BOSTON ( TheStreet) -- Even the most well-intentioned personal finance advice and most standard, accepted bit of conventional wisdom on money matters can be bad in the wrong situation.Of course 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.
|Following the conventional wisdom on investing isn't always certain to fill your piggy bank.|
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. Boost your deferral rate as high as you can.
Even if you have an above-average salary, is a bigger deferral rate necessarily better? Choosing how much to contribute isn't always so simple. "If you contribute too little to your 401(k), you may not get the full employer match," says Robert J. DiQuollo, president of Brinton Eaton, a New Jersey financial planning firm. "On the other hand, if you contribute too much, too fast, you can shortchange yourself." DiQuollo uses the example of an executive making $20,000 a month who contributes 20% to a 401(k), with a 5% company match. He or she will reach the IRS' annual contribution limit of $16,500 in May and can't contribute for the rest of the year.
A common refrain, even on the heels of the bursting real estate bubble, is that renting an apartment is "throwing money away" compared with homeownership 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. Make paying off debt a priority.
Reducing your debt and excising the interest payments and accompanying fees is usually a good idea. But paying down debt shouldn't derail a savings plan. It is important to knock down those credit card bills, but be careful you don't shortchange your retirement savings or emergency fund to do so. Also, not all debt is bad, suggests Morrison Creech, head of private banking and executive vice president for Wells Fargo Private Bank ( WFC). In a recent interview with TheStreet, Creech suggested that if you have debt maturing in the next 24 months, you might consider extending that to a five- or 10-year horizon and taking advantage of the current historically low interest rate environment. If you are contemplating additional debt over the near term again, locking in a rate now would be advantageous. For some, allotting money that would be used to pay down low-interest debt might be better used to improve liquidity, diversify portfolios and mitigate risk, he says. -- Written by Joe Mont in Boston. >To contact the writer of this article, click here: Joe Mont. >To follow the writer on Twitter, go to http://twitter.com/josephmont. >To submit a news tip, send an email to: email@example.com.