These days, financial advice is not hard to come by. Unfortunately, most of what you hear is not right. The information is skewed and the presentation overly dramatic because it comes from people who stand to benefit if you respond.
The best thing you can do is to assume everything you hear is wrong. Then confirm or refute the information for yourself, relying on the wisdom of people and resources that you know you can trust.
ä Life insurance. You’ve heard that everyone needs life insurance — even children. That is wrong. The purpose of life insurance is not to pay for burial. The purpose of life insurance is to replace your income for those who now depend on it and-or to pay for services — for example, child care and housekeeping — that your family would require in your absence.
Do you need life insurance? Ask yourself this question: If my income or the services I perform for my family were to disappear suddenly, would anyone be left in dire financial straits? That is how to decide whether you need life insurance. Except in the case of sophisticated estate planning, life insurance should not be combined with investing or other financial activities. (Before I get a lot of angry mail from insurance salespeople, let me stress that I’ve heard all of your arguments. I am not easily dissuaded.)
ä Credit counseling. You’ve heard there are nonprofit credit counseling companies that will help you pay your credit card debt in full for only 25 to 50 percent of the amount you owe. That is wrong. Though a reputable nonprofit credit counseling organization can be a lifesaver for someone in the fast lane to bankruptcy court, credit counseling is not a panacea. Credit counselors sometimes can negotiate lower interest rates, but debt reduction? In your dreams.
Most creditors who agree to lesser terms negotiated by a third party will report the debt as being paid late or unsatisfactorily. That could mean a seven-year black eye on your credit report.
ä Tax-deductible. You’ve heard that you should not pay off your home mortgage because the interest is tax-deductible. It is, but that reasoning is wrong. Deductibility is a consolation prize. It softens the blow on expenses that cannot be avoided.
Example: If you are in the 28 percent tax bracket and pay $1,000 in deductible mortgage interest a year, that translates to a $280 reduction in your tax bill. If you pay off that mortgage, you lose the $280 tax relief. But guess what? You get to keep the $720, too. Who in his right mind would choose to pay $720 to get back $280?
ä A miserable life. You’ve heard that if you live within your means, you never will have anything nice; you’ll have to find your food in a trash bin and your children will hate you.
That is wrong. Add up your debts. See that number? That’s misery. Seeing those debts melt away to $0 is not. How much do you pay in debt payments each month? Just imagine if that money stayed in your bank account, not in your creditors’.
Living well below your means is what leads to peace of mind, joy and abundance.
Mary Hunt is the founder of www.DebtProofLiving.com and author of 18 books, including “Debt-Proof Living.” You can e-mail her at firstname.lastname@example.org, or write to Everyday Cheapskate, P.O. Box 2135, Paramount, CA 90723.