Yesterday I was reading a piece about retirement planning. The author, a popular money guru, was making the case that before anything you should save toward retirement. I laughed when I read it because as an artist who also works with artists, I’ve learned to challenge assumptions. Most of the creative people I work with would like to retire, but they’re also into living a balanced life: they aren’t going to give up their art today to put a few more dollars in the retirement bucket.
I believe that we should naturally challenge some of the common assumptions when it comes to finance. Here are a few I could think of, and maybe you’ll have more that you can add in the comments.
“Good” and “Bad” Debt – I’ve heard these terms used too often. Let’s set the record straight: debt is neither good nor bad. A credit card isn’t necessarily bad and a mortgage isn’t necessarily good. Here are a couple of contrary examples:
Credit card as good debt – A responsible person uses credit cards to rack up big points toward airline miles, hotel stays, and other reward. She pays the card off every month and never pays interest. Sure, she owes the credit card company each month, but because she pays it off and earns rewards, I’d consider this “good debt.”
Mortgage as bad debt – A man uses 35% of his income to purchase a house, only because the bank says it’s “okay.” Because he doesn’t have enough for a 20% down payment, he also owes PMI insurance, which costs his family even more money each month. The loan has a pre-payment penalty if he tries to pay it off in the first several years, and because he has bad credit, his interest rate is 9% on the loan. Sure, he gets a tax break, but the high interest rate, high percentage of his income and PMI all combine to make this a “bad debt” in my book.
Here’s another good housing assumption you should challenge: Buying a house is better than renting. Who created this assumption? I often hear mortgage people talk about “throwing money down the toilet.” That may be the case if you buy a home before you’re ready. Remember when you purchase a house to evaluate all of the costs involved. Homeowners routinely shell out money to landscape and buy nice furniture. Homeowners have to purchase appliances and pay property taxes. Also, don’t forget that homeowners have to pay all the utility bills, while sometimes some of these are rolled into the rent payment. Maybe in your situation owning a home equals throwing money away.
Social Security won’t be around when you retire. I heard someone on television say this recently. Then I began to think…what would have to happen for Social Security to become extinct? Our legislators would have to agree to let the biggest social program in America fail. While I don’t nece
ssarily believe that will happen, I have to admit that I don’t mind where this assumption is headed. There may be big changes to Social Security over the next several years, so I’d like to count on it for “extra” things, rather than depend on it for retirement.
Student loans crush students. This has been in the media a ton recently, hasn’t it? While student loans aren’t my first choice when paying for college, sometimes they’re a necessary evil. The real problem? Unrealistic job expectations by students who take on debt. In your creative endeavors you already know that anything can be risky. When you spend money toward increasing your education, you should evaluate the chances that this is going to lead to a higher paying job. If it does, take out the calculator and analyze how much more money you’ll need to make to make the loans worthwhile.
…on the subject of college, if you have children as students you also often find a surprise. While the cost of education is expensive, the fact that they aren’t living at home often becomes a cost transfer. Your grocery, gas, and home spending usually decrease, making some room and board charges a “cost transfer” for people. In this case the assumption that college is expensive is true, but it might not be as expensive as you’d originally imagined.
Whole life insurances are bad. While I’m usually a fan of term life insurance over whole life coverage, I don’t believe this assumption because there are cases where whole life makes more sense. If people are estate planning or have a need for coverage later in life, whole life coverage can be the right choice. How do you know? Rather than use a rule of thumb like “whole life insurance is bad,” consider how and why you need coverage. In fact, this is an important tip for all of your insurance needs.
Luckily for you, assumption crushing is in your genes. If you’ve been an AbundanceBound reader for any length of time, you’re probably not the type of person who works “inside the box.” Keep challenging and you’ll find good things happen to your financial plan!