Everyone has that one person they turn to for financial advice. Whether it’s a relative, friend or co-worker, we like to hear other opinions before making key financial decisions. But, have the people we listen to been brainwashed into offering the same static answers that have been around for years? Let’s take a look at three “common sense” financial suggestions that might not be so true anymore.
Use your debit card rather than a credit card. Yes, this is absolutely the best practice for those who lack the discipline to spend within their financial means. But for those who might see a great deal now and know they will have the money at a later date, a credit card might be the way to go. Plus, there are incentives with credit cards like cash rewards, airline miles and other reward points.
If your credit card is lost or stolen, your cash won’t be tied up while it is sorted out. If your debit card is compromised, money in your checking account could be tied up for a while. But remember there is interest to pay if you carry over a balance month-to-month.
Never borrow against your 401(k). This was the common thought process for many years, but let’s look at what it actually costs you to borrow against your 401(k). The going rate on 401(k) loans is prime plus 1 percentage point. And that gets paid back to yourself, so you are actually paying yourself the interest.
It is true that if you leave your job while you have a loan outstanding you may have to pay back the loan immediately or consider it a taxable distribution and cause yourself a big tax hit. But if you plan to stay in your job and need the money, for a medical problem or other emergency, and you know you can keep up with the payments this might be a better deal that an unsecured loan or credit-card debt.
Don’t carry mortgage into retirement. Why not? Instead of making extra payments along the way to end the mortgage early, take that money and invest it into a retirement investment account. It would almost certainly earn more than the 4 percent mortgage interest you are paying.
Then when you retire you have that cash on hand instead of the paid up mortgage. Use that cash for those payments. Paying off a low-rate mortgage slowly while you bank the money can be a better solution than paying it off now and finding you need a costly reverse mortgage in the future.
These are just a few of the common notions we have heard through the years that aren’t always sound. Speak to a financial representative or mortgage expert about what might be the best route for each situation.
Michael Drapeau is Rabobank, N.A. Financial Services Officer in Murrieta. Rabobank, N.A. has nearly 120 retail branches in California, including Murrieta. Rabobank, N.A. is an Equal Housing Lender. www.rabobankamerica.com