Looking for crappy money advice? You came to the right place! In today’s post we explore a few of the worst pieces of (crap) money advice, brought to you buy MSN Money, along with my two cents (keep the change), now that my little run-in with the girl scouts is behind me and I can focus again without fear of getting my kneecaps busted…
Basically, MainStreet asked “a group of average Americans” what the worst financial advice they’ve received and highlighted a few of the responses. I’ve included three of my favorite dumb ideas from their survey, which I grade on a scale of 1-10 with one being “not that” dumb and 10 being “you should go into politics” stupid.
Although grading these is tough because you don’t have all the information, but I did my best. Plus, the scale is anything but scientific so does it really matter? Anyhow, let’s dig in!
About 10 years ago an old accountant advised we cash in a substantial 401k plan to pay off credit card debt, instead of instituting a plan to pay it off over time and learn how to spend and save at the same time.
Grade: 9; get your campaign manager on the phone… There are a lot of reasons to pay off debt, but cashing out a 401k is really a bad idea in almost every instance. You end up paying income tax (and in this case a 10% penalty) to pay off unsecured debts and don’t address the real problem by changing their habits. Instead, this brain surgeon advises his client to take the short cut (and the most expensive) route to get out of debt… sad.
Incidentally, at least one “expert” didn’t do much better with his thoughts, IMO.
Of course, there are exceptions. “The advice may have been appropriate if, say, the credit card was charging 29% interest and the consumer was in the 15% bracket with a 10% penalty,” says financial adviser Fred Amrein of Amrein Financial in Wynnewood, Pa. In this instance, “your cost of the 401k redemption is 25%, saving you 4%.”
Really? As my two-year-old would say: You’re so silly Mr. Amrien. All of that for 4% minus the opportunity of your money making money in the market, minus the effect of paying back the loan in after-tax dollars that will be taxed again when you take it out at retirement minus the risk of having to pay it back within a couple of months if you leave your job? You so silly. Just pay off your debts folks. Deal?
To buy an extra house, get a tenant and let the tenant’s rent pay the mortgage and all the bills. So many people and books say this, but many tenants are horrible. I’ve had great (renters), nightmare (renters) and everything in between.
Grade: 5; destined for mediocrity. It sounds like whoever gave this advice was giving one-size-fits-all advice to someone who (at least in hindsight) was not cut out for real estate investing. If you’re not willing to tolerate stupid excuses for late rent or people who can’t get their priorities straight, real estate investing is not for you. But if you’re willing to invest some time and deal with a few
extra morons, it can be a great long-term investment. Sounds like it wasn’t right for this gal.
During college, I was told to open a credit card and use it to charge all my books and school fees on. The 19% or more interest on a credit card is far more than the subsidized government loan that ended up covering my school costs.
Grade: 7; get your exploratory committee together. I don’t mind the subsidized loan (I took them) but what about a third option: getting a job and just paying for the books and fees? I get it though – most people don’t. And I didn’t (at least not completely – I took out loans but also worked and paid for a bunch of crap). I also wonder who “told” her. My guess is it wasn’t a financial advisor but more likely her dumb uncle Fred. But how about thinking “outside of the proverbial box” and doing a little college planning…
I’m a pretty optimistic, glass-half-full guy but if this is the type of “advice” out there for “the masses” we may be in some pretty big trouble… Take the 401k redemption, for example. Your debts are gone, but you didn’t change your habits so 2 years later you’re back in debt but your 401k is now a 101k (get it?), so you don’t have enough money to pay off your new debts, even if you cash out the rest of your retirement.
And you’re still spending more than you make so you end up falling behind, getting sued and end up going bankrupt. Then you come out of bankrutpcy with no debt and no retirement because you cashed it in… Seems harsh, but it’s pretty common.
So how do you spot bad advice?
The first sign is your’e reading it here 🙂
Another thing in common with most of the crappy advice out there is it’s way too complicated for way little upside. (i.e. cashing out a 401k loan by estimating your tax rate plus the penalty and then comparing it to your interest rate to find an arbitrage spread to save 4% of interest when your 401k is in mutual funds that averaged 8% over the last 10 years if you left it in there and just paid off the money…) See how long a sentence that is? Compare it to this: Get on a budget and pay off the credit cards as fast as you can. Pretty simple right?
Another sign is that the plan only works if everything goes right. If you make more money and your tax rate goes up your stupid 401k plan just lost money. If you take on more debt you didn’t solve any problem. If, if, if, if… way too many ifs. If your plan is to spend less than you make and put the rest to pay down the debt, it’s kind of hard to screw up unless you lose your income, in which case you’d be screwed with your other plan anyhow…
So what was the worst financial advice you got? And who gave it to you?
Until next time, put your credit card down and slowly step away from the mall!
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