3 Totally Common Financial Tips You Should Probably Ignore

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Whether you get your financial tips by asking friends and family or checking out library books, attending seminars or searching online (at sites other than DailyFinance), impractical pieces of advice abound.

Too many personal finance experts tend to populate their cable appearances, books, columns and blogs with the same simple tidbits. But some of that common advice is also ... useless. For each of these three cliched tips, let's look at some better alternatives.

1. In Debt? Cut Up Your Credit Cards

Certain financial gurus advise people in debt to cut up all their plastic and consider using credit cards the eighth deadly sin. Here's some advice: don't.

People land in debt for various reasons, and some -- like student loans -- don't have anything to do with credit cards.

If being a unable to pass up a sale or discount clothing bin is your trigger for getting into massive amounts of debt, then put your cards in a lock box and back away. If you fell into some bad luck and used your credit card for an emergency, consider a balance transfer.

But just because someone is in debt and wants to get out of it doesn't mean they're going to stop spending money entirely. People still need to eat, gas up the car, and deal with the occasional unexpected expense.

Some may counter that it's best to use a debit card, but consider the ramifications of debit card fraud. A compromised debit card gives thieves direct access to your bank account. While most banks will cover the majority of money taken from your bank account, it's an extreme hassle to deal with. When a credit card is compromised, the issuer typically reacts quickly -- possibly even before the customer notices -- and offers 100 percent fraud protection. A credit card should be used for all online purchases, and you need one to rent a car -- otherwise you'll get a hard inquiry on your credit report for using a debit card.

It also helps to have a low-interest credit card for emergencies. Think of it as a fire extinguisher housed in a glass case. You don't want to break that glass unless you really, really need it. But you do want the fire extinguisher to be there.

2. Have a 20 Percent Buffer (or Any Buffer) in Checking

Undoubtedly, it's preferably to have a buffer in your checking account to avoid overdraft fees, but two types of situations cause overdraft fees.
  • Person A is forgetful, forgets a recurring charge or neglects to check his or her balance before making a purchase.
  • Person B uses overdrafts as a form of short-term borrowing because he or she does not have enough money to get by without going overdraft.
Person B doesn't need to be lectured about keeping a buffer in his or her checking account.

About 38 million American households spend all of their paycheck, with more than two-thirds being part of the middle class, according to a study by Brookings Institution.

It's simple for personal finance experts, writers and advisers to recommend tightening up the purse strings, doubling down on paying off debt, and moving out of the paycheck-to-paycheck lifestyle.

Those looking to avoid overdraft fees should evaluate their banking products.

But those who don't have assets and who struggle each month to make ends meet don't need to hear people harping about avoiding overdraft fees by "just saving a little bit." Every little bit counts for them.

Instead, let's offer practical advice: Those looking to avoid overdraft fees should evaluate their banking products.

Investigate and find out if your bank reorders your transactions. Some banks will change the order in which they process your transactions at the end of the day, so they can maximize the number of overdraft fees they charge.

Internet-only banks are revolutionizing how people can interact with their banks and their own money. Internet-only banks often offer higher interest rates, don't charge monthly maintenance fees and reimburse customers for out-of-network ATM fees. For example, Simple, an Internet-only bank based out of Portland, Oregon, doesn't charge overdraft fees.

Ally Bank (ALLY) offers real overdraft protection by linking a savings account to checking. If you overdraft, it will take $100 out of your savings to cover your overdraft -- free of charge.

Americans who use overdraft fees as a form of short-term lending may want to set up a line of credit with a credit union or have a low-interest credit card for emergencies.

3. Skip That Latte!

Many years ago, David Bach created a unifying mantra for frugalistas and personal finance enthusiasts. The "latte factor" was that you could save big by cutting back on small things.

Bach's deeper concept -- that each individual needs to identify his or her latte factor -- got lost in the battle cries, with many people crusade specifically against your daily cup of coffee.

Yes, people should be aware of leaks in their budget. But everyone's budget looks different. If "Summer" buys a coffee each day, but rarely buys new clothing, and trims her budget by cutting cable and brown-bagging it to work, then leave her alone about her caffeine habit.

People are allowed to live a little when it comes to their personal finances, whether your little splurge is organic food, name-brand snacks or triple-ply toilet paper. Most people, except for maybe those on TLC's "Extreme Cheapskates," could find more ways to trim the budget.

But why keep trimming? It's important to save for the future, but it's also imperative to enjoy life in the present. Personal finance shouldn't be a culture of constant denial.

Create a budget, figure out if you can work in an indulgence or two, and don't live in complete deprivation

For those working to dig out of seemingly insurmountable debt, then yes, it may be time to identify and limit your latte factor.

Decide What's Right for You

Personal finance experts, bloggers, reporters, advisers are well intentioned in their advice. Certain personal finance idols truly believe everyone should use cash, while others hawk prepaid debit cards claiming they're a great tool. Okay, maybe sometimes personal finance experts are a bit self-serving and not looking out for your best interests. Just keep in mind, personal finance is indeed personal. A generic piece of advice, like keep a 20 percent buffer in your checking account to avoid overdrafts, may not be helpful in your personal situation.

Erin Lowry writes for DailyFinance on issues relating to millennials, money and personal finance. She is the blogger behind Broke Millennial, where her sarcastic sense of humor entertains and educates her peers. She is also the brand and content manager for MagnifyMoney.


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18 Comments

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Sarah Murchison

Getting rid of credit cards is numero uno. That debt can prevent any fiscal growth for you and your family. Try investing in something like precious metals. They really boost your portfolio's potential and all your funds in the long run. https://www.sdiraservices.com/ira-resource-center/gold-and-precious-metals-ira-investing

August 05 2014 at 1:20 PM Report abuse rate up rate down Reply
alfredschrader

1. Pay your bill on time.
2. Put it all in the bank.
3. Make your own latte.

July 29 2014 at 2:11 PM Report abuse rate up rate down Reply
Valerie

The author of this article is quite young --- and her lack of financial experience shows in what she has written.

Advising anyone how to work the banking system and avoid changing a habit of not keeping track of your checking account balance (resulting in NSF checks) is essentially bad advice. The solution to that problem is simple. Don't spend more than you have in your checking account. No one ever got rich by paying overdraft fees to financial institutions.

Relying on a credit card to provide "cash" for emergencies is also bad advice. The tougher it is for you to save money to build a CASH emergency fund --- the more you need to do that. (Just for the record --- buying a new iPhone, or a new pair of cute shoes, or the latest video game is NOT an emergency.)

Also, this writer has not yet realized that those "little money leaks" she claims do not matter are the ones that have the potential to to add up and sink your financial boat. What she wrote, about that, is just a variation on an old excuse for not being a serious saver: "I work hard --- so I deserve to reward myself with some "fun stuff" because I want it."

When she gets a little older (and, hopefully) a little wiser) she will probably flinch with embarrassment when she looks back at this article.

July 28 2014 at 11:45 PM Report abuse +1 rate up rate down Reply
1 reply to Valerie's comment
RANDYTHOMAS711

You hit the nail on the head!

July 29 2014 at 1:44 PM Report abuse rate up rate down Reply
elaineen

I started saving after I purchased my first new car. I financed it through my credit union and the payments were deducted from my paycheck. After it was paid off the deductions continued and were added to my savings account. Of course you must resist the urge to buy a new car.

July 28 2014 at 12:29 PM Report abuse rate up rate down Reply
1 reply to elaineen's comment
jpfmtka

What urge? I love my 1997 Jeep Grand Cherokee. Has served me well and still does everything it was designed to do. Plus, since it has always been property maintained and garaged, unless you really know your cars, one would not know it's age. Oh, and did I mention the annual registration is $31.00 and full coverage (yes.. full coverage) plus a million dollars of liability runs just over $300.00 a year? Keep the old cars!

July 28 2014 at 1:46 PM Report abuse +2 rate up rate down Reply
2 replies to jpfmtka's comment
kitharris1

who is your insurance company? i want them!!!!! i have to have a separate policy to get that kind of liability coverage. mine is called an umbrella policy but it does cover more than car liability. i cover 300k under the car policy and the umbrella takes over after that.

July 28 2014 at 4:14 PM Report abuse +1 rate up rate down
Valerie

@ jpfmtka --- Very good advice.

I currently drive a 2005 Chevy Impala, which I bought when it was two years old and paid $9,500 cash for that purchase. (All the money down and NO car payments = no money wasted paying interest on a car loan to a finance company. LOL)

The car has given me nine trouble-free years. All I have had to pay for is routine maintainance. Just bought a set of tires and a new battery for it last December, which are the first "major" items it has needed.

Insurance cost for this vehicle is less than 50 bucks a month. I'm planning to keep on driving it as long as it will run. My advice?? Take care of your car. Keep it maintained, wash and wax it regularly, get it detailed once a year, and change the oil regularly, and you can probably drive it for 20 years before you need to think about paying for another car.

July 28 2014 at 11:20 PM Report abuse rate up rate down
Prudence Debtfree

I respectfully disagree with your advice to keep a credit card for emergencies. The "fire extinguisher" is definitely needed, but it is best to have it in the form of an emergency fund. The fact that so many households spend all of their pay might make saving such a fund seem impossible. But in the vast majority of cases, it isn't. For a period of time, many people really do need to cut back on their lattes - and anything else they can manage to do without - to get on the right track. It's not a forever deprivation. And sometimes, we start out by "depriving" ourselves of something only to find out in the end that we don't miss it. I'm with Dave Ramsey on this: It's not easy to get on the right track. Cutting costs, saving an emergency fund, and reducing debt all go against the grain - initially. I know that from personal experience. But I also know that people are resilient. We're tougher than we realize. A period of discomfort gives way to confidence and peace. It's worth it to feel deprived and out of our comfort zone for a while.

July 28 2014 at 10:45 AM Report abuse +1 rate up rate down Reply
2 replies to Prudence Debtfree's comment
jpfmtka

We may be tough and benefit from some discomfort and deprivation, but if what happens in a true emergency? Yes, we should all have savings, insurance and a back up plan but what happens in a true emergency? Do you never travel? On my last cruise vacation (last month) a passenger required not only evacuation via medical hospital to the mainland, but subsequent med-evac to a city where they could be properly assessed and treated. I am guessing IOU's might have been the accepted form of payment. (Cruise lines will not even accept cash for any ancillary onboard or shore excursions).

What if a loved one encounters a problem and needs financial help? Are you going to phone an airline, hotel, or car rental company and tell them you will send them a check tomorrow if they help today? Doubtful.

For the record, we have always been "cash paying" folks but credit cards, paid off monthly, can reap significant rewards in terms of convenience, safety and flexibility. Just because you have a credit card does not mean or assume one will abuse it.

July 28 2014 at 2:10 PM Report abuse +1 rate up rate down Reply
3 replies to jpfmtka's comment
Valerie

@ Prudence --- Good advice, but most people won't follow it. They are focused on staying in their comfort zone --- not on saving and having a better life.

Dave Ramsey is right on target about this. Saving is definitely not an easy habit to learn. It's basically simple --- but not easy. You have to REALLY want a better financial future much more than you want to continue doing the same stuff that has resulted in you being constantly broke and worrying about money.

People who are broke and in debt tend to take advice from others they know who are just as broke as they are. (That's part of the comfort level.) They also usually make the pursuit of constant entertainment their first priority in life. Acquiring financial knowledge isn't a big priority for someone living from one paycheck to the next. Entertainment is No. 1. If they ever sit down and write out a list of everything they are spending $$ on that fits under the heading of "Entertainment", their list would be very long.

Making a decision to cut expenses (starting with entertainment) and save money can be very scarey, at first. (The unknown path is always scarey.) It takes courage to break out of the same spending and debting pattern that everyone you know is following. But, you won't feel that uncomfortable forever. After a while --- when you see your savings balance growing --- THAT will feel better than mindless spending ever did.

July 29 2014 at 12:10 AM Report abuse rate up rate down Reply
1 reply to Valerie's comment
Prudence Debtfree

Fortunately, there really is hope for people who need to change their money habits. You did a good job of describing the way I used to be - spending far too much money on entertainment because I "needed" it, while at the same time feeling overwhelmed by expenses. You hit the nail on the head when you said, "You have to REALLY want a better financial future much more than you want to continue doing the same stuff that has resulted in you being constantly broke and worrying about money." My husband and I reached that point after a period of financial distress following his job loss. We have changed our ways, paid off significant debt, and are on our way, I believe, to solid financial health. So people with their heads in the sand really can change. We did : )

July 29 2014 at 10:49 AM Report abuse +1 rate up rate down
socioeconomist1

I don't want to be sexist, but every time a woman writes a story on here, it is usually a waste of time to read... This whole essay could have been summed up by simply saying "Have discipline with your spending habits if you don't want to be a broke ass"

July 28 2014 at 10:00 AM Report abuse -2 rate up rate down Reply
1 reply to socioeconomist1's comment
kitharris1

if you are married, i sure hope your wife doesn't read your comment! lol

July 28 2014 at 4:17 PM Report abuse rate up rate down Reply
MarketingDivaDeb

To re-evaluate your checking account, build a small savings 'buffer' and avoid high fees, you failed to mention the easiest method: JOIN A CREDIT UNION. (where do you think Ally Bank got the idea of over-drafting from a savings account?) #100mm

July 28 2014 at 9:56 AM Report abuse +3 rate up rate down Reply