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6 “Smart” Financial Moves that are Really Kind of Stupid

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Light bulbThere are lots of things we do in life because we think we’re being smart. Some of the things we do with money seem like a good idea at the time, but might actually be kind of stupid. At the very least, some of the “smart” money moves you’re making might not be that smart after all.

Before you congratulate yourself on your money smarts, remember that one of the big problems in America today is the fact that people think they are financially literate, when they really aren’t. Here are 7 “smart” money moves that really aren’t:

1. Insisting on a 15-Year Mortgage

It seems like a smart idea. You get a 15-year mortgage, and you are done with your mortgage debt that much sooner. Plus, you pay less in interest. But is a 15-year mortgage really all that smart? One of the problems with a 15-year mortgage is that you lock yourself into higher payments. This can cause cash flow problems later on. What happens if you are in a tight spot and can’t afford the 15-year mortgage payment? You’ve locked yourself in.

With a 30-year mortgage, you have more options available to you. You have a lower monthly payment (which can be a big thing with cash flow), and you can make extra payments if you want. Make the extra payments to reduce your mortgage debt faster, and if you run into problems, you can scale back without risking foreclosure.

2. Paying Off Low-Interest Debt ASAP

You should get rid of all debt immediately, right? It’s only smart to stop paying interest to someone else as quickly as possible. But is it really that smart? It depends on the type of debt in many cases. High interest debt should be paid off as quickly as possible. But what about student loans or mortgages? I’m paying less than 2% on my consolidated student loan — and I’m getting a tax deduction on the interest. If I’ve got an extra $300 a month, should I put it toward my student loan to pay down a tax-deductible debt that’s only costing me 2%? Or should I put that $300 into my retirement account — which has returned almost 7% annualized since 2006? My money will be put to better use through investing.

3. Cutting Up the Credit Card

Once you pay off your debt, it’s smart to cut up the credit card and cancel the account, right? You don’t need credit cards, anyway. But what if this isn’t so smart? Canceling your credit card after paying it off can result in higher credit utilization, so it can be a not-so-smart move if you are still in debt pay down mode, dinging your credit score. Plus, you lose out on other benefits, like rewards programs that offer you things for free.

Responsible credit card use can do more for your finances than cutting up your credit card. If you can control yourself, keep the credit card.

4. Taking Advantage of Interest-Free Promotions

It seems like a no brainer: Six months same as cash! You can get an big-ticket item on credit without paying interest. Smart, right? It might be stupid, if you aren’t absolutely sure that you will have that item paid off within the promo period. Interest doesn’t just stop for that time; it’s still calculated. If you haven’t paid off the item within the allotted time, all of the accrued interest is added to the loan, and now it’s part of the balance, so it’s usually compounded going forward. That means a bigger bill later.

5. Using Up Time to Get Something for Free

A few months ago, a restaurant in town ran a promotion. Come to the restaurant on a certain day, and get a free ice cream cone. People were lined up for two hours to get this free ice cream cone which only cost about $1.50. Divide that $1.50 by two, and you are basically standing in line for $0.75 per hour. Instead of waiting in line, I went back another day for the ice cream cone. I stood in line for 10 minutes and paid the $1.50. However, since I value my time at $85 an hour, and was able to get work done for the other 50 minutes, I ended up ahead in the transaction. Don’t make the mistake of missing out on actually earning more money just to get something for free.

6. Buying Life Insurance for Your Child

When I bought my life insurance policy, I bought a rider that includes enough to cover funeral expenses for my son (and I’m still not sure that was really a “smart” thing to do). The agent tried to sell me on a full-blown life insurance policy for my son, but I passed. It seems like it might seem smart. After all, what if the unthinkable does happen. But unless your child is actually a movie star and providing your family’s income, a child life insurance policy is just wasted money.

What do you think? Are these “smart” moves really stupid? And what “smart” moves do you think are not-so-smart in reality?

(Photo: Kevin Dooley)

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17 Responses to “6 “Smart” Financial Moves that are Really Kind of Stupid”

  1. Interesting list. I don’t agree with getting a 30 year mortgage to save on payments. I think it would be best to buy something that you can comfortably afford on a 15 year payment. 30 years is a long time to have a payment.

    • GaryG says:

      The idea of getting a 30 yr mortgage over a 15 was to get a loan for an amount you can afford at the 15yr mortgage rate. Get the 30 yr mortgage rate which the payment will be considerable less and then make payments at the 15yr rate putting the excess toward principle knocking down the length of the 30 yr loan. If something were to happen like a prolonged unemployment you can drop to the 30 yr payment without penalty. You have to have the discipline to make the higher payments but it is nice to know you have options. With the 15 yr mortgage you don’t have any options.

    • Scott says:

      Did you read the whole paragraph about the 30-year mortgage? The idea is that you get a 30-year mortgage but make payments like it’s a 15-year mortgage. So it fits perfectly with your recommendation – buy something you can comfortably afford on a 15 year payment. But what you can comfortably afford today might not be what you can comfortably afford tomorrow. Stuff happens. Life happens. And you get extra flexibility with a 30-year mortgage that might just be a lifesaver when you need it most.

      Think about it a little more and it will make sense. Or give it another 5-10 years and undoubtedly something will happen in life to you or someone you know that will help you see that flexibility in payments is a very desirable asset for when you need it most. The rest of the time, budget appropriately like you’re already doing.

    • CS says:

      I agree with this statement. We are in our early 40′s and recently purchased a home with a 15 year mortgage. I have no interest in planning to have a mortgage past my anticipated date of retirement.

      • JP says:

        Agreed. I feel like people I’ve met with 15 year mortgages are more disciplined with their personal finances, including budgeting and saving, than those who seek to maximize cash flow with 30 year terms. Although, I have no actual statistics either way.

    • David S says:

      He did list is as an INSIST. I think he meant that you should look at the consequences. For example when we refinances the difference in rates was about 0.75% between a 15 (2.5%) and 30 (3.25%). Even if we paid it as if it was a 15 year we would be paying an additional $105 in interest per month (or nearly 19k over the life of the loan) on the 30 year, However we could drop the payment down about $600 if times got tough. However we could also just save the $105 a month that we would have been paying in interest and every 6 months have a emergency month difference saved.
      Also in our case it not only reduced the term but also got rid of PMI and lowered our total payment from the previous mortgage by about $500 a month.

  2. Sadie says:

    As we pay for life insurance based upon our age, I fail to understand why so many recommended that life insurance not be bought for a child especially when the premium can be locked in for life!

  3. DG says:

    my parents got me life insurance at a very young age. not a big policy, but enough to have a small one in place for the future. this seemed silly until i was diagnosed with type 1 diabetes at age 10. i am now married with a family, and i can tell you the amazingly high price of insurance for someone in my position makes that extra layer of youth insurance an even smarter ‘what if’ hedge. the difference between my cost for the youth policy and what i would have to pay now is STAGGERING and possibly cost prohibitive for some people.
    i would recommend, at the very least, a small life insurance policy for all children to protect against this type of situation.

  4. Scott says:

    #5 is so true. A better use of your time would be to come up with your own idea of how to get people to waste their time waiting in line for YOUR business. There’s two sides to every story :-)

  5. Sydney says:

    My parents got a life insurance policy for me when I was about years old. When my dad passed away last year (I’m 24), I became the owner of the policy and I decided to keep it. It’s $80 per year for $50,000 and the price will never go up as long as I keep the policy. If I wanted to get that same policy now (I’m healthy, no pre-existing anything yet), it would be waaaaaayy higher.

    This is the big reason why it’s a smart move to get a life insurance policy for your kid. Not everyone can afford to pay for insurance you probably won’t need that will be beneficial later on, but if you can, it’s generally worth it.

  6. Michael Rice says:

    #6 is still a smart financial move! You need to focus on the benefits of cash value life insurance, not the death benefit. I wish my parents had the foresight to buy such policies for me. The cash value that it would build up can be borrowed against, essentially making an interest free loan (since any interest is paid to CV acct. not insurer) when needed to buy a house or car, or supplemental income at kids retirement. Also, for very little money, since purchased when so young, it could be paid up insurance by the time they graduate HS, and they could have it forever to help their families as they grow. I agree on the other moves, however.

  7. KN says:

    I disagree that a 15 year mortgage is stupid. In January 2003, my wife and I bought a brand new house with a 10 year mortgage. Now we are mortgage free.

  8. SLCCOM says:

    An important reason to get life insurance for children is that they may not be able to get life insurance later in life. If they have this, they can add to it and have protection for their family even if they become “uninsurable.”

    And you have no way to know that they won’t become uninsurable, so this is really cheap insurance. Plus, if the unthinkable happens, you have burial money.

  9. Carla says:

    the job market is not real stable, so when we did a refi this summer we got 30-year mortgage and will pay extra every month towards the principal. If my husband loses his job, we can go back down to the lower payment until he gets another job and since we have an emergency fund, we presumably won’t lose the house.

    15-year mortgage only makes sense if you have job security and savings.

  10. Don C says:

    I guess I’m in the minority in thinking paying ANY accelerated payments on your mortgage is a good idea. If you have the extra money, invest it. Make sure you max out on all of your retirement savings and emergency funds first, then put the rest of your extra money into an investment account. You are better off (financially) in the long run and can probably pay off the morgtage faster. Plus, if you lose your job, you have that money easily accessible. Try taking out a home equity loan with no job. Even f you can get the loan, why pay the bank all those fees just to get your money back? People pay off mortgages early to feel better, not because it’s a better move financially. Now if you don’t have the discipline to actually save and invest the money, then by all means give it to the bank. They will be happy to take your money.

  11. I am a big fan of number 4 and number 5. I don’t think that low interest balance transfers are a good idea and I really hate wasting my time – even if I am getting something for free. Great post.

  12. Melissa says:

    Great post! Controversy galore! #1 and #2 are tied together… where to put the extra cash. Comments about #6 are interesting regarding pre-existing conditions.


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