When we are not looking at times, we receive all kinds of financial advice. Some of it is good and at other occasions it can downright harmful. I recently read an article on Yahoo Finance that discussed seven pieces of financial advice that may be detrimental to some people. Just as no financial plan is the same for everyone, so is the advice we need to take from others. At times, these seven may make sense to you but for others they can be dangerous, and costly mistakes people will make. So read this post and make the decision for yourself on how and if you would act on these seven pieces of financial advice.
The first is that we need to save 10% of our salary to retire in comfort. While that may be the case if you are in your 40’s or later in life, but for younger workers this may not be the case. And the reason is simple in some respects and complicated in others. Social Security will most likely be very different for a 20-year-old as compared to someone who is closing in on retirement age now. Benefits will probably be lower, and the starting age will likely be pushed back past the current age of 67 to be considered full retirement age. But that is up to Congress, and we all know that they can be unpredictable at best. Also, pension are becoming a thing of the past, and that is yet another income stream that many people working now have that those in the future will most likely have to do without. Many advisors recommend you save 15-20% if you can and start saving as early as possible to maximize the effect of compounding of your money.
The second myth is to start saving for your children’s education as soon as you can. The reality is more along the lines of continue funding your retirement accounts and if there is anything left after that fund a 529 plan for education. If not you may end up costing your children in your retirement due to the fact you do not have enough saved to live on. It is better to leave them with the student loans than rely on them in your golden years as that could be more costly in the end.
The third piece of advice that is extremely popular is not to use credit cards. I admire Dave Ramsey, but he and I differ on this point to a significant degree. He advises not to use them at all while I say use them responsibly to help maintain your good credit rating. Provided you do not carry balances or spend outside your means credit cards are not a tool of evil at all. But abused they can be very disastrous to one’s financial health. And many cards have extra benefits such as rental car insurance or travel insurance that a debit card just does not offer. But if the card charges a fee it is best to think twice about having that particular one unless the rewards outweigh the fees.
The fourth is to close credit cards that are no longer needed. This is not good for a few reasons many involving your credit score. People who extend credit like to see a long history between you and your creditors on the report. If you close an account, you had for many years this can hurt you in some respects. Also, the amount of credit you have available and what is used goes into the credit score as well. If you have older cards, that means your spending limit is higher, and if you are paying off your balances, you will increase your score by having low credit usage. But you need to use these older cards from time to time so that the credit card company does not close the account for you due to inactivity.
The fifth issue is that many people say to retire as soon as you can. Well, it is better to retire when you can afford it financially and not at a predetermined age. Not everyone can retire at age 62 when Social Security can begin just as some people cannot work past say age 67 which is my full retirement age. Many factors need to go into the decision of when to retire, and the first is to retire when you can afford it and not before. If you want to retire early the best advice I can give in a broad sense is to save as much as you can starting as soon as you can. The main reason for this is that younger people will be financing their retirement more than they will be relying on the government or pensions.
The sixth that is misunderstood is to wait until age 70 to start taking Social Security. While it is true by waiting until age 70 you will get a 24% increase in your monthly benefits that is not always practical. Some people love their jobs and are healthy enough to work at age 70 while others may not be as fortunate. This is where you need to examine your retirement accounts and any possible income streams you may rely on to decide when is the best time for you to start collecting Social Security benefits.
And finally number seven, and that is not everyone needs a financial advisor. In fact, if you do not have a significant amount of assets chances are you can manage your affairs yourself. If you also do not have much as far as an emergency fund or have high debt you pretty much know what your plan needs to be and do not need to pay an advisor to help you figure that out. And if you do go with an advisor steer clear of commission-based advisors and work with a fee-only advisor.
Depending on your situation will depend on if one of these seven topics will or will not apply to you. The best thing is to look at each one and decide for yourself if it is worth listening to or not. And as always, if you have any questions feel free to contact me.
