Some Rules Are Made to be Broken
You know them — those hard and fast rules to live by, both in money (don’t get buried in credit card debt, don’t pay full retail) and music (don’t do me like that, don’t mess around with Jim — look it up here if you’re under 40).
But there are some “rules” I consider to be more like myths in that they shouldn’t be taken as universal truths, especially when looking at your individual big picture. Here are 5 of each:
Money Myth #1 – Find retirement gold by skipping the daily latte
Have you heard that one of the best ways to reach that seven-figure retirement goal was to “skip the morning coffee”? It’s gotten so tired I consider this to be cop-out advice. I understand that it’s something most people can relate to, but projecting how many millions you could have 40 years from now by cutting out small, daily expenses is overly simplistic.
And when you mess with coffee, I say “over my dead body”. Don’t get me wrong, I am very frugal when it comes to resisting expensive espresso drinks, for example the Venti Caramel Latte at Starbucks for $4.95 (which I would have every day if I was (a) still in high school shape and (b) won the PowerBall lotto), plus I just love regular coffee, which I can get for around $2.00.
And I’m an even bigger fan of making my coffee at home (whenever I’m not out blogging from coffee places, like The Office in Royal Oak, Mi, shown here).
But the bigger point is this: you are not going to coffee-save your way to prosperity.
Sure, every expense should be scrutinized, but get the big things right (like having a budget, a long-term plan, regular retirement contributions, sensible choices regarding houses, cars, insurance, travel and entertainment) and you can whip yourself into a Frappaccino-induced frenzy whenever you want.
I am pleased to find that some sites have even picked up on the “skip the coffee” backlash. See this article on ‘Why dumping your coffee habit isn’t the best savings plan”.
Music Myth #1 – “Please don’t put your life in the hands of a rock and roll band” (Oasis)
This is generally sound advice, but if it’s say, the Beatles, go ahead. Put your life in their hands. You’ll be just fine.
Money Myth #2 – Try to max out your 401(k)
It makes a lot of sense to save as much as you can, as early as you can. You might even get to $1 million with the right combination of time and diligence, and you may be planning to save much of this in your 401(k). But your longer-term strategies should take into account a plan for eventual distributions that mainly involve various tax rates. Since taking funds from different accounts will likely be taxed at different rates, you shouldn’t try to maximize contributions ONLY within your 401(k) (the limit is $18,500 in 2018) without considering other savings buckets.
For example, 401(k) distributions will be fully taxed at your future personal tax rate, which under the new tax brackets are likely be between 22% and 32% for most of you. (Of course these may be higher or lower in the future). But most of the money you could have growing outside tax-deferred accounts will incur taxes at the prevailing capital gains rate (which today can be as low as zero or 15%, depending on your income). So having some money growing outside the 401(k) may be preferable.
This is particularly true in two instances:
(1) you have many years until retirement and have the chance to maximize contributions to a Roth IRA (current limit $5,500) which does not enjoy a current tax deduction but will grow forever tax-free. You might want to contribute some portion to your 401(k) – at the very least to capture any employer match – then shift savings to the Roth.
And (2) you might want early retirement options (i.e. age 55 or earlier) that use some funds for the “bridge” period before you can tap the 401(k) at age 59 ½.
Music Myth #2 – “Go on, take the money and run” (Steve Miller Band)
Speaking of 401(k)s, I’m pretty sure Mr. Miller was talking about his retirement plan options, particularly when changing jobs. And to this I say “No!”. Leave the money alone, either with that former employer or by rolling it over directly into another account. Do not take it and “run”. Let it grow. (Now, I can empathize with Steve’s other adage, “Jungle love, it’s driving me mad, it’s making me crazy”. But that’s a whole other blog).
Money Myth #3 – Pay off the mortgage before you retire
As with may of these “myths”, they are rooted in sound advice, but often do not take your total financial situation into context. In a perfect world, where your income allows you to save proficiently AND pay off a house or two before retiring, this is the way to go. However, with interest rates having been at historic lows for the past several years, you may be sitting on a big source of cheap money that also allows you to grow your retirement funds in tax-sheltered investments at a much higher rate than pre-paying a mortgage.
A personal example here will probably help. Over the past several years (when I was working for the soul-sucking Big Corporate machine), I did indeed contribute the maximum to my 401(k) and Roth IRA, fully taking advantage of the tax deduction on the former and tax-free growth in the latter. I also bought a second home with a 15-year fixed mortgage at 2.75%.
Say what? To me that looked like free money. This house was bought five years ago, and at this point three-quarters of my monthly payment goes back to myself in the form of principle (i.e. only one-quarter is interest), because of the amortization of the loan at such a low interest rate. In the meantime, my full contributions to growth-oriented retirement investments have ridden the wave of one of the greatest bull markets in history, which I would not have gotten if I had thought I needed to “pay off” this mortgage (or not taken on this debt at all).
(A future blog topic will be “good debt” vs “bad debt”. Spoiler alert: buying prime real estate at 2.75% interest is not in the “bad” column).
Music Myth #3 – “Wake me up before you go go” (Wham!)
Faulty advice for sure. If I’m asleep, it’s probably cuz I need my sleep. Just go on, let me be, do your thing quietly and get on with your day. But I guess “Text me later after you go go” didn’t make for a catchy song lyric.
Money Myth #4 – Find a penny, pick it up…
…and, yada yada yada, something about good luck, I know I know. I used to go out of my way to always pick up a penny on the street or in a parking lot, not necessarily to ensure good karma, but because I had that little voice in my head that said “you can stop picking up free cash when you’re a big shot and don’t need it”. Well, thirty years or so have changed that thinking, and not because I’m anywhere near being a big shot or don’t need it. In fact, I can always use whatever extra funds may come my way.
But…it now just seems so annoying, digging a penny off the pavement and having it jostle around in your pocket, probably not finding any real purpose except the lonely little change jar you keep in the back of the junk drawer. I am also secretly in defiance of the whole good luck thing, so not picking it up is like a secret affront to the “luck gods”.
(However, I have found that a great source of free change is at any drive-through window during a northern winter. After having dropped twelve cents of change on the ground recently after fumbling the handoff, and just driving away rather than scrounging around in the snow in 5-degree weather, I noticed in subsequent stops at other establishments that there always seemed to be someone elses’ change down there! So while I hope you don’t need a few extra nickels or dimes that desperately, you now know where to find them).
Music Myth #4 – “The sun will come out, tomorrow” (Annie)
Not here. Not in Michigan, in January.
Money Myth #5 – Buy as much house as you can “afford”
Have you shopped for a house for which you consulted your bank or real estate agent on just how big a house you should be looking at? Wrong answer! They will use a formula based on your income to tell you the MOST you could theoretically buy, but what does that have to do with how much you SHOULD spend?
These people who probably just met you have no idea what your overall financial plan is and what house payment best fits into it. They are going with the thinking that “permitting” you the maximum amount increases their odds of scoring a deal, and assumes you start your planning with the maximum house payment and are left to plan the rest of your budget around it!
No, no, no. While I espouse the benefits of “good debt” above in the form of a low fixed rate (and always go for the 15-year mortgage by the way, not 30), I never considered taking on the most debt I possibly could. I knew several people who stretched to their limits, egged on pre-housing crisis by lenders who pushed all sorts of exotic loans, only to find themselves in a way-too-big mortgage on a suddenly shrinking home value. Trust me, your pet goldfish may do just fine under water, but you won’t.
Music Myth #5 -“Everybody was Kung Fu fighting” (Carl Douglas)
Confirms what I’ve suspected all along, in one of the best t-shirts I’ve seen in a while.
So there you go. Have any other “myths” you’ve challenged lately? Let me know!
Hey, in case you missed it:
Rather than search the GBC Archives or Categories tabs (which I still hope you do anyway), here are a couple of quick links to some recent posts:
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Again, check out The Office in Royal Oak, MI if you’re in town. This place has made it into my top 3 so far!
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