Financial Tips
Everyone’s situation is unique and what works for some is unwise for others, and vice versa. But there’s advice so common it’s hard to keep that common-sense truth in mind.
Here are a couple usually strategies that in the wrong situation can backfire and cause more damage in the long run: Put as much as you can into your 401(k) or IRA. Like all investments they differ depending on your personal situations. So best to consultant a professional if you have questions, or simple not sure what is best.
The mantra of many retirement experts falls into two camps: “save” and “save more.” Deferrals of 10% and 15% of pay are often touted as ideal. While planning for the future, it’s naive to not at least consider your current reality. If all you can legitimately kick in is 2%, so be it. At least you are doing something and setting the stage for when times are better.Another scenario where pumped-up contributions may not make sense for everyone is when it comes to creating an emergency fund. Experts advise that having an emergency fund of at least three to 12 months of salary is important, to help in the case of disasters such as unemployment, an unexpected illness or the always poorly timed car breakdown.
On paper, your money will do better in a 401(k), especially if it can leverage an employer match, or an IRA because there will be — in all likelihood — a far better return on your money than the typical savings account. But if you have little or no emergency savings, that money can be costly to extract when needed — a 10% penalty on top of additional state and federal income taxes. You also lose the future value of compounded returns.
Buying property is better than renting.A common refrain, even on the heels of the bursting real estate bubble, is that renting an apartment is “throwing money away” compared with home ownership and the ability it offers to build equity and wealth.
As if staggering foreclosure rates and underwater mortgages aren’t enough to make a different case, consider that it is not just mortgage payments to worry about. There are interest payments, property taxes, homeowner’s insurance, furnishings, utility bills, maintenance and repairs to add to the mix.
Treating a home as an always-appreciating investment is no longer a smart strategy, and those who base their ability to pay a mortgage on projected earnings, rather than current paychecks, may be dangerously optimistic.
Tags: car breakdown, emergency fund, future value of compounded returns