Singing Loudly: Some Money Advice to Avoid

Singing Loudly

Saturday, July 07, 2007

Some Money Advice to Avoid

Over at Yahoo! Finance, they posted an article from the Wall Street Journal about money advice 20-somethings should avoid. I have some thoughts on it...

Amass Cash:

according to some financial experts, your top financial priority should be amassing an emergency reserve equal to six months of living expenses, with this cash tucked away in conservative investments like money-market funds and certificates of deposit.

Let's be honest: This is dull, unrealistic and -- I would argue -- not all that sensible.

I disagree. It's not really all that dull to save money. It might not be as exciting as blowing it on a weekend in Vegas, but it sure beats calling up mom when the Mercedes payment, rent on the fancy loft, eating out every meal, and surprise injury that leaves you on short term disability put you too far in the hole.

He goes on to explain himself:

My advice: Forget the emergency reserve. Instead, stick at least enough in your 401(k) to get the full company match. Next, fund a Roth individual retirement account. If you still have extra money to save each year, by all means stash it in conservative investments in a regular taxable account.

If you get hit with a financial emergency, tap the money in your regular taxable account first. But you could also borrow from your 401(k). In addition, at any time, you can pull out your Roth contributions -- but not the account's investment earnings -- without paying taxes or penalties.

I'm not sure why he doesn't encourage young people to do all three. Set aside your 401K contributions up to, but not over, the point of employee matching. Then set aside enough money to fill the 4K allowed on your IRA (or whatever your max is depending on your income level). Finally, save an extra amount of money each month until you have a 4-6 month supply in an online high-yield savings account. Then you won't need to break into your retirement savings and won't feel that is an appropriate crutch to rely upon.

2. Buy Big
Borrowing a huge sum to purchase an unnecessarily large house is financial foolishness. You will saddle yourself with hefty monthly mortgage payments and a lifetime of large utility bills, maintenance costs, property-tax payments and home-insurance premiums. Rather, when buying that first home, you should strive to purchase a place that's the right size for you and your family -- and that you can see living in for a good long time.

I agree, but I would go even further. Buy as small as you possibly can and still be happy. You'll save mortgage costs, insurance, property taxes, home improvement costs, utilities, etc. All the while, you'll be helping the environment out by not wasting resources on more house than you need.

3. Get a Life:

Insurance agents often push folks in their 20s to buy cash-value life insurance, arguing that it's far cheaper to purchase these policies when you are young.

Don't do it. To be sure, under the right circumstances and with the right policy from the right company, cash-value life insurance can be a decent investment. But for those in their 20s, these policies are unlikely to make sense.

I have to say that I agree. Until you have a family that relies upon you, I don't think that cash-value life insurance is all that big of a deal. It's more of a waste of money than any real utility.

Go for Growth:

Those in their 20s are encouraged to invest heavily in stocks, because they have decades until retirement and thus plenty of time to ride out market declines. This is good advice -- in theory.

In practice, I would be a little cautious.

I disagree with this one. He goes on to say that you should put your money in 60% stocks and 40% bonds when you are in your twenties. You still have at least 30 years until you are going to retire. There is plenty of time to ride out the markets. Put your money in 80 to 90% stocks and let it sit. Perhaps if you're pulling out your money because you don't have a 6 month emergency fund you shouldn't trust the markets, but I think if you invest wisely and leave your money alone it'll ride out the markets.




I always love financial advice articles. Just wish I had more money coming in to put them to better use.

Anyway, you might like this link:

By Anonymous Anonymous, at 10:13 PM, July 08, 2007  

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