Photo: ThinkstockBy Suze Orman
Bad financial information doesn't come only from scammers; even our loved ones can unwittingly steer us wrong. That's why knowing what not to do with your money is often your biggest asset. In general, there are two little words that should set off everybody's suspicion meter: Trust me. Anyone who gives you this line--whether a financial adviser or your significant other--is disrespecting you. You should never entrust a money decision entirely to someone else. I know, I know: Sometimes you'd rather pass the buck. But remember, we're talking about your security, your future, your peace of mind. It's one thing to hire an investment adviser to help you choose funds for your IRA, or to cheerlead a spouse as he or she sets up a 529 plan to help pay your child's college tuition. It's quite another to tune out completely.
Find an hour or so a month to peruse a personal finance Web site or a magazine like Money or Kiplinger's, which will keep you up-to-date on the basics. The blog at Mint.com is also a great resource, with posts on everything from choosing a mortgage to spotting medical bill errors. By educating yourself in these simple ways, you'll sidestep all sorts of traps. Here's some common advice you should disregard--and more profitable leads to follow instead.
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Don't Buy It: "Your child's college degree is a great investment."
A blanket statement like this is missing a crucial qualifier: An affordable college degree is a great investment. The unemployment rate for Americans 25 years of age and older is a lot lower for college graduates than for those with only a high school diploma (3.9 versus 8.1 percent). But that doesn't mean you should tell your kids to set their sights on any school--regardless of whether it will leave you with a crushing amount of debt. All too often, parents fail to strategize when it comes to paying for education and end up getting off the track to retiring comfortably. Ironically, this does kids a major disservice: If you lack sufficient retirement savings down the line, your children are the ones who'll bear the burden of supporting you.
A Better Idea: Think in terms of long-run affordability. (This goes for you and your child, since I firmly believe kids must borrow for school before parents dip into their savings or take out a loan.) Mark Kantrowitz, publisher of FinAid.org, says students should limit their total borrowing to an amount no greater than what they can reasonably expect to earn in their first year of full-time work; borrow more, and the odds of running into payback problems and default soar. Check out typical starting salaries at Salary.com; even if your child doesn't have a specific career in mind yet, it's a great exercise for families to do together, to start getting grounded in post-college reality.
When it comes to financing options, remember that federal Perkins and Stafford loans offer the best deals; private loans are risky and can end up being far too expensive. The maximum Stafford loan amount a dependent student can borrow for all undergrad years is $31,000. Parents who want to chip in should first figure out if they can afford to do so by using the T. Rowe Price Retirement Income Calculator and then look into federal PLUS loans. Finally, your child should apply to at least one public institution; if money is extremely tight, there's also the option of attending two years of community college (whose credits are usually transferable) and finishing at a four-year school.
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Don't Buy It: "Renting is a waste of money."Buying a home can of course be a wise investment, especially considering today's record-low mortgage rates. But that doesn't mean choosing home ownership over renting is right for everyone. In some regions of the country, the cost of owning may still be higher than that of renting (to account for total ownership expenses, including property tax and maintenance, my rule of thumb is to add about 30 percent to the base mortgage amount). And while home values may be stabilizing in many parts of the United States, that doesn't mean they're suddenly going to start rising at a fast and furious pace. Over the next five to seven years, you still might not see a home's value appreciate the roughly 8 to 10 percent it would need to simply to cover the costs of relocating (which at the very least include the real estate agent's typical 6 percent commission, as well as movers' fees).
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A Better Idea: Do the math carefully before you consider buying. Ask yourself: Do you have any inkling that you'll want to move in the next five to seven years, whether for a job, a fresh start, or a new experience? If so, purchasing a home is not a smart choice. Keep renting until you can commit to settling down for longer, and tune out everyone who says you're throwing away money.
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