Guest Post: Don't Always Listen to Conventional Advice

Today I have a guest post from Mr. Credit Card. Yesterday I was on Mr. Credit Card’s Blog Talk Radio show and what a lot of fun!  I was nervous about what I was going to say, and I stuttered a few times, but overall I think I did okay.  You can hear the interview with Mr. Credit Card by clicking here to go to the  BlogTalkRadio site. We talked a bit about my credit card consolidation, credit card transfers, raising Mr. A’s credit score and my frugalness. And now, here’s Mr. Credit Card’s guest post:

Hi, I’m Mr Credit Card from www.askmrcreditcard.com and I would firstly like to thank Mrs A. for allowing me to write a post on this blog. Today, I’m going to write about looking past conventional wisdom and advice in personal finance. If you are ever looking for a credit card, please check out my best credit cards recommendations.

If you read mainstream finance media and personal finance blogs, you will find a lot of conventional advice. Some of these apply to the majority of people. But for many people, blindly following this advice may not be the best solution. Below are some examples of common advice and I will explore how they may or may not apply to everyone.

Joint or separate bank accounts – Should you combine accounts with your spouse or partner? Should you have some individual and some joint accounts? No one can answer that for you. It really depends on both people’s attitude and comfort level. But, regardless of what you decide, you have to be aware of its implications.

For example, you need to understand what happens to a joint account when you decide to divorce? Can a spouse empty the bank account? Can your attorney stop that?

Here is another example. Let’s take a couple who has say, seven million in assets (really rich!) and they have four million dollars in their joint account. In this example, having a joint account may not be the right strategy because if one spouse passes away, 50% of the account ($2 million) will be counted toward estate taxes. They could be better off retitling their assets and setting up an AB trust.

So while it doesn’t really matter for most folks whether you choose to have a joint account as a couple, there could be serious consequences in certain circumstances. Explore your individual circumstances before deciding what is the best option.

Term Life Insurance or Whole Life – Nothing gets so universally recommended than a term life insurance policy by the mainstream media. This one was probably started by gurus like Suze Orman, who says most folks are better off buying term insurance and using the difference they would have paid for a whole life policy to invest in a place that will yield higher than the rate of return an insurance policy might promise to give you. For folks who need insurance but do not have the necessary monthly cash flow, this might be a good strategy.

However, this strategy may not be appropriate under some circumstances. For example, many folks buy a million dollar term insurance on the assumption that in twenty years time, they would have saved perhaps close to a million dollars and assume that they do not need any more policies. But guess what, in 20 years time when that person is 40 or 50 years old, their career may not have gone as planned and they find that with kids now, they do need further insurance policies. But term insurance is more costly as you grow older. If you buy a whole life policy, your premium is fixed. And you can set them such that you are done paying after a set number of years. Folks also never consider what happens if they get seriously ill and cannot afford insurance in the middle ages when they need it most.

For folks with special needs children, very often, a life insurance is purchased in a “special needs trust” to provide for the child when their parents pass away. In this instance, one has to purchase a whole life policy because the insurance need is “permanent”! Whole Life policies are also useful for those looking to use up their skip generation tax exemption to pass on their insurance to their grandchildren.

So before you blindly believe what you read, seek advice and look at your particular situation before concluding that term insurance is the only way to go.

You need 6 months of emergency funds – Conventional wisdom says we need 6 months of emergency funds. Suze Orman and other financial gurus have the same recommendations as well. I would say that the number really depends on one’s individual situation. If you are a real estate broker, you’d better have a year or two in emergency funds because you never know when your next sale will be. For those in the financial industry, you might need a really huge emergency fund because that career may be short.

Your level of emergency fund also depends on how quickly you can get a job if you are laid off? And what are your unemployment benefits? It would also depend on whether you have other income aside from your primary job. If you have say, three rental properties that are all profitable and bring in cash flow every month, then perhaps you do not need such a large emergency fund. If you do not have medical insurance, then perhaps you do need a larger emergency fund.

So please “do not make 6 months” the rule. Six months of emergency funds could be too little or more than enough depending on your circumstances.

Ditch your credit card or use credit card rewards – Read enough blogs and you will find folks who hate credit cards and those who love them. Both have views that are correct depending on the person. If you cannot control your spending and pay your bills in full every month, then perhaps you do have to consider not using your credit card. On the other hand, if you are the sort of person that pays your bills in full every month, then using a cash back rewards credit card actually saves you money.

Truth of the matter is that you know yourself best. Do what works for you. Some folks who have credit card debt use balance transfer credit cards to reduce their interest payment and then add Dave Ramsey’s snowball method to get out of debt faster. Some swear never to use them again, while others learn to pay in full. Some folks simply cannot live with an all cash spending system.

Mrs A. herself got Mr A. to sign up for a secured credit card solely for the purpose of building his credit score.

Do what works best for you.

Active or Passive Investment Strategies – Once again the universal advice from almost everyone is to “index” and use a passive investment strategy. The truth is this may not be correct for every market. In efficient markets, like the stock markets, perhaps a passive index only strategy works. But there may be sectors in which active management is a better fit. For example, you might want to invest in a “special situations turnaround fund”. You are probably better off trying to look for a good fund manager because there just isn’t an index for them. Or maybe you are looking for funds that invest in Chapter 11 bonds and distress situations. Well, you probably need to find a “deep value” investor who has mandate to invest in distressed bonds because indexes do not exist for such markets.

In many cases, a combination of both active and passive investment strategies make more sense than blindly following one camp.

Conclusion – There are other issues in personal finance, like whether to do strict budget or not, that many folks write about. My advice would always be to think over many of these issues before trying them out or applying them to your situation. Each of us have unique situations where blindly following conventional advice may not be the right thing to do.

Thank you Mr. Credit Card for your very informative post!  Thank you for inviting me to be on your show.

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3 comments to Guest Post: Don’t Always Listen to Conventional Advice

  • Ken

    I am of the opinion that there is no ‘right’ or ‘wrong’ financial plan, it’s about YOUR plan. What works for one person may be totally out of sorts for another. We do need to be flexible in setting up our finances.

    [Reply]

  • I agree with you that conventional advice cannot be applied rigorously. Nevertheless I think that conventional advice still has a place for most people. Take the emergency fund, for example. Say 6 months are not enough in one particular case. It is still better than having none (as many people do) or less than 6 months. On the other hand, if 6 months is too much the worst that you are doing is that you have the money in savings rather than in investments. So, in either case an emergency fund of 6 months would be ok even if it is not ideal.

    [Reply]

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