Popular Financial Advice that is Wrong!

[tomsang]

I think we have seen all of these here, but I thought the article was pretty good.

http://finance.yahoo.com/news/financial-advice-popular-wrong-154025960.html

[willn]

Not with her on the "borrowing against 401k can be ok" advice, otherwise it isn't too horrible an article.  She doesn't mention the risk of losing your job or changing jobs.  You don't want that to happen if you have a 401k loan, because the balance comes due. Can't pay it? Now you have taxes due, plus a 10% penalty.

And despite the apparent low interest rate, when you factor in investment losses on the loan amount, it probably would be best to use a slightly less shitty debt instrument.

Much of her advice seems to lean toward keeping debt.  Fuck if I want a mortgage in retirement.  Math may seem to work in your favor on that but I'm really ready for the peace of mind of having a paid for domicile.  Peace of mind is a financial advantage too...

Agree with the idea of not moving to bonds though.

As for not choosing a practical major in college, sure, study Appalachian Folk Dancing in Early American Literature but don't borrow 60K to do it.

[Villanelle]

I hate "pay off loans with the smallest balance first".  It costs more and is a perfect example of spending money based on feelings, which is what gets so many people in trouble in the first place. 

[AlmostIndependent]

I hate "pay off loans with the smallest balance first".  It costs more and is a perfect example of spending money based on feelings, which is what gets so many people in trouble in the first place.

While I agree with you that spending based on feelings is all wrong, using those same feelings to make you feel like you are accomplishing something and increasing the likelihood that you will continue down that path isn't always a bad thing. I would chock this up to personal preference. Is it best financially? No. Is it better for some people who maybe aren't good at sticking with things? Yes.

[Rural]

I hate "pay off loans with the smallest balance first".  It costs more and is a perfect example of spending money based on feelings, which is what gets so many people in trouble in the first place.

While I agree with you that spending based on feelings is all wrong, using those same feelings to make you feel like you are accomplishing something and increasing the likelihood that you will continue down that path isn't always a bad thing. I would chock this up to personal preference. Is it best financially? No. Is it better for some people who maybe aren't good at sticking with things? Yes.

Sometimes it also increases desperately needed cash flow faster, too.

[Luck better Skill]

  The book Switch talks about that.  Debt counselors found that having people pay off the smallest debt first gave an accomplishment that help more stick with the program then doing the math of paying the highest interest debt first.  When you are deep in debt you have not been paying close attention to the math.  Motivate first then get the details right.

[ace1224]

I hate "pay off loans with the smallest balance first".  It costs more and is a perfect example of spending money based on feelings, which is what gets so many people in trouble in the first place.

you are totally right but dave ramsey's debt snowball is what changed my life and finally managed to get me to stop having consumer credit.  seeing the creditors go away faster and faster got me pumped up and changed my outlook so i started looking for ways to save money to make extra payments.  i may have paid more in interest on other cards but it was totally worth it to me to finally have it "click" in my brain.

[Insanity]

Not with her on the "borrowing against 401k can be ok" advice, otherwise it isn't too horrible an article.  She doesn't mention the risk of losing your job or changing jobs.  You don't want that to happen if you have a 401k loan, because the balance comes due. Can't pay it? Now you have taxes due, plus a 10% penalty.

I thought that was mentioned in the initial description of why you shouldn't do it.  I might be wrong (I didn't go back and re-read it).

[willn]

Not with her on the "borrowing against 401k can be ok" advice, otherwise it isn't too horrible an article.  She doesn't mention the risk of losing your job or changing jobs.  You don't want that to happen if you have a 401k loan, because the balance comes due. Can't pay it? Now you have taxes due, plus a 10% penalty.

I thought that was mentioned in the initial description of why you shouldn't do it.  I might be wrong (I didn't go back and re-read it).

You're right, she did mention it.  Still a crappy idea to do though.

[Villanelle]

Keeping up with the Jones is common human behavior.  Doing what seems easiest is common human behavior.

To me, if someone truly wants to change, they should start by forcing themselves to think about financial efficiency instead of feelings.  And that's especially true when you are in a debt emergency. 

I get the the debt snowball, Ramsey-style, works for some people, and maybe it even works for some people who would have given up if they started with a larger debt and that just took too long.  But somehow, I think people who cave because they don't have a warm fuzzy feel good moment where they can cross something off a list probably haven't learned enough or changed enough to stay out of debt for very long anyway.  They are still prioritizing what feels good over what makes financial sense, and I don't see how that's much difference than getting a Starbuck's latte and driving a Mercedes instead of making your own coffee and driving a 14 year old For Focus (or riding a bike). 

[willn]

Keeping up with the Jones is common human behavior.  Doing what seems easiest is common human behavior.

To me, if someone truly wants to change, they should start by forcing themselves to think about financial efficiency instead of feelings.  And that's especially true when you are in a debt emergency. 

I get the the debt snowball, Ramsey-style, works for some people, and maybe it even works for some people who would have given up if they started with a larger debt and that just took too long.  But somehow, I think people who cave because they don't have a warm fuzzy feel good moment where they can cross something off a list probably haven't learned enough or changed enough to stay out of debt for very long anyway.  They are still prioritizing what feels good over what makes financial sense, and I don't see how that's much difference than getting a Starbuck's latte and driving a Mercedes instead of making your own coffee and driving a 14 year old For Focus (or riding a bike).

This isn't just feel good stuff.  It's about doing what works, not just for some people, but for more people than any other method.

http://www.kellogg.northwestern.edu/News_Articles/2012/snowball-approach.aspx

Like it or not, we are all creatures of emotion, and that's a good thing.  Your primitive brain has decided what you are going to do before your conscious brain has.

The satisfaction of paying of a debt is real, and that satisfaction is what teaches you a new habit.  It's a very real reward, and your brain seeks reward.  The anticipation you get from seeing a debt approach zero is one of the most rewarding things that happens to your brain.  Here's another example of why anticipation is important:

http://well.blogs.nytimes.com/2010/02/18/how-vacations-affect-your-happiness/?_r=0

Another benefit of the method is simply focus.  Ramsey points this out I think too.  We get good at what we focus on.  Too many balls in the air and you start dropping them. Pound down one debt, then another, then another.

You may think its a trick or cop out, but really its just taking advantage of the tools available in our built-in reward mechanism. 

Also, the fact is, that once people get on a roll with this and get serious about paying it down, the math doesn't even make that much difference.  Having a higher interest debt hang around a bit longer doesn't really make a difference in your life, compared to the development of new habits of finance.

[Jamesqf]

One point about mortgage interest being deductible: yes, if you have a large mortgage, are in the early stages of payback where most of the payment is interest, or have a lot of other potential deductions.  Otherwise, you'll eventually reach the point where the interest plus other itemizeable stuff is less than the standard deduction.   (I'll be there in about 3 years.)

[Iron Mike Sharpe]

One point about mortgage interest being deductible: yes, if you have a large mortgage, are in the early stages of payback where most of the payment is interest, or have a lot of other potential deductions.  Otherwise, you'll eventually reach the point where the interest plus other itemizeable stuff is less than the standard deduction.   (I'll be there in about 3 years.)

I'm in Year 1 of my mortgage.  The interest I'm paying is WAY lower than the standard deduction.

[Insanity]

This is an interesting Ted talk that talks about feelings and how they are very important in getting action..

http://www.ted.com/playlists/60/work_smarter.html

[Crash87]

One point about mortgage interest being deductible: yes, if you have a large mortgage, are in the early stages of payback where most of the payment is interest, or have a lot of other potential deductions.  Otherwise, you'll eventually reach the point where the interest plus other itemizeable stuff is less than the standard deduction.   (I'll be there in about 3 years.)

I'm in Year 1 of my mortgage.  The interest I'm paying is WAY lower than the standard deduction.

Yeah, the mortgage interest deduction doesn't really do the middle class much good. Now if you have a million dollar home...

[renbutler]

Yeah, the mortgage interest deduction doesn't really do the middle class much good. Now if you have a million dollar home...

It does me good, with a home that's only a quarter of a million. But, then again, I combine it with a healthy charity budget.

Anybody in the first half of a mortgage payback who is committed to giving to charity should be able to itemize and save a good chunk of money on taxes.

[Jamesqf]

Yeah, the mortgage interest deduction doesn't really do the middle class much good. Now if you have a million dollar home...

Not really that bad.  First, you have to realize that we're enjoying (or have been until just recently) really low mortgage interest rates, so we're getting into not-deductible-any-more territory much sooner than has historically been the case.  Second, even a more typical loan of $150K or so will give you several deductible years, even if the only other thing you have to itemize are real estate taxes.

[frompa]

The whole debate above over doing the rational thing versus doing what feels good when it comes to money misses the point that once a person gets the "click" about how to deal with money, doing the rational thing (like getting rid of debt or riding a 14 year old bike instead of driving a new mercedes, or making and eating all your meals at home) FEELS good.  So while I agree that it doesn't make sense in the short term to pay off the smallest debts first instead of paying off the higher interest ones first, if doing the debt snowball gets a person to change their long term view, it's rational to do the feel good short term irrational thing.  Ah... logic is such a warm fuzzy, isn't it??

[ender]

Yeah, the mortgage interest deduction doesn't really do the middle class much good. Now if you have a million dollar home...

It does me good, with a home that's only a quarter of a million. But, then again, I combine it with a healthy charity budget.

Anybody in the first half of a mortgage payback who is committed to giving to charity should be able to itemize and save a good chunk of money on taxes.

This will be my situation should I end up purchasing a home.

The mortgage deduction itself won't bring me over the standard deduction, but considering I'm already going to be there from charitable giving... well, great! :)

[No Name Guy]

There's a saying in Engineering - perfect is the enemy of good enough.

In re the snowball - paying the highest rate versus paying the smallest balance first (and hence getting a "victory" under ones belt).  Paying off debt IS the good.  Is paying off the highest rate better?  Absolutely.  However don't overlook the fact that a person doing the smallest balance method IS PAYING OFF DEBT.  That is good - focus on what is being done right during the first stages, instead of what can be done better.

[Insanity]

There's a saying in Engineering - perfect is the enemy of good enough.

Depends on what "good enough" means....

[Crash87]

Yeah, the mortgage interest deduction doesn't really do the middle class much good. Now if you have a million dollar home...

Not really that bad.  First, you have to realize that we're enjoying (or have been until just recently) really low mortgage interest rates, so we're getting into not-deductible-any-more territory much sooner than has historically been the case.  Second, even a more typical loan of $150K or so will give you several deductible years, even if the only other thing you have to itemize are real estate taxes.

I just don't like that only itemized deductions over the standard deduction make a difference and many people think they are saving more on their takes than they actually are. Plus there are the agi limitations... I just think schedule a was poorly put together

[SwordGuy]

I hate "pay off loans with the smallest balance first".  It costs more and is a perfect example of spending money based on feelings, which is what gets so many people in trouble in the first place.

While I agree with you that spending based on feelings is all wrong, using those same feelings to make you feel like you are accomplishing something and increasing the likelihood that you will continue down that path isn't always a bad thing. I would chock this up to personal preference. Is it best financially? No. Is it better for some people who maybe aren't good at sticking with things? Yes.

Sometimes it also increases desperately needed cash flow faster, too.

Boy, a bunch of people just blew past this comment and apparently totally ignored it.

That's a shame because it's a very powerful argument for paying off the smallest debts first.

When people are having trouble making ends meet, it's because their income and their outgo are too close together.  There isn't enough slack in the budget to deal with the inevitable dammits that will show up.

Paying off the biggest debt first will save money in the long run.  Paying off the smallest debts first moves you to a predictably positive cash flow faster.   

That extra wiggle room in a monthly is worth a lot.  Given that 50% of US divorces are over money problems, making one's money problems less dramatic earlier on can pay a big dividend.

And not just a piece of mind dividend when we consider that divorce is one of the fastest ways to destroy one's wealth.

[Rural]

I hate "pay off loans with the smallest balance first".  It costs more and is a perfect example of spending money based on feelings, which is what gets so many people in trouble in the first place.

While I agree with you that spending based on feelings is all wrong, using those same feelings to make you feel like you are accomplishing something and increasing the likelihood that you will continue down that path isn't always a bad thing. I would chock this up to personal preference. Is it best financially? No. Is it better for some people who maybe aren't good at sticking with things? Yes.

Sometimes it also increases desperately needed cash flow faster, too.

Boy, a bunch of people just blew past this comment and apparently totally ignored it.

That's a shame because it's a very powerful argument for paying off the smallest debts first.

When people are having trouble making ends meet, it's because their income and their outgo are too close together.  There isn't enough slack in the budget to deal with the inevitable dammits that will show up.

Paying off the biggest debt first will save money in the long run.  Paying off the smallest debts first moves you to a predictably positive cash flow faster.   

That extra wiggle room in a monthly is worth a lot.  Given that 50% of US divorces are over money problems, making one's money problems less dramatic earlier on can pay a big dividend.

And not just a piece of mind dividend when we consider that divorce is one of the fastest ways to destroy one's wealth.

Divorce, yes, and also late fees, reconnect fees, repossessions, evictions... We hope no one is that close to the line, but of course many people are. Cash flow can provide a cushion for people who are just starting on a recovery process. It can make an emergency fund possible.

[Khan]

There's a saying in Engineering - perfect is the enemy of good enough.

Depends on what "good enough" means....

No, it really, really doesn't, especially in this case.

[gecko10x]

I hate "pay off loans with the smallest balance first".  It costs more and is a perfect example of spending money based on feelings, which is what gets so many people in trouble in the first place.

While I agree with you that spending based on feelings is all wrong, using those same feelings to make you feel like you are accomplishing something and increasing the likelihood that you will continue down that path isn't always a bad thing. I would chock this up to personal preference. Is it best financially? No. Is it better for some people who maybe aren't good at sticking with things? Yes.

Sometimes it also increases desperately needed cash flow faster, too.

Boy, a bunch of people just blew past this comment and apparently totally ignored it.

That's a shame because it's a very powerful argument for paying off the smallest debts first.

When people are having trouble making ends meet, it's because their income and their outgo are too close together.  There isn't enough slack in the budget to deal with the inevitable dammits that will show up.

Paying off the biggest debt first will save money in the long run.  Paying off the smallest debts first moves you to a predictably positive cash flow faster.   

That extra wiggle room in a monthly is worth a lot.  Given that 50% of US divorces are over money problems, making one's money problems less dramatic earlier on can pay a big dividend.

And not just a piece of mind dividend when we consider that divorce is one of the fastest ways to destroy one's wealth.

+1

[Insanity]

There's a saying in Engineering - perfect is the enemy of good enough.

Depends on what "good enough" means....

No, it really, really doesn't, especially in this case.

I was referring to the generalization, not this instance.  I'm actually for paying off the smaller debt first due to (as stated) cash flow.

Examples of where "good enough" isn't successful:

Tacoma Narrows Bridge.


It was good enough to support the cars.. But they kind of forgot about the wind.

[MoneyCat]

Back in the day, I used the "snowball" method when dealing with my credit card debt, and while I realize that I ended up paying a little more in interest than I really needed to before it was all paid off, it helped me psychologically to be able to check some debt off on my list.  It also gave me some financial flexibility because I wasn't obligated to pay so many payments all at once anymore.  Sure, it doesn't make sense from a purely financial point-of-view, but it really helped me ease out of panic mode when I was first getting my ship on course.

Now, of course, I use credit cards the way they are meant to be used.  To get discounts and freebies with rewards for stuff I was already going to buy.