Life doesn’t always turn out as you might expect it to. The truth is, many things in life often defy all sense of logic.
For example, there was a time when a reasonable person watching Justin Bieber sing on a city sidewalk for spare change would most likely assume the kid wasn’t destined for much success in the music business.
Of course, “the Bieb” went on to become a pop music superstar. (Go figure.)
The crazy world of personal finance is no different; in fact, there are many effective strategies that people refuse to employ simply because they seem to go against conventional wisdom. Here are some of the biggest examples:
Renting a home. Yes, home ownership has its benefits. However, renting makes sense for folks who plan to only be in their home for a short time, and/or fear equity loss in a declining market. Besides, after taxes, the annual cost of owning a home is typically more than the cost of renting. You can calculate the price-to-rent ratio to help determine if renting may be the right decision for you.
Using credit cards. Many people unjustly fear credit cards. However, when used wisely and responsibly, credit cards provide valuable benefits that cash simply can’t including consumer protections, cash dividends and other rewards. They also help establish and build one’s credit score, which which is especially valuable when shopping for long-term credit to buy a home or car.
Not paying off the mortgage early. When it comes to 15 vs. 30 year loans, it seems like the conventional wisdom out there is to strive to pay off the home mortgage as early as possible. However, not doing so has its advantages too; especially if you’re in a high-inflation environment — or expect one to emerge in the future.
Splurging. Splurging every once in awhile is perfectly fine if you’ve built up an emergency fund, are saving for retirement, and have eliminated all of your credit card debt. The secret is to do it in moderation.
Letting your kids fail. It may seem cruel, but parents who aren’t afraid to let their kids spend their money on ill-advised purchases — especially those with limited shelf lives — are actually doing them a favor. Experience is a terrific teacher and, with respect to personal finance, it’s better they err early when the impacts are relatively benign. Those “wasted” dollars are money well spent — an invaluable investment in your kids’ personal finance education.
Buying a used car. Sure, new cars are great, but they’re an extremely expensive proposition; financially they make little sense. The truth is, folks who can live without that new car smell, and are willing to pay for occasional maintenance and repair costs, will get maximum value by buying used instead of new.
Loaning money to family. There is no problem at all with this as long as you are willing to accept that you may never get your money back.
Filling a new home with hand-me-down furniture. Here’s a notice to first-time home buyers who are just starting out and find themselves short of cash: It’s not against the law to buy a new home and fill the rooms with hand-me-down or used furniture — or even leave a room or two completely empty. Patience is a virtue, you know. Just sayin’.
Asking for a lower price. Why is negotiating considered taboo? I’m not suggesting you should go into a grocery store and start negotiating down the price of canned corn; you have to be reasonable and pick your spots. However, there are many stores and service providers out there who will negotiate. The trick is mustering the courage to simply ask if you can get a better price. The worst they can say is “no.”
Saying no. Speaking of “no,” we all want to be liked. So it’s not surprising that for many people, myself included, saying no is extremely difficult at times. Unfortunately, one of the biggest risks to our personal finances is the inability to say no, whether, for example, it’s to satisfy a friend asking you to cosign for a loan — or even to yourself when being tempted to keep up with the Joneses.
Buying store-brand labels. As my unscientific blind taste tests have proven time and again, sometimes it makes absolutely zero sense paying a premium for name-brand labels. Believe it or not, those bargain store-brand labels are often just as good — if not better — than their name-brand counterparts.
Paying extra for quality. It’s true that it often pays to go cheap on items that are disposable or you’ll only have for a short amount of time, but sometimes it’s more cost effective in the long-run paying a higher price for a quality product than trying to “save” money by getting an inferior product. This is especially true when buying products you intend to keep for a long time.
Attending a lower-cost state college. There is no shame in attending a lower-cost state college or university. After all, they often provide a higher return on your education investment. And there’s nothing worse than graduating from a big-name university with $200,000 in student loan debt and a new job that earns $40,000 per year.
Skipping college. Then again, college is not for everyone; it just isn’t. Many people would be much better served — and financially better off in the long run — going out on their own, gaining real world experience doing what they love, and then starting their own business. Hey, if you don’t believe me, just ask Justin Bieber.
Photo Credit: wildxplorer
Hi Len, You’re right on the money with not paying off mortgages early. I think that if you’re a natural saver, and you can accumulate and grow a large bankroll, paying off the mortgage early may not even be necessary. Fixed rate mortgages are patient debt–just make the scheduled payments and it will go away in it’s time. It’s a matter of building equity in savings rather than in a home, and it’s perfectly OK doing it either way.
I’ve long thought that paying off the mortgage early is more of an imperative for the non-saver. It’s the forced equity situation for a person who can’t accumulate savings any other way.
Well said, Kevin. My regular readers know I decided a couple years ago — after a lot of reflection — that it made more sense to stop making extra principal payments.
I’m not saying paying down the mortgage as early as possible is wrong, it just didn’t make financial sense for me.
I disagree with all Len! Just kidding. Although, I donna why anybody in America wouldn’t want to make big bucks!
I think everyone would love to make big bucks, Sam! (In my opinion it’s just that a lot of folks either aren’t willing to make the sacrifices required to get there, or they are fortunate enough to be able to derive happiness without the need of lots of disposable income.)
Interesting list. I’m actually not in a rush to pay down the mortgage faster ATM since the home already makes up a sizeable portion of our net worth. We don’t have those superlong fixed-rate mortgages though, so the risk is of interest rates rising later on.
My bet is those rates are going to go through the roof eventually (unless the US can somehow manage to stop the money hemorrhage being abetted by the Fed).
Great list Len. Interesting point about paying off the mortgage early. That has been one of our current goals but maybe we need to readdress it.
Thank you, Miss T! I encourage you to take another look. If you truly believe all of this deficit spending is devaluing the dollar, then it’s tough to justify paying down a loan today with dollars that are going to be worth a lot less in the future. Remember, inflation is debtor’s best friend!
This is a good list. I think it just shows that hard and fast rules aren’t really appropriate since personal circumstances can vary so much.
1. Short-time renting is okay. When real estate was on upswing, many folks borrowed 3-year or 5-year Adjustable Mortgage for many reasons. One was lower interest rate. Second was they would sell it and buy another bigger home.
2. Some folks use credit cards for borrowing money. That eventually becomes a trap. That’s big mistake. Credit cards should be used for convenience to avoid carrying large cash.
3. I remember in early 1980s, many people offered 10% or 20% more than the asking price thinking and correctly so the following year the house would increase by 30, 40 or even 50%.
4. If you have paid off all your debt, continually save for retirement, emergency fund, then I don’t see any reason why one cannot splurge a little.
5. Some learn by making mistakes, some learn from others’ mistakes. Life goes on.
6. I always buy 3-4 year old car.
7. Lending money to family members as long as you know they lead a responsible life.
8. When we bought our house 22 years ago, we would look for furniture in flea market and bought living and dining furniture and bed frames from those places.
9. You always negotiate buying a home, buying a car, a carpet. Why not negotiate price for kitchen appliances and other necessities.
10. Again the same reason as in 7.
11. We very seldom buy brand names. In my opinion brand name is a waste of money. But it depends on one’s state of mind.
12. Quality does not necessarily come from brand name. If some believe in it, I think it’s a misconception.
13. You mentioned the word shame. That’s again a misconception. My son goes to community college. We are all proud of it.
14. College may or may not help in getting good real life experience. However, a degree can get you inside the door better and faster than if one did not have college degree. The important thing is to not get in credit card debt while in school. Tuition is enough headache for parents and students.
8. Our house was filled with hand-me-down furniture for years before we could afford to buy new stuff.
13. I went to a community college too for a few quarters before moving to my state university. You can save a lot of money by getting your General Ed certificate at a CC, prior to attending a bigger university.
14. If you are starting your own business, you usually figure out how to open your own doors out of necessity.
I love hand-me-downs, as I am thankful for what I can get now! Someday I will be able to buy what I want, but until then, hand-me-downs work!
They never bothered me either when I was starting out, Robert!
I agree about the renting – not just to avoid higher housing costs or the underwater-mortgage problem, but renting is a great way to test out a city, neighborhood, building (or even the neighbors)that you don’t know well – and it’s easy to escape if you’re a renter and the location is not as “rosy”as you thought – it also gives you time to scout around in a good neighborhood and find the real bargains and hidden jewels that never get listed in the want-ads.
Great post! A lot of people think there are defining black and white rules for personal finance that everyone should be following. But in reality, financial decisions are only as good as the thought process behind them. I don’t think there is always a 100% answer to rent vs. buy or pay debt vs. save.
Good list, I can’t really disagree with any, except I might see #14 as being a lesser option. Go to college, it’s the norm in 2011. Except be careful where you go and how much you spend. If you’re paying a premium price, make sure there are premium opportunities that will come your way afterward. Many a person finds themselves deep in college debt these days, it seems!
“Go to college, it’s the norm in 2011”. I think that’s the problem.
People are swarming the colleges without a real plan for what they intend to get from it. I’m sure this has at least some blame for tuition costs rising so steeply.
Many people are going to college because they don’t know what else to do and degrees are considered “essential”. That’s what I did. Through a combination of luck and smarts (mostly luck) it worked out ok. Smarts: I went to a community college first. Luck: by the end of my 2nd quarter in commnunity college I figured out what I wanted to do. Luck: most of my time at the community college was paid for with grants and scholarships so I didn’t take any loans until I transferred to a university.
I would not advise anybody to do what I did until they have a plan. Going to community college first was a brilliant move. But not knowing what I wanted to do second actually caused me to waste a whole quarter on classes that didn’t apply to my degree. Don’t go to college until you decide what you intend to gain from it. A degree, by itself, is just a piece of paper. It’s value depends 100% on the person that owns it. There are a lot of people, with degrees, that are trying to pay off student loans with low-skill jobs that have nothing to do with their degrees. It happens. More so when you don’t have a plan.
College prices are rising because of the increased number of administrators, the building splurge by colleges to build the nicest, newest, bestest dorms, and the easy money from Uncle Sugar that people can just keep refinancing over and over.
Another option is to go to community college and then transfer to a university to finish your degree. I think a degree is essential these days unless the kid is really talented or has strong entrepreneurial drive.
All true enough. Since new furniture sucks anyway, why not buy a vintage couch that was made in High Point, NC?
Buying a used car, using hand-me-down furniture, negotiating for a lower price, and buying store-brand products are pretty much the conventional wisdom in personal finance.
They may be conventional wisdom, Sara, but many many people don’t act on those practices. So in that respect, they are unconventional (for them) — which is why I put the term “unconventional” in quotes. 🙂
Don’t change you clocks during daylight savings, eventually someone will get tired of it being an hour off and they will change it for you. That takes time, and time is money. That 2 minutes I saved makes me….. A lazy P.O.S.
I guess that’s not good advice. Though your ideas are pretty good.
We used to think that we would pay off our next house as quickly as possible, and possibly even try to pay for it with cash. However, as time has passed, I am actually feeling less inclined to do this. There are both positives and negatives for both sides!
These are all great points, Len! I think taking a break is also a good idea. It might seem counterproductive but taking a break once in a while is a proven way to boost your efficiency in making financial decisions.
I definitely agree with “letting kids fail”. My experience has always been that I’ve learened a lot more after I’ve failed but then it has given me the push to learn why I failed and to not let it happen again.
If my parents had protected me from that, I wouldn’t have experienced the let down of not succeeding and wouldn’t have learned from it. Great post!
Good stuff here, Len. I’ve been converted to renting for now, and all of our furniture was free of cost from friends and family. My wife hates it, but it all serves its purpose.
These are all life experiences and decisions that we often need to make in order to acquire better financial knowledge. I think you forgot #15 Skipping the wedding costs. People nowadays go overboard by spending $30,000 or more in weddings. Instead of having an average American ceremony, its better to take an alternative path and keep the even as small and intimate as possible. Its a lifetime ceremony, but the commercial expectations set on it should not dictate how much you need to spend on it.
I’m really torn between paying mortgage early and not. Which is better, really?