Cliché Financial Advice

Cliché Financial Advice that Gets It Wrong

Sometimes Soundbite Financial Advice Can Be Problematic

Whether from traditional financial advisors or from radio show talking heads, you will hear financial advice spouted as clichés over and over. These sayings sound logical, but they often sacrifice financial judgment for the sake of brief dictums that are trite but easily grasped if not actually accurate. Financial clichés can cause long-term problems and put some households decades behind others in similar situations that make better financial choices.

What are some cliches about money that are not true?

Cliches that instruct an individual or a couple to sacrifice their long-term goals for the sake of short-sighted objectives can cause more troubles than they help to resolve. Those that focus solely on one household’s financial aspect at the expense of others will often lead to more problems.

Because these cliches sometimes come from professionals with certifications or licenses (e.g. CPAs, financial advisors, financial counselors), too many consumers accept them at face value. Consider the four money cliches below, why they are so popular (the justification), how they can harm your household finances (the problem), and what you can do instead (the alternative).

Pay Off Your Debt Before Saving or Investing

This money cliché has been around for generations. You are most likely to hear it from behind the desk at a CPA’s office or from your financial advisor. Too many consumers assume that if such highly qualified advisors give such advice, it must be true. However, most households will be better off adjusting the cliches for their own unique circumstances and personalities.

The Justification for Paying off Debt before Saving or Investing

Because the interest rates you pay on debts are almost always higher than anything you could earn on money in a savings or investment account, some advisors tell all their clients to pay off their debts first. Later, when the consumers are out of debt, they will receive advice to start saving and investing.

The Problem with Delaying Savings and Investing until After Paying off Debts

All three of these activities are more than numbers. Paying off debt, saving for emergencies, and investing for the future all involve commitments, habits, and mindsets. If you wait to start one activity until after you have finished another, your chances of starting at all can be pretty low.

The Alternative to Delaying Your Savings and Investments until Paying Off Debts

Most households should consider committing to all three activities simultaneously, even if not all equally. While repaying debts should rightly be prioritized, it should not be at the cost of all saving and investing activities.

Let’s say you have $400 available to use after your living expenses and other important bills. This cliché would have you send all $400 to your debts and contribute nothing to savings or investment accounts.

Alternatively, committing to do all three right from the start might look something like this: focus 80% of your disposable cash ($320) on accelerating your debt repayment while using 10% to build savings ($40) and another 10% to invest for your future ($40).

That way, once you pay off all your debt, you are already in the habit of saving and can simply transfer your debt payment to your emergency savings and investment accounts. At that point, you would be sending $200 to savings and $200 to investments. Once your savings balance reaches an acceptable level, you can then transfer the entire $400 to your investments.

Never Pay off Your Mortgage

Homeowners will hear this cliché from their financial advisor, perhaps a CPA, and even their mortgage officer.

The Justification for Never Paying off Your Mortgage

The current tax laws offer definite advantages to homeowners with a mortgage. Though overly simplistic, the law says homeowners can deduct the amount of interest from their taxable income, lowering the amount of tax they pay throughout the term of the loan. These tax savings are not insignificant.

Consequently, advisors will often tell homeowners that the tax benefits of carrying a mortgage are worth more than anything the homeowner could earn through a savings account, on Wall Street, or with other investments.

The Problem with Never Paying off Your Mortgage

Not everything about homeownership is related to a balance sheet. The Great Recession should have taught homeowners that financial freedom is more than just tax deductions and write-offs.

Paying off your mortgage means you can experience greater financial freedom. No lender has any claim on your home.

During recessions and pandemics (or anytime, really), it doesn’t matter how long you’ve been making your mortgage payments on time because all it takes are a few months of missed payments due to job loss or medical emergencies to see your home foreclosed.

Yes, you might think you could refinance, but what lender wants to refinance a loan for a borrower without any sort of steady income? Plus, if the household market has dipped as it did during the great recession, you may not be able to refinance even with a steady income if your home’s value has dropped below the balance on your mortgage.

The Alternative to Never Paying off Your Mortgage

First of all, make sure you are aware of your housing options should you lose your income. Consider the worst-case scenario of trying to sell your home in a down market. With a mortgage but no income, you could lose your home. Granted, the government has instituted several programs and protections for homebuyers using a government-guaranteed mortgage, but even they have their limits.

On the other hand, the only thing homeowners without a mortgage have to pay during such times is property tax and insurance premiums, and those are usually annually or possibly quarterly. However, many taxing authorities first move toward a lien on the property for back taxes rather than foreclosure.

Always Borrow to Buy a Vehicle if the APR Is Less than Inflation

This cliché usually originates with a financial advisor or perhaps a CPA. On paper, the recommendation to buy your vehicles with borrowed money at low-interest rates makes sense. As with most clichés, though, this one fails to consider long-term and individual issues.

The Justification for Borrowing to Purchase a Vehicle

The math for this cliché advice is straightforward enough. If you’re paying on a loan whose APR is lower than inflation, then it’s like the lender is paying you the difference between your APR and inflation. Why wouldn’t you borrow money for a vehicle in such cases?

The Problem with Borrowing to Buy a Vehicle

First, inflation can change, and it can change quickly. A low-interest rate today can seem like an intolerable rate in six months if inflation dropped to near 0%. In times of deflation, the APR would seem even more onerous.

Worst and more common, though, is the reality that for the first half of most car loans, the borrower is upside-down on their loan. That means that since the vehicle loses an extraordinary amount of its value during the first two years or so after manufacture, the borrower will owe more money than the vehicle is worth.

Many also describe these situations as the borrower being underwater. If the borrower has enough funds in saving to repay the balance of the loan if necessary, then this becomes less of an issue. Otherwise, it just takes the loss or reduction of income to create hardship in the home when it comes to the vehicle.

Unlike homeowners, car and truck owners have no government programs and virtually no nonprofit agencies to turn to for help when they get behind on their vehicle loan payments. And since the borrower owes more than the value of the vehicle, no one will purchase the car. Just as few (no one) will be interested in assuming the loan either, presuming it can be taken over by another consumer in the first place.

That leaves the borrower with two unpleasant and equally damaging options when it comes to their vehicle: first, they could voluntarily surrender the vehicle to the lender, and second, they can wait until the lender repossesses the vehicle.

While a voluntary repossession will save the borrower from being charged multiple fees related to repossession, both options have the same negative effect on the borrower’s credit.

The Alternative to Borrowing to Buy a Vehicle

Such a trend may be unlikely to happen, but as more consumers see their vehicles as something that gets them from Point A to Point B rather than as a symbol of their success and status, we would see far fewer consumers underwater in vehicles too expensive for their household finances. Safety concerns for parents and fuel efficiency can be considerations, but with the average new car payment somewhere between $600 and $700 a month, maybe it’s time to consider simplifying your own transportation requirements.

Besides purchasing lower-priced vehicles, putting larger down payments on the vehicle or purchasing 100% in cash will reduce or eliminate consumer issues related to being upside down on their car loans.

Never Use Credit Cards

This cliché is probably the newest of those listed in this post. If not originating with popular talking heads on the radio and online, this cliché has certainly received a boost from these talk show hosts, spreading it far and wide. It plays on consumer fears based on past experiences or horror stories of other consumers.

The Justification for Never Using Credit Cards

Here’s how the story goes. It’s so easy to get into overwhelming credit card debt, and credit card companies are so evil and greedy that consumers should just never use these products.

The Problem with Never Using Credit Cards

As with any decision based on fear, this advice misses the mark. It’s reactionary advice against the symptom, but it ignores the cause.

This advice is a knee-jerk reaction based on fear, not on reality. If you ever want to borrow money to purchase a home, you’re going to need a mortgage. And that mortgage lender will give you better repayment terms if you’ve used credit wisely (not going into debt) for years.

Instead of helping consumers to develop the discipline and the surrounding spending systems that make credit card debt much less likely, this cliché jumps past the cause of credit card debt and greatly hinders the consumer’s credit-building opportunities.

The Alternative to Never Using Credit Cards

We often suggest that consumers who have no credit history or who have struggled with credit card debt in the past start small and even start local. A store card from a local or regional clothing store in the mall might offer not only a 10% to 15% discount on what you were going to buy anyway, but if you stop at the customer service desk before exiting and pay off the entire balance you won’t have to pay any interest or worry about your balance getting out of control. Congratulations, you just used credit wisely.

You can also do this with a standard credit card except that instead of stopping at the customer service desk, you make the payment to the credit card account through the credit card company’s phone app or online payment portal.

For additional alternatives, see our Complete How-To Guide to Building Credit.

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