Do you think outdated money advice has affected how you manage your finances? Money is an essential part of life. It makes the world go round – from rent or mortgage payments to groceries, savings, and more. It’s sought-after, encouraged, and acquired through many different avenues. By the time you begin earning and managing your own finances, you’ve likely heard your fair share of money advice.
With so many different kinds of financial tips and tricks out there, it can be hard to tell what works for you until you try it for yourself. Some advice is good, some bad, and some could be so outdated that it’s holding you back from reaching your greatest potential.
Outdated Money Advice
Here are a few “nuggets of wisdom” that might need retiring:
Don’t Talk About Money
Have you heard that it’s not polite to talk about money, politics, or religion? Apparently, it’s a social faux pas. I’m not one to shy away from having these conversations. Just ask Brian – he claims I interrogated him on our first date. I personally find these viewpoints interesting and integral to understanding how someone operates.
The key, of course, is gauging whether or not someone can have these conversations in a healthy and constructive manner.
Money can be a sensitive topic that can stir up all kinds of feelings. While it might be uncomfortable to talk about, it’s an important way to learn. Knowledge is power. When we talk about money with others, we can learn from mistakes, apply different strategies, and keep ourselves motivated.
Credit Cards Are Bad
Some folks aren’t interested in owning credit cards. I’ve run into a few people who aren’t comfortable using them or have had or heard of bad experiences with them. As someone once shared with me, “If I have to pay for things anyway, why not just pay with the cash I already have in hand?” It’s a fair question. People are going to use their money the way they feel most comfortable.
Your cash will ultimately pay off the credit card anyway. As long as the monthly balance is paid off in full (unless you have a 0% APR), a credit card is just like using your own funds, but with added protections in place.
Credit cards are incredibly useful when properly managed. With care and discipline, credit cards can be used to your advantage. They’re a great way to build credit, earn cash back and other rewards, and access exclusive benefits.
Additionally, you’ll receive zero-fraud liability in cases of theft, as well as a team of people willing to dispute billing errors on your behalf.
Never Open a Credit Card with an Annual Fee
As long as you find a credit card that works for you, an annual fee is not the end of the world! In fact, paying a premium to open a credit card can open the door to premium perks.
Brian and I love our Chase Sapphire Reserve. We find that its benefits completely offset its current annual fee of $550. This card offers a $300 travel credit, Global Entry or TSA PreCheck® statement reimbursement, complimentary airport lounge access with Priority Pass, and more! It provides us with amazing value.
Pay Everything in Cash
Although paying for everything in cash is not a bad thing, it can certainly be a roadblock to great success. People who prefer to solely pay in cash will steer clear of credit cards and all other types of lending.
Cash payments have the drawback of preventing the development of credit history. Without a credit history, you are relying on yourself to fund your own investments, real estate, and business opportunities. Self-loaning ultimately ignores the freedom and flexibility to make money using the resources of other people or financial institutions.
For instance, the median sale price of a home purchase in 2022 exceeded $400,000. Can you imagine putting aside that much cash to buy a house? It’s not an impossible feat, but is it practical?
The Only Way to Increase Income is Through Your Day Job
This statement is simply not accurate in today’s modern world. There are many opportunities to increase your income outside of a 9-to-5 job. From side hustles and investments to multiple jobs and more, you should be able to find a gig that works for you.
Technology has opened the door to a myriad of different income sources. Etsy and Redbubble, for example, are straight-forward platforms for the artist entrepreneur. Create a profile and upload your past projects to Upwork or Freelancer to explore freelancing jobs. Some people are even loading up on multiple full-time remote jobs.
Engagement Ring Salary Rule
I first heard about this so-called rule during my second year of college. My roommates were both engaged and kept going on about how their fiancés had been saving up to meet the “Engagement Ring Rule”. I actually laughed in their faces because I thought they were joking. They were not. Oops.
Again, people are going to believe whatever they want to believe. I’ve always considered the wedding industry a scam, almost as much as college. In any case, this rule purports that an engagement ring must cost 3-months’ salary.
It turns out that this rule originated from a 1930s marketing campaign from the De Beers diamond company. Is anyone surprised? The original campaign suggests that a man really doesn’t love a woman unless he is willing to part with one month’s salary to propose marriage. Apparently, since then, it has grown to three months’ salary.
Will you be held back if you spend this much on an engagement ring? Not necessarily. However, I’d argue that it could cause undue stress for something that should simply feel celebratory. There are bound to be other pressing matters that that money could go towards during the course of your marriage.
Now, enjoy this creepy, cringe-worthy De Beers commercial from the ’90s:
Parents Should Pay for Their Children’s Wedding
No, parents shouldn’t have to pay for their children’s weddings. This is an antiquated tradition.
If I’m being honest, I genuinely believe that the spouses-to-be should pony up the funds for the kind of celebration they want to have. This experience can make or break a relationship.
It is an excellent opportunity to experience real-life decision-making, negotiation, and compromise. Suggesting that parents pay for the wedding can actually eliminate the chance to learn important financial and life lessons.
However, parents will do what they want to do for their kids. As antiquated a tradition as parental financial support is, it’s something that still happens to this day. Should parents have to pay for their kids’ weddings? No.
If you have the opportunity to pay for your own wedding, I think it’s a great idea to do so. It’ll make sure you have a backbone and teach you a few things about yourself and your partner. Who wouldn’t want that before you commit yourself to someone?
Always Purchase a House with 20% Down
A 20% down payment used to be the standard amount required to purchase a home. It was essentially an insurance policy for the lender. Down payments of 20% or greater indicated that you were within your ability to afford the home and less likely to default on your loan.
However, with soaring home prices, the cost of putting down a fifth of the purchase price of a home is out of reach for many Americans. It can take decades to save for 20% down, particularly in expensive cities.
It’s now becoming more common to purchase a home with anywhere from 3% to 10% down. In these cases, most lenders would add a Private Mortgage Insurance (PMI) fee to the monthly mortgage payment. PMI is designed to protect the lender should the buyer default on the loan. While a lower down payment typically means the buyer is issued PMI along with a higher interest rate, it also means that they can start building equity sooner rather than later.
Saving for a 20% down payment might not be completely practical in a strong housing market.
Max Out Your 401(k) Contributions
For 2023, the maximum 401(k) contribution is $22,500 for those under age 50 and $30,000 for those 50 and older. While it’s not bad to max out your retirement funds, it’s actually better to focus on maxing out your tax-free accounts first.
A traditional 401(k) is a tax-deferred account, which means that taxes are paid when you withdraw from your account. If you have an employee match, it’s best to fund your 401(k) to meet that match; otherwise, you would be leaving free money on the table.
Once you meet that match, switch your focus to maxing out your tax-exempt retirement accounts, such as a Roth IRA or HSA. Unlike a traditional 401(k) or Traditional IRA, tax-exempt accounts allow you to withdraw your retirement funds tax-free!
|Note: Most importantly, you should first cover your “todays” before maxing out your retirement accounts. Pay off any high-interest debt, make sure you have adequate insurance coverage, and put money aside for an emergency fund. You will be in a better position with liquidity and protection today than you will be with retirement savings tomorrow.|
You Can Afford What You Can Finance
Look no further than the 2008 Housing Crisis for proof to the contrary. Easy credit and monthly payment plans have tricked people into believing they can afford more than they actually can. From student loans and mortgages to car loans and more, financing can either be helpful or detrimental to you.
Due diligence is your friend here. Do you have an emergency fund saved up, or can you easily pay off or amend your loan if necessary? Life can change in an instant; can you afford your lifestyle if things change for you? Do your homework and pay attention to your boundaries and limitations.
Just because a bank or lender is willing to finance your purchase, it doesn’t mean that you can comfortably afford it. Reflect on the potential purchase, its associated costs and benefits, and the loan terms and conditions. If you don’t truly understand your loan terms, you can find yourself chained down by a ton of debt and frustration.
Brian and I were approved for a mortgage that was more than 3x our own budget. Buying a property for that amount was unconscionable to us. It was totally and completely unnecessary.
In the end, it all depends on what the purchase is worth to you. Even with a decent monthly payment, would you be willing to pay it, plus interest, for the life of the loan?
People are different. We live differently, operate differently, and spend differently. Advice that works well for one person might not work for another, just as what might have been a good rule of thumb in the past might not make much sense today.
One of the best ways to determine what advice is relevant or helpful is to simply have a conversation with others.
What money advice have you applied in your life that has or hasn’t worked for you? Have you heard of any other outdated financial advice that you’d like to share?