Is It Good Advice, Or Not?

A recent Yahoo Finance article says, “Five Pieces of Free Financial Advice You Can’t Afford To Take”. In other words, the article says each one of these ideas is bad. Hmm…let’s see how many of these we agree with….

1. Your basic expenses in retirement will be much lower – we agree this is false, for two main reasons – healthcare and travel. Both will cost more in retirement.
2. To build wealth, you must be willing to accept risks – they are saying don’t invest in Wall Street, and that “millions of Americans have opted for steadier, safer ways to build a healthy nest egg.” But they don’t tell you in what. So I will agree with this assuming they mean to not invest your nest egg into single stocks. But avoiding “the market” altogether is a bad plan. What is a good plan is buying mutual funds through retirement accounts such as 401k’s and IRA’s. Now, a mutual fund is simply a collection of stocks. So you are still “in the market”, but in a much less risky vehicle than single stocks. That’s the way to go. But realize there is still some risk.
3. You’ll come out ahead deferring your taxes – Again, the article doesn’t provide enough information but I think we agree. If you are young enough (in my estimation, younger than 50-55) I recommend Roth IRAs and if possible the Roth 401k. You are paying taxes now (so you are not deferring) and you will pay no taxes on the growth in retirement.
4. Fees for mutual funds are negligible compared to returns – Here I disagree, but you have to be careful. This assumes that you will only pick average mutual funds. The consensus is that the average managed fund doesn’t do better than a no or low-cost S&P 500 Index fund, and while I do agree with that, we teach people to find mutual funds that out-perform the S&P. That’s why it’s called an average. So, don’t be average! Find an excellent one and invest in it.
5. Pay off your debt before you try to save money – Once again, not enough info. Saving is actually a two step process. Here’s the plan: Baby Step One is to save $1000 as fast as you can. This is your baby Emergency Fund. Not enough to cover a huge expense, but enough to cover most smaller things that come up. Got kids? OK, maybe you increase that to $1500. But the point is, get this into savings and don’t touch it for ANYTHING except an emergency. Then, Baby Step Two is to pay off your debt as fast as you can. You have to get mad. Get visceral. You have to be so pissed off that your heart rate increases. Be done with debt, everything but the house. THEN, once Baby Step Two is 100% complete, circle back and beef up that Emergency Fund to 3-6 months of your household expenses.

So I think we agree with most of what’s in this article but they could have done a better job of explaining a few things.