When it comes to your finances, do you ever feel like everyone else seems to know better than you? You’re not alone. More often than not, well meaning friends and relatives always have the answer on how you should spend your hard earned dollars. The truth is, however well intentioned, many times the advice isn’t grounded in solid evidence. Even what many consider “classic” advice doesn’t always fit in today’s society anymore, let alone match your own personal goal. So the next time someone offers some words of wisdom, do your own research and see if the advice lines up with your strategies. Here are a few “pointers” that may not.
1. Get Out of Debt and Stay Out
It’s not that this isn’t sound counsel. It’s just isn’t always possible or the most beneficial for your situation. Sometimes, debts with low-interest rates could save you money in the long run. For example, let’s say you lock in a 30-year mortgage at 3.5%. Your stock portfolio is earning 7%. Then you’d be better off to invest any extra in your portfolio, as opposed to paying off the debt early. You’ll see a greater return on your investment that way, especially as long as investment rates stay ahead of interest rates. The key isn’t always getting out debt and staying there - it’s keeping debt low and using it as wisely as possible to your advantage. (For more from this author, see: Secure Your Financial Future With These 3 Steps.)
2. Renting Is Throwing Your Money Away
While owning your own home is certainly a rite of passage in America, It’s not always the answer. Owning a home definitely mean you’re building equity and possibly even getting some tax breaks. However, depending on your personal situation, it just isn’t for everyone. Just because you’re renting doesn’t mean you’re throwing your money away. It could allow you to save and invest more, making owning a home a greater reality when the time is right.
If you live in certain parts of the country, owning a home could be out of reach for you. It could be just too expensive, keeping you from saving for the future or possibly even breaking your budget. Far too many times, banks approve loans that aren’t necessarily the right fit for the client. So just because you qualify doesn’t mean you should buy. Buying could be out of reach at this time. Think about it this way, if you can’t comfortably afford the monthly payments and save for future needs than more than likely you’re just not there yet.
3. Always Max Out Your 401(k)
While you definitely want to contribute to your 401(k), maxing it out may not be the best option. Some 401(k) plans are just plain lousy. The fees are too high or the investment options are slim pickings. Obviously, it’s free money if you take advantage of an employer’s match, so don’t throw your hands up completely. That match doesn’t always mean the max. Perhaps they give 4% if you give up 4%, but the plan allows you to do 6%. In this case give the 4% and put the other 2% to better use now. Perhaps you still want to invest that 2% in a Roth IRA or another investment vehicle better suited for your situation.
4. Diversify With a Good Mix of Stocks and Bonds
Diversity! Diversify! Diversify! Of course as a Certfied Financial Planner I’m going to tell you to diversify. Here’s where the advice goes from good to bad. If you’re young, take risks. There’s no reason you need to devote a large chunk of your portfolio to fixed-income. Invest more in bonds as you near retirement, but if you are 10, 15 or 20 years from retiring then you’re better off going with stocks. More often than not, the returns outweigh the risks long-term and you’ll likely recoup what you lost if you invest wisely. If you’re not sure what to invest in, talk to your financial advisor. (For more from this author, see: The Roles Fear and Greed Play in Investing.)
Disclaimer: Heritage Investors, LLC, 11470 Parkside Dr Suite 201, Knoxville, TN 37934, (865) 690-1155, is registered as an investment adviser with the State of Tennessee. Heritage Investors only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.