B&C Financial Advisors

Spooky Finance: 5 Real (Bad) Personal Finance Tips We Hear Too Often

Well, Halloween is upon us, and while the fact it’s already the end of October is somewhat frightening on its own, we think it’s a perfect time to revisit some of the advice we’ve heard over the years that still haunt people to this day.

1    You should borrow money from your 401(k) plan, because you are paying yourself the interest.

Shudders. While this is technically correct (you do pay yourself the interest), it completely ignores the potential downsides of making this decision. First, contributions you make to a (Traditional) 401(k) plan are made with pre-tax dollars, but you pay back the loan using after-tax dollars. Assuming you’re in a 32% tax bracket, this means for every $1 you earn to pay back the loan, only 68 cents of it can be used to do so. This means you need to earn more to make up that original contribution. Additionally, since the money you take out is no longer invested, you miss out on any potential earnings that money could make you toward your retirement. So, while the interest rate on the loan might be low, this additional “opportunity cost” increases the total cost of the loan. Finally, if for some reason you are unable to repay the loan and default on it, the outstanding balance becomes a normal withdrawal (if you don’t qualify for a hardship withdrawal). Then, you must pay ordinary income tax on the money, plus an additional 10% early withdrawal penalty if you are under age 59 ½. Now that’s scary!

2    Buying a house is better than renting because you can write off the mortgage interest.

That might be true, but it also might not. You can deduct the mortgage interest (on mortgages of up to $750,000), but only if you itemize your deductions on your tax return. If you do not have enough mortgage interest or other deductions to allow you to itemize, as opposed to taking the standard deduction, which was nearly doubled by the Tax Cuts and Jobs Act (TCJA), then you really aren’t benefiting from that tax benefit at all. This might cause some people to buy more house than they can afford, since a larger mortgage means more mortgage interest. Other factors that should also be considered in the buy versus rent decision include the length of time you expect to live in your home, the total amount of debt you already owe, and additional costs to owning a home. If you plan to move in the next few years, are unsure if your income is stable, or have a large amount of debt (student loans, car loans, credit cards, etc.), you are likely better off renting.

3    The mortgage you are approved for is what you can afford.

Buying a home can be a daunting experience, especially if you are purchasing your first home. It can be a wonderful feeling getting that pre-approval letter back saying you’re approved for a larger house than you expected, but you must take into account the added expenses that go into owning and maintaining a home. These include property taxes, utilities, insurance, homeowners’ association fees, and general upkeep costs like maintaining your yard and fixing broken appliances. All of these “hidden” costs add up and are not taken into account when a bank approves you for a loan, which is a good reminder that just because you can, doesn’t mean you should—it may come back to haunt you down the road.

4    You should keep a balance on your credit card to help your credit score.

Credit cards are a bit of a “trick or treat” kind of deal. Using them can certainly be a good way to improve your credit and rack up travel perks or cash back. However, you should be responsible and pay off the balance regularly, ideally every month. Keeping a balance on the card costs you money in the form of (high) interest, and you can potentially hurt your credit score if the balance gets too high. If you are still skeptical, take it from one of the largest credit rating agencies out there.

5    All debt is bad debt, and you should pay it off before investing.

We get it, having debt can feel like someone is always watching you (and your bank account). When it comes to deciding whether to pay off debt or not, though, it’s important to consider your alternatives. For example, if you are thinking about paying off your car loan, the interest on your car loan may be lower than your return on investing, so investing would likely be preferable to paying off the car loan. That being said, we understand there is a psychological benefit to paying off debt, and we do not necessarily discourage people from doing so if it does not materially affect their financial plan. In fact, sometimes it does make sense to pay off debt, such as when the interest rate is high or paying it off will improve your monthly cash flow. At the end of the day, everyone’s financial situation is unique, and what makes sense for one person may be terrible advice for someone else.

So, what do you think? Have you been given financial advice that concerned you or was downright terrifying? We’d love to hear about it! Feel free to contact us from our website or send us an email at [email protected].

Happy Halloween!

The information presented in this article is for educational purposes only and is not meant to provide individual advice to the reader. There is no guarantee the information provided above relates to your personal situation. All financial situations are unique and should be advised as such.

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