's some common advice you should disregard—and more profitable leads to follow instead.
Don't Buy It: "Your child's college degree is a great investment."
A blanket statement like this is missing a crucial qualifier: An affordable college degree is a great investment. The unemployment rate for Americans
25 years of age and older is a lot lower for college graduates than for those with only a high school diploma (3.9 versus 8.1 percent). But that doesn't
mean you should tell your kids to set their sights on any school—regardless of whether it will leave you with a crushing amount of debt. All too
often, parents fail to strategize when it comes to paying for education and end up getting off the track to retiring comfortably. Ironically, this does kids
a major disservice: If you lack sufficient retirement savings down the line, your children are the ones who'll bear the burden of supporting you.
A Better Idea: Think in terms of long-run affordability. (This goes for you and your child, since I firmly believe kids must borrow for school before parents dip into their savings or take out a loan.) Mark Kantrowitz, publisher of FinAid.org, says students should limit their total borrowing to an amount no greater than what they can reasonably expect to earn in their first year of full-time work; borrow more, and the odds of running into payback problems and default soar. Check out typical starting salaries at Salary.com; even if your child doesn't have a specific career in mind yet, it's a great exercise for families to do together, to start getting grounded in postcollege reality.
When it comes to financing options, remember that federal Perkins and Stafford loans offer the best deals; private loans are risky and can end up being far too expensive. The maximum Stafford loan amount a dependent student can borrow for all undergrad years is $31,000. Parents who want to chip in should first figure out if they can afford to do so by using the T. Rowe Price Retirement Income Calculator and then look into federal PLUS loans. Finally, your child should apply to at least one public institution; if money is extremely tight, there's also the option of attending two years of community college (whose credits are usually transferable) and finishing at a four-year school.
Don't Buy It: "Renting is a waste of money."Buying a home can of course be a wise investment, especially considering today's record-low mortgage rates. But that doesn't mean choosing home ownership over renting is right for everyone. In some regions of the country, the cost of owning may still be higher than that of renting (to account for total ownership expenses, including property tax and maintenance, my rule of thumb is to add about 30 percent to the base mortgage amount). And while home values may be stabilizing in many parts of the United States, that doesn't mean they're suddenly going to start rising at a fast and furious pace. Over the next five to seven years, you still might not see a home's value appreciate the roughly 8 to 10 percent it would need to simply to cover the costs of relocating (which at the very least include the real estate agent's typical 6 percent commission, as well as movers' fees).
A Better Idea: Do the math carefully before you consider buying. Ask yourself: Do you have any inkling that you'll want to move in the next five to seven years, whether for a job, a fresh start, or a new experience? If so, purchasing a home is not a smart choice. Keep renting until you can commit to settling down for longer, and tune out everyone who says you're throwing away money.
Don't Buy It: "Purchase whole life insurance for a better value."
Life insurance comes in two basic flavors: term insurance and whole life insurance. With the former, you're buying only insurance; the latter also includes
an investing component, which makes it more expensive. The premium cost of a whole life policy is going to be much higher than that of a term policy. This
would be justifiable if you were getting a great investment deal. But you really aren't—when you consider all the embedded fees.
A Better Idea: As far as I'm concerned, life insurance should be about life insurance, not investing. Reserve that for your 401(k) or IRA, and invest on your own through low-cost exchange-traded funds (ETFs) or no-load (commission-free) index mutual funds.
Don't Buy It: "Stocks are too risky; play it safe with bonds."
It's true that stocks are riskier than bonds and that, recently, bonds have produced better returns than stocks. But "recently" is the past; investing is
all about the future. When interest rates are as low as they are today, the future is likely to be less profitable for bond investors; the value of bonds
goes down when formerly low rates go up. And with the current interest rate on the ten-year treasury note at only 1.5 percent, there's virtually nowhere
else for them to go. (To be clear, 1.5 percent isn't normal. Before the financial crisis, the same ten-year security paid an interest rate of around 5
As for stocks, before you assume they're too much of a roller-coaster ride, don't forget about inflation—another word for the fact that over time, the price of stuff rises, on average about 3 percent a year. You need your long-term investments, like retirement money, to earn at least that average percentage so that when you retire you can afford the same standard of living you have today. Stocks have the best chance of earning inflation-beating returns.
A Better Idea: Keep some of your long-term investments (money you won't touch for at least ten years) in stocks. Consider dividend stocks, which both change in value and pay a portion of a company's earnings to the shareholder, typically on a quarterly or annual basis. Your 401(k) or 403(b) probably offers a stock fund that invests in dividend-paying companies, which include most of those in the S&P 500 Index. The dividend yield for that index market is currently about 2 percent—more than the yield of a ten-year treasury note! In general, be wary of investment tips, even from friends or family. Love doesn't mean having to take their financial opinions as gospel.
Don't Buy It: "Only multimillionaires need a trust. You're all set with a will."Oh, no, you're not! A will designates where your assets go after your death. But what if you become sick and incapacitated and need someone to oversee your financial affairs? Your will won't help, and court proceedings will be required to establish a guardian to act in your stead. A trust functions for your own use and benefit while you are alive—including designating someone to handle your affairs in the event of incapacitation—and when you die, the courts aren't involved in the transfer of your estate.
A Better Idea: Pay a lawyer to draw up a revocable living trust. Also arrange for a durable power of attorney—a document that enables you to appoint someone to manage all your financial and legal affairs on your behalf should you become incapacitated. Finally, you'll need a "pour-over" will as backup, covering any assets (like furniture and items of strictly sentimental value) you haven't put into your trust. The little extra time and money that go into these steps are well worth it, for your sake and that of your loved ones.
Suze Orman is the author of The Money Class: How to Stand in Your Truth and Create the Future You Deserve. To ask Suze a question, go to oprah.com/omagazine_talk.
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