New personal finance rules?
It’s time to break with some tried-and-true personal finance lessons, especially with interest rates low and credit increasingly available. Or so the article argues. What are rules?
1) 401(k) Loans: Old school advice: Avoid taking one at all costs.
Now: The most affordable loan available.
2) Roth IRAs: Old school advice: Convert a traditional IRA into a Roth to save on taxes.
Now: Stick with the IRA.
3) Mortgages: Old school advice: Choose the mortgage with the smallest interest payments.
Now: Go with more interest.
4) Credit Cards: Old school advice: Refrain from using them.
Now: Swipe – with caution.
I’m not a fan of the new rules. Yes, IRA owners should heed the caution about converting to a Roth. There’s far too much hype in the Roth conversion market. And, yes, it’s fine to use the credit card sparingly if you pay off the balance in full. But that has always been the case. You can use the credit card frequently if you pay off the balance in full every month. It isn’t really a new rule. It’s simply standard advice.
More questionable is the approach toward borrowing with a 401(k) and a home.
Take the advice to borrow from your 401(k) because it’s the cheapest loan available? The actual advice is nuanced with plenty of caveats. But a 401(k) loan is only cheap money if everything goes right. It’s still a risky loan with a 9% unemployment rate and the broadest measure of unemployment and under-employment at 16.2%. Downsizing, restructuring, and job losses remain all too common. And when you lose your job you have 6 months to pay back the loan or its considered an early distribution. The bigger problem for most workers is not saving enough, not finding the cheapest source of borrowed money.
A smaller downpayment on a home? Maybe it’s better not to buy.
Fact is, the old rules are broad-based. The new rules are niche insights. For some people, they make sense. For a majority of folks, I doubt it.
What do you think of the new rules?
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