It’s important to respect the wisdom of our elders, but even the wise are not infallible. Old-school money advice that has been passed down through the generations is a good example of this. What worked 30 years ago may not be effective in the current economic climate. Changing circumstances require a new way of thinking.
One area where the old school and the new agree is that paying off debt needs to be a priority. The debt snowball method suggests that you focus on the debt with the smallest balance owed first, while the debt avalanche method suggests starting with the account that has the highest interest rate.[CM1] [KF2] Both are effective techniques for eliminating debt.
Outdated advice about savings and retirement
Let’s take a look at savings and retirement. Old-school advisors recommend that you max out contributions to your 401(k) plan. That’s adding up to $19,500 to your principal, based on 2021 IRS guidelines. New-age advisors suggest only contributing as much as an employer is willing to match, saving the balance to ensure better liquidity.
Another issue with the max out strategy is that contributions to your 401(k) are tax-deferred, meaning that distributions during your retirement will be taxed. The higher the overall contributions, the more you’re adding to your post-retirement tax burden. Using after-tax (net income) to invest in equities and exchange-traded funds (ETFs) will yield the same return with no tax liability.
As for traditional savings accounts, interest rates are so low that keeping your money in the bank is a losing proposition. According to the Federal Deposit Insurance Corporation (FDIC), the national average interest rate for savings accounts is 0.06%. The average rate of inflation is 2%. Do the math. That money sitting in your savings account is losing value. Find something to invest it in.
Buying a house might not be the best option
Our parents and grandparents bought their homes for an affordable price and watched the property value steadily rise. That’s no longer guaranteed. With the low interest rates instituted by the Federal Reserve in recent years, demand for homes has risen and property values have skyrocketed. You’re more likely to lose money than make it if you buy a home now.
It’s also no longer recommended that you buy more home than you can afford. This was a common strategy when home prices were still reasonable and expected to go up every year. You buy a house, take on some roommates, pay the mortgage for a few years, then sell the home and make a profit. That’s great in theory, but what if property values go down?
Understanding cost vs. value
We live in a faster and more complex world than our predecessors did. When it comes to financial decisions, it’s better to understand cost vs. value than to blindly take old-school advice. Homes cost more now and may not hold their value. Credit card debt comes with higher interest rates than mortgage debt, so paying if off first can help you save money on interest.
The general school of thought used to be to get as much education as possible. With today’s high tuitions, sometimes it’s better to specialize and focus on specific classes needed to move forward in your professional life. That’s why certificate programs have become so popular. It’s simple cost vs. value.
The wisdom of our elders is something we should cherish. That doesn’t mean we want to blindly follow their advice. The world has moved on from the simpler times they experienced. Financial decisions need to be firmly rooted in the present, not the past.
Kevin is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their eight wonderful grandchildren and two cats.