These days we Google everything, including money tips. There are so many tips out there, the right way and wrong way, and then disputing each way….. it is confusing and it’s no wonder so many people are broke! How do you know what is the right advice?
Even as a Financial Planner I have to admit that a lot of my money views have changed over time the more financial courses I take, the more successful Planners I work with, and even the more wealthy clients I get to work with over the years. I have the advantage to pick their brains from their money lessons.
Here are 3 Financial Tips that I have thrown out the window and the alternatives that you can apply to your money instead:
1. Pay off your mortgage early
This is probably the worst piece of advice ever, with one exception, which I will explain in a bit.
Paying off your mortgage early is the number one finance tip from people like Dave Ramsey, his daughter, Rachel Cruz, or the FIRE community. They focus on the interest you will save over the long run by paying it off early. It makes sense….. However, there are two sides to this story.
First of all, I hate to be the bearer of bad news, but your house isn’t actually an investment. It is a lifestyle and a forced savings account. The value of your house will likely appreciate over time, not always, and it depends on when you bought and when you sell. Your house is not a liquid investment, meaning that if you have an emergency or want to go to Hawaii for a vacation, you can’t just draw money out of your house. You will get the money back when you sell it but you will still need a place to live once it is sold. With interest rates being as low as they are, take the extra money and invest it. This is even better advice if you are a business owner and look at interest rates versus tax rates.
Putting money into an investment will grow your money faster than your house. Plus, it’s liquid. If you need the cash, you can have the money out of your investments within a few business days.
The only time I recommend paying your mortgage off early is if you don’t qualify for life insurance. Why? Mortgage’s tend to be our biggest debt and if you pass away, your family is still obligated to pay that debt, or sell the house, which doesn’t happen over night. Not every one qualifies for life insurance. If you don’t – pay off your debts as fast as you can! And don’t buy the life insurance offered through your mortgage – it is not guaranteed to pay out!
2. Don’t buy Permanent Life Insurance
This is another one of Dave Ramsey’s favorite financial tips. Buy Term Life Insurance because it’s cheaper and invest the difference. The problem with this? 99% of people don’t invest the rest! The other problem with this? For the majority of Canadians, CPP and OAS are the biggest portion of a person’s retirement portfolio. If you are married and both you and your spouse rely on each other’s CPP and OAS income in retirement, when one of you dies, so does half of their CPP and all of their OAS benefit. Chances are, one of you will live longer. Chances also are that you will live past the age of 65 when the majority of Term Life Insurance policies expire or increase exponentially in premium making it unaffordable. You will likely outlive your Term Life Insurance, that’s why it’s cheap. That’s why you need a Permanent Policy.
Permanent Life Insurance has so many uses and wealthy people buy it all the time. The younger you are, the cheaper it is, so buy it early! It is an investment. The best thing about this investment is that earnings are typically around 6% and the lowest it will go is 0%. It is not volatile like other investments these days.
Permanent life insurance will replace your CPP and OAS for your spouse. They need that. You both do! Plus, it can be used for so many things. It is more expensive to buy, yes, but it is more versatile and has many more uses than most people realize.
3. Save for your child’s education with a RESP and avoid student loans
Don’t worry, I was once suckered into a RESP as well. They sound so good; they are so easy to sell – building hopes and dreams of what the future will bring for your child because now they can be anything they want to be – blah blah blah. We want the best for our kids and it’s an easy dream to sell.
Often a lot of people ask me what the fees are on their investments, but the funny thing is, they never ask what the fees on a RESP are. Does it really matter when you are getting “free” money from the Government for your child just for contributing? Yes, it does!
The reality is….. the fees are insanely high with a RESP to cover administration costs. If you have ever started one for your child you know how lengthy the whole application process is. I swear those things have a hundred pages! And every page costs you a lot of money because of all the different people that are involved to set it up and manage it over time. The positive side is that you are giving a few people a job and everyone deserves to earn an income, however, you are throwing away money that should go to your child instead. Or even to you.
What should you do? My best advice is to set up a Permanent Life Insurance policy for them. They earn more interest in the end because the administration costs are a lot less, plus your child can use it for so many other things than just school, like start a business. Or use your own TFSA to save the money. You will earn way more interest in the end.
On the flip side, student loans are not a bad thing! I used to think they were evil and that’s how I was so easily sold on a RESP for my son. They are tax deductible (RESP’s are taxable), they have a low interest rate and no interest while going to school. This is great if you use your TFSA to earn interest while they are going to school and then giving them some money towards their student loan when they are done. It is so much more flexible in the end than an RESP.
It’s not easy to find good financial advice and every person’s situation is different and requires a different plan. One size does not fit all! If you are struggling to find the right financial advice, I hope I can be the person to work through that with you.