Financial Literacy Month puts a spotlight on the financial knowledge Americans are supposed to know and often don’t. But what about financial knowledge that we think we know, but should reconsider?
When it comes to money, we pick up lessons from a mish-mash of sources ranging from parents to TikTok videos to high school classes. Along the way we can form strong opinions about the best ways to manage our finances. People can hold tight to these ideas, and even come to regard them as financial commandments that must never be broken. But sometimes these so-called rules are based on outdated thinking or incorrect assumptions.
“There’s a whole lot of people that have made what they call cardinal rules of financial planning, and they really aren’t rules,” said Jack White, a certified financial planner with Fidelis Financial Planning in St. Charles, Mo. “The only cardinal rule that you can’t break is that you can’t spend more than you make.”
Even that one can be broken for a little while, he noted, but “if you do it consistently, the results aren’t pretty.”
In honor of National Financial Literacy Month (or Financial Fitness month, as MarketWatch has dubbed it) we talked to financial planners about personal-finance “commandments” that people sometimes blindly follow, and why it can be OK to bend or even break them.
1. Thou shalt not use credit cards
People sometimes have a knee-jerk rejection of credit cards because they’re convinced they’re a path to financial ruin. “I think that’s the No. 1 myth out there,” said Jeff Brown, president of BWM Financial, part of Stratos Wealth Partners, in San Diego, Calif. “Obviously they’re viewed negatively due to the potential for debt accumulation and the high rates, however there’s a lot that credit cards can offer.”
If you can afford to pay them off, credit cards can be a great tool, especially during times in your life when you’re waiting to make money from a new job or business. Brown himself leaned on credit cards when he started his business.
Unlike a debit card that draws cash from your checking account, credit cards come with benefits, including points and cash-back rewards. They often include robust fraud protection and insurance coverage. Most importantly, credit cards — when used properly — help you build your credit score, which can open financial doors down the road.
2. Thou shalt always be frugal
It’s true that you should start building your savings as soon as possible in life, but there comes a time when it’s permissible to spend the money you’ve worked so hard to make, said White, who is 74.
“People my age spend a lot of time being very frugal and accumulating money,” he told MarketWatch. “Part of accumulating for retirement is saying it’s OK to spend it.”
You can go ahead and splurge — within reason — especially if you’ve worked hard to save this money. It’s not frivolous if you’ve wanted to go to Europe all your life and you spend $5,000 of your savings to do it, White said.
3. Thou shalt pay off your mortgage before you retire
Financial planners interviewed for this story repeatedly mentioned clients who insist they need to pay off their house before retirement. “They think that’s the golden rule, the 11th commandment that Moses had that didn’t make it into the Bible: Thou shalt have a paid-off home in order for you to retire,” said Jeremy Shipp, a certified financial planner specializing in retirement planning with Retirement Capital Partners in Richmond, Va.
Though financial gurus like Dave Ramsay preach getting rid of debt at all costs, not all debt is bad debt, Shipp and other experts noted. It doesn’t make sense to rush to pay off your house with money from your savings if the returns on your portfolio are higher than the rate on your mortgage.
“I tell people, if you’ve got a 3%, 30-year fixed mortgage, why are you paying that thing off? Keep it forever. It’s free money,” said Ken Waltzer, a certified financial planner with KCS Wealth Advisory in Los Angeles. “If you’re making 7% on your investments and you’re paying 3% for your mortgage, that’s 4% a year on that money you’re earning for free.”
“ “They think that’s the golden rule, the 11th commandment that Moses had that didn’t make it into the Bible: Thou shalt have a paid off home in order for you to retire.” ”
The urge to pay off a house as fast as possible is based on Great Depression-era thinking, says Shipp. Mortgages were structured differently then and it was easier to lose your house while you were still paying it off. But he advises clients that “they can really be shooting themselves in the foot if they’re piling any extra cash they have into trying to pay down this liability when it’s a very favorable liability to have.”
Once you put $1,000 in extra payments into the walls of your house, you lose access to that money, whereas you would still control and manage it if you held onto it and put it into a side account, Shipp said. “People don’t understand they don’t really own and control the equity that is inside their house,” Shipp said. “It’s not like a piggy bank.”
The only way to access that equity is to either sell the house or obtain a home-equity loan from a bank. Instead of pouring extra money into your house, it’s a better bet to keep that money close at hand, he said.
“The intangible benefit of liquidity, use and control of your cash, it’s so hard to quantify because as life changes and situations arise, we just can’t quantify how much it could mean to you to be able to put your hands on a sizable amount money whenever you want without any penalties or taxes associated,” Shipp said. “That’s just one benefit that is really overlooked.”
4. Thou shalt send your kids to the best college money can buy
Higher education is seen as a golden ticket, and parents often have the urge to try to pay for their children’s college or graduate school, especially because they want to save them from the burden of student-loan debt. But doing so can derail parents’ financial future, said Niv Persaud, a certified financial planner at Transition Planning & Guidance in Atlanta.
“The best college for your child is the college you can afford,” Persaud told MarketWatch. “Many parents go into debt for their child to go to a top college or sacrifice their retirement savings. It’s easier for your child to secure a student loan. But there is no loan for retirement.”
Clients of hers, a successful lawyer and her husband, paid for their children’s schooling, then saw their dreams of early retirement disappear. “She was really annoyed because she thought she had more than enough,” Persaud said. “She was looking to retire by 58, 59, but that wasn’t going to happen. They didn’t even have an extravagant lifestyle. They just have one home; they didn’t travel a lot. People are always surprised.”
5. ‘Retirement’ is the Holy Grail
We’ve been taught to work hard and save money so that, hopefully, someday we can plop down on a beach and relax for the rest of our lives. The idea of leaving the workforce later in life was popularized in part with the advent of Social Security in the 1930s, Brown said. Back then, people started receiving their retirement benefits only a few years before the typical American reached their life expectancy. The financial services industry “jumped all over” the idea of retirement, Brown added, and in his view, his industry has heavily promoted the idea that people’s primary financial goal should be to save enough money so they can drop out of work and recede from active life.
But he’s seen many clients retire completely — as in, effectively stop doing something useful with their time — and he’s been alarmed to see their cognitive abilities diminish shortly afterward. (There is also considerable research that backs up this idea.) “People think there’s this magic thing, ‘I’m gonna grind it [and] work 60 hours a week, and then I have some magical day when I don’t do it anymore,’” Brown said. “It’s had a massive impact negatively for people.”
A better approach is to reframe your thinking around retirement, and make plans for later years that are purpose-filled and engaging, either through work, or other activities. Think carefully about how you’ll spend your time during this period, because some people, especially men, find themselves lost when they suddenly switch from working non-stop to endless leisure time. “What a successful retirement means is that you’re done working for your money and it’s time for your money to work for you,” Shipp said.
6. Thou shalt achieve financial success by owning a home
People often see buying a home as a necessary milestone that means they’ve reached adulthood and achieved security. Home ownership is also seen as a way for Black and Latino families in particular to grab a rung on the financial ladder, but some research suggests that homeownership isn’t necessarily effective in closing the racial wealth gap.
“ “The thing that people never seem to include in the cost of homeownership is maintenance and repairs…It’s not the gold mine that people think it to be.” ”
That’s because homeownership — beyond whether you can scrape together enough for a down payment — is an expensive ongoing cost.
“The thing that people never seem to include in the cost of homeownership is maintenance and repairs,” Waltzer said. “It’s always way higher than you expect. I always tell people to add at least 1% per year of the cost of the house for maintenance, and if you’re going to do remodeling, add that in too. It’s not the gold mine that people think it to be.”
While real estate is considered a solid investment because home prices generally go up over time, it doesn’t typically outperform the stock market over the long term.
7. Thou shalt buy and sell individual stocks because that is what savvy investors do
Popular culture tends to glamorize stock-market traders, and there’s no shortage of celebrities and social media influencers peddling cryptocurrency and other investments as get-rich-quick schemes. But buying and selling individual stocks, or stock picking, is risky and volatile, not to mention that it takes time to research companies and track stock performance.
A better bet is to grow your money steadily by investing in index funds that mirror the overall performance of the S&P 500 SPX, +1.30% or Dow Jones Industrial Average DJIA, +1.00%. “The biggest loss of money I’ve seen in my career is people chasing individual stocks,” Brown said. “More people get blown up from that than anything else.”