As hard times grind on, many Americans are taking a fresh look at the money lessons learned from their families. While some of the personal finance advice from prior generations and old adages hold up, some no longer apply – and sometimes they weren’t on target to begin with. The struggling economy has dismantled some tried-and-true concepts. With the stock market taking wild swings and low returns on savings, “I keep my money in my pocket,” said Steve Morris, 64, a title searcher from Freehold.
Financially speaking, he’s taking things a step at a time and not bounding into new investments. That may appear to defy the biblical advice against burying your talents, although the parable means much more. But more people seem to be just hanging on to their assets, happy they’re still there, and waiting for a little stability. But one person interviewed bemoaned the interest rate on savings. “It used to be you got 6 percent,” said Margery Condie, 64, a retired teacher from Stirling, Scotland, visiting her son who lives in Freehold. “Now, they give you peanuts.” Even an adage as seemingly sound as “Watch your pennies and your dollars will take care of themselves” can be called into question these days.
A modern twist on this advice has made buying a daily latte a questionable financial decision. That’s the view of Mark Boyer, CEO of Foundation Financial Group in Jacksonville, Fla. “It’s all about the four bucks here, and the 10 bucks there,” he said, adding that not only does he make his own coffee at home, he also packs his lunch. Boyer looks at it as simple math: If buying lunch each day costs $7, that adds up to about $1,800 of post-tax earnings a year. Someone earning $30,000 a year can give themselves an 8 percent raise by packing their lunch, he said. Morris himself has shifted to this reasoning. “I eat most of my meals at home,” he said. “I never thought I’d do that. I used to eat out three times a day.”
But author Ramit Sethi – who blogs about personal finances at www.iwillteachyoutoberich.com – thinks telling people they can’t have their daily half-caf-extra-foam fix can derail the good intentions that inspire the advice. “When the first thing you hear is what you can’t do,” he said, it makes you dislike thinking about money. Furthermore, he believes that focusing on small numbers takes energy away from bigger ones, like the impact of maintaining a good credit rating. “Excellent credit versus poor credit can make a $100,000 difference” on a home purchase, Sethi said.
The daily latte is fine as long as you have the discretionary income, said George Gotthold, a certified public accountant and certified financial planner in Ship Bottom. You may also want to first maximize the contributions in your retirement plan. But it’s definitely not OK if you’re carrying $40,000 in credit card debt. “Then you’re just creating a massive financial hole for yourself and spending $100 a week on lunches and coffee is a problem,” he said. Gotthold offers the following advice to clients: Always get a paper ATM receipt and write down on the back what the cash was spent on. “That way you can see what you wasted on nonsense,” he said. Before you pass some of these financial nuggets on to your kids, consider whether they ring true:
Buying a home is always a good investment.
“That’s not true,” said Jorie Johnson, a certified financial planner who owns Financial Futures in Manasquan. “Real estate in a single-family home environment is never an investment,” she said. “You don’t buy it to see your money grow. You buy it for stability, to have a place to raise a family so you’re not going to be kicked out by a landlord. And for pride of ownership.” She advises clients to not buy a home in this market if they don’t plan on staying in it for seven to 10 years. Empty-nesters, retirees and those approaching retirement who are considering selling their homes should rent for a year or two – or longer – before plunging into a neighborhood, she said.
What’s more, blogger Sethi said, buying a home can limit mobility, especially for younger buyers, which may in turn limit job prospects and earnings potential. “For many, it’s not the best financial decision,” he stated. But that is not at odds with the fact that owning a home is the primary goal for many. And buying a home is still likely to be the biggest purchase most Americans ever make. The issues that should be considered are how long one plans to stay and what kind of mortgage is obtained, said Darryl Dahlheimer, program director for LSS Financial Counseling Service, a credit counselor. “A home is the best investment for a long-term purchase, if you don’t plan to move,” Dahlheimer said. “And you have a fixed interest-rate mortgage.” The view of real estate has changed dramatically over the last few years. Not long ago, many saw it as a piggy bank ripe for smashing, usually in the form of a home equity loan. Gotthold, the financial planner, said real estate was always an investment that was supposed to keep pace with the rate of inflation.
To build credit, pay down your debts
Carrying debt month to month does not help build a credit score, and in fact can hurt it if the total owed climbs high enough. That’s because you’re using a higher percentage of your available credit. The percentage is one of the main components of a score, and a high ratio is considered a negative. “You can use your credit card once a month, for a purchase you’d already make. Pay it in full, not the minimum, and your credit score soars,” said Dahlheimer. In fact, the most important factor in a score is whether you pay your debts on time, not if you’re carrying some debt over from month to month. And getting too comfortable with carrying a balance can also blur the lines between wants and needs, said Jim Stovall, the speaker and author, most recently, of “The Ultimate Financial Plan.”
If you trust your adviser, you don’t have to make decisions
Although trust is a key component in the relationship between a financial adviser and a customer, the adviser shouldn’t be making all of the decisions. If the problem stems from confusion about investment choices, Stovall said it’s important to make sure you get the information you need to make the right choices. If the adviser can’t explain an investment to your satisfaction, “you should walk away not only from the investment, but from that professional.”