Bad advice: Do not save money for yourself until you have paid off your credit cards. Direct every cent you can scrape together to pay down your credit card debt as quickly as possible. It’s not smart to earn 1 percent interest on money you save while you are paying 20 percent or more on your credit card debt.
Good advice: That bad advice sounds great, but let’s get real. If you do not have an emergency fund, what will you do next month when your car breaks down or next summer when you lose your job? You will run back to your credit cards for a bailout. Unless you are aggressively building an emergency fund, you never will get out of debt because unexpected expenses always come up. Instead, you should pull back to making only minimum payments so you can start saving money now. You need to stash all the cash you can, to be used only in a dire emergency. Once you have that fund in place, you will be ready to tackle your credit card debt with a vengeance.
Bad advice: Purchase whole life insurance for children. The cash value will pay for college. It guarantees insurability should that child develop a health issue later that would make him or her uninsurable, and it will pay for the child’s funeral if that becomes necessary.
Good advice: The only purpose for life insurance is to replace income for dependents who would become financially destitute if the breadwinner were to die. If you want to save for college, life insurance is not the way to do that. Instead, set up a 529 savings plan or another type of savings or investment vehicle. If you are con-cerned about a funeral (statistically, the chances of a child’s dying are very small), create a funeral account. As for the insurability issue, chances that your child will become uninsurable for health issues are very slim. Unless you have money to burn, buying life insurance on non-wage-earning individuals who have no dependents is a terrible waste of money.
Bad advice: Do not pay off your mortgage, because you would lose a valuable tax deduction. Mortgage interest on your principal residence is a deductible expense on your federal tax return. Even if you can pay off your mortgage, don’t do it. If you don’t have a mortgage, get one so you can claim this tax advantage.
Good advice: Deductibility is not a wonderful thing. It’s a “consolation prize” to ease the pain of having to pay interest. If you pay $12,000 a year in mortgage interest and you are in the 22 percent tax bracket, you get to deduct $12,000 from your gross reportable income. That means a tax savings of $2,640 ($12,000 times 22 percent equals $2,640). You pay $12,000 to get back $2,640. Does that sound great to you? If so, I’ll give you a better offer. Send me $12,000, and I’ll double it and give you back $5,280. Deal?