Odds are your parents have given you an enormous wealth of financial advice over the course of your life – so often that you’ve considered them to be financial truths. But what if your parents are all wrong? What if the financial advice they are offering is actually a recipe for financial distress. Think I’m crazy yet? Well let’s look at some of these financial “truths” you might have heard and why they might be dead wrong.
It’s OK to Take Out Student Loans For a College Degree
Let’s be honest here – the cost of a college degree is being inflated more than it’s worth. Why? Well you’re not just paying for the piece of paper – you’re paying for the college experience.
If living on your own, eating cafeteria food, and accumulating mountains of debt is your thing then college is the choice for you. If saving money and getting a comparable degree sounds like a better option then you can go to a local community college.
But why do parents send their kids to these overpriced colleges? The answer: brand and name recognition. Chances are you’re not going to be a better 6th grade math teacher because you went to an Ivy League school. If anything, you’ll be more stressed with the mountains of student loan debt you’ve accumulated and therefore take it out on those poor 6th graders (disclaimer: if you are getting a free ride somewhere, then by all means go).
If you want to be a doctor, CEO of a Fortune 500 company, or an investment banker on Wall Street then getting that name recognition definitely helps. But if you’re going to be an entry-level staff accountant in New York why do you need a Master’s degree from a big state school in Miami? (Besides for wanting to sip Coronas by the beach year round).
You Can Make the Minimum Payment To Your Student Loans
If you’re like most college students graduating from a 4 year institution then you probably have student loan debt – and I bet you’ve been given this advice, “just make the minimum payment.” Wrong again!
Making the minimum payment to a student loan means you’re just increasing the cost of your college experience over time. It’s like paying for a Spotify subscription but the tracks never get updated. By the time you’re in your 30’s you’ll still be listening to Justin Bieber while the rest of the world has moved on.
Paying the maximum possible amount to a student loan while still being able to support yourself is the way to go. It’s a lot easier trying to plan a wedding, buy a home, raise children, and save for retirement when you don’t have a massive student loan hanging over your head.
It’s Never Too Early To Save For Retirement
This has to be true right? …Wrong! Sometimes it’s too early to save for retirement. This is especially true if you have massive amounts of student loan debt.
Everyone is always thinking about their future self – specifically their 60-year-old self. This is why we have 401Ks, Roth IRAs, Traditional IRAs, SEPs, and a boatload of other retirement options. However, your future self will thank you when you’re debt free and you properly structure your financial future in your 20s.
When you build a house you first start with a solid foundation. No architect will say, “Hey, it’s never to early to start building the roof.” Just because an architect doesn’t start building the roof first doesn’t mean the roof isn’t important. However, what is important is starting on the right foot by paying off student loan debt first before considering retirement.
Why is that? Well when people juggle everything at once they set themselves up for failure. Think about trying to save for retirement, paying a student loan payment, paying a car payment, paying a mortgage or rent payment, paying for daycare, and taking the occasional vacation and you have yourself one big mess. No wonder people take 30 years to pay off student loan debt.
Having a Good Credit Score is Important
This has to be good advice right? Not so fast! A good credit score has no impact on your financial well-being. A good credit score only means you can dig yourself deeper into debt.
How do you build a good credit score? By going into debt. Does that sound like good financial advice? Having a good credit score means you can charge that vacation you can’t afford, drive that car you can’t afford, and live in that house you can’t afford.
Instead of worrying about your credit score worry about not going into debt. Having good credit can be beneficial in the long run, and if you are thinking about getting a credit card make sure to pay the whole balance every month or even every pay check.
Borrowing From Your 401K is OK Because You Pay Yourself Interest
If you borrow from your 401K then you might as well not save in the first place. Borrowing from a 401K to go on vacation or to fill gaps in your budget is never OK. If you have a medical emergency or something catastrophic happens in your life then it’s understandable to borrow from a 401K.
However, borrowing from a 401K implies that you didn’t save up an emergency fund, it implies that you don’t have control over your budget and it implies that you aren’t ready to save for retirement.
Consider this scenario: If you borrow $10,000 from a 401K and subsequently lose your job then you’ll have to pay tax on upwards of half of that money. Would you take out a 50% loan to cover your bills? I didn’t think so.
What about this scenario: Assuming you don’t lose your job you’ll still have to pay that $10,000 back. If you had to take the money out to plug holes in your budget then odds are you won’t have the money to pay the loans back. If you default on the loan then it will be considered a distribution and if you’re not 59 and a half then you’ll pay early distribution penalties.
The Advice They Should Give You
- You don’t need to go to an expensive school to get a fancy degree. If you’re coming out of school with $100,000 in student loan debt then you better be a Doctor or a lawyer. Otherwise, keep it simple.
- Before saving for retirement put all your efforts into paying off your student loans. You’ll save thousands in interest by paying them sooner than later. Having all that extra income when they are paid off frees you up to save for retirement and live the way you want to live.
- You don’t need a good credit score to be wealthy. Instead of working on your credit score work on your finances.
- Don’t borrow or distribute money from your 401k to pay for vacations, cars, or other things you can’t afford.