Spend less than you earn.
Pay off your high interest debts.
Save for the future.
Many of the tenets of personal finance are essentially common sense. They just work in practically every situation.
Still, there are some areas where it’s not nearly as clear cut. Different people will make different arguments when it comes to some issues, often insisting that their path is the only sensible path.
Here are ten debates that I often see come up in personal finance writings, podcasts, and in other media. I’ll take a look at both sides of each debate and give you my own take.
Debate #1: Should You Ever Go Into Debt?
Some might argue…
Yes! Without debt, many people simply would not be able to afford things like a car of their own or a home of their own. Without debt, parents would be forced into very limited housing options without the possibility of building any equity for themselves. College education would be out of reach of most people simply due to the cost of tuition. Debt makes the lives of many people in America possible.
On the other hand…
No! Everything that people use debt for is simply a result of impatience. A college education financed by loans is one that is entered into by someone who doesn’t want to wait until they’ve earned the money to afford schooling. A home financed by loans is one that is purchased by someone who hasn’t yet learned how to save or is unwilling to buy a home that needs work.
My take is that, although many people overvalue home ownership and the value of a college education (issues we’ll look at in more detail later on), financing those things once you understand their value does make sense for most people. In both cases, however, people often dive in and borrow so much that it makes their life difficult in later years, so it’s always a good idea to think carefully about your future whenever you borrow money.
Debate #2: Do You Have to Go to College to Succeed?
Some might argue…
Yes! A college education is the most effective way for most Americans to improve their economic outlook over the rest of their lives. A bachelor’s degree represents about $300,000 in additional average earnings over the lifetime of an individual as compared to just a high school diploma.
On the other hand…
No! College degrees do help many people to earn more, but it is not the only route to success. The true differentiator is hard work and an entrepreneurial spirit, not a college degree. A college degree is merely the ticket in the door for some jobs, most of which exist to make other people more money than you’ll make for yourself. If you’re a self-starter and willing to teach yourself things, you can make a mint without devoting years of your life and tens of thousands of dollars to a college education.
My take is that people can succeed without a college degree, but that a college degree is a huge help. In general, it requires a lot more initiative, hard work, and self-direction to succeed without a degree. Of course, there’s also the option of trade school, which is something I recommend for many people to at least consider, as it sets you on a path to a solid earning career that will always be in demand.
Debate #3: Should You Ever Not Pay Off Your Debts As Quickly As Possible?
Some might argue…
Yes! It is often a mistake to pay off low interest debts early because you can use that money elsewhere for smarter purposes. For example, a diversified investment in the stock market can reap an average annual return of 7%. You might also use that money to start or improve a business, which can really amp up your returns.
On the other hand…
No! Debts come with minimum payments, which increase the amount of money that you’re required to come up with each month. That means you’re required to earn more income each month just to keep your bills covered. Eliminating debts lowers your total monthly bills, meaning you have more money not only for investing, but for life flexibility. If you hold onto debt just to invest or do something else, then your investment flops and you lose your job during an economic downturn, your life is now in the hurt locker. Don’t do it.
My take is that debt freedom is a strong low-risk personal finance goal. Holding onto debts so that you can use the money for other things adds risk to the equation – there are potentially greater rewards, but there’s also the potential for backfiring. Personally, I lean toward the low risk approach when it comes to debt. Get rid of it. That way, no matter what happens to the economy or to your job, you’re going to be okay.
Debate #4: Is It Always Better to Earn More Rather Than Spending Less?
Some might argue…
Yes! Your primary personal finance goal should always be to maximize your earnings, even if that sometimes means spending more and paying money for convenience and time savings. Investing your time and energy into earning more really has no ceiling – you can always earn more. On the other hand, there’s only so much you can cut before you get into the realm of diminishing returns where you’re investing a lot of time to “save” pennies.
On the other hand…
No! Most frugal strategies don’t involve spending more time. They just involve executing one-time strategies or being smarter with the time you’re already going to be using. Many money-saving strategies actually save time, too, like making meals in advance. Beyond that, frugality itself makes a huge amount of sense when it comes to getting ahead financially because it reduces your expenses immediately, enabling you to start paying off debts and investing now. Career and business strategies don’t pay off this month – frugality absolutely can.
My take is that you should be doing both. When you’re first realizing that you might be in financial trouble, your main focus should be on frugality as it will have immediate returns. If you’re starting to look at long term goals, you should be focusing on earning more. No matter where you’re at, though, you should always take advantage of opportunities to easily earn or save money.
Debate #5: Are Credit Cards Ever Worthwhile?
Some might argue…
Yes! Credit cards make purchases more convenient. They also offer buyer protections for purchases, and unlike debit cards, they’re not tied directly to your checking account. They also help you establish a positive credit history. They also help you in a pinch if something unexpected happens, keeping you from facing things like overdraft charges. They also offer you rewards programs that include things like large discounts on other purchases and, in some cases, a cash refund. In short, they’re good.
On the other hand…
No! Credit cards make it very easy to spend more than you realize, accumulating high interest debt incredibly quickly. That high interest debt just devours your bank account, as it represents money just given to the credit card company for your impatience. They also open the door to identity theft, which can have a disastrous impact on your credit history. There’s nothing that a credit card does that can’t be done with cash or a debit card.
My take is that credit cards make sense for routine purchases, like buying groceries, as long as they’re not financing extra purchases and you pay off the balance in full each month. The problem is that most people don’t do that. They use the card to finance purchases that they’ll pay off “next month,” and that leads to a situation where they’re handing their hard earned money to the banks and getting nothing in return on those nasty interest payments. To me, credit cards are like a sharp knife – they can be a powerful tool, but it’s really easy to hurt yourself with them if you’re not careful.
Debate #6: Do You Need an Emergency Fund?
Some might argue…
Yes! An emergency fund is the pile of cash you turn to when your finances go awry. It’s a bundle of cash that’s just sitting in your savings account for those moments when a car breaks down or someone loses a job or there’s an illness in the family or you have to fly somewhere for a funeral or any of the countless other unexpected events in life.
On the other hand…
No! A credit card serves the same purpose as an emergency fund without requiring you to keep a bunch of money in a savings account that barely earns any return at all. Put that money into better investments instead and rely on your credit card if things go bad – and you’ll still have the money in investments if things go really bad.
My take is that a credit card doesn’t suffice for a real emergency fund. The purpose of an emergency fund is to help you out when you need it most, and there are many emergencies that simply aren’t helped by a credit card. Identity theft. A stolen wallet. A job loss. A serious credit problem. Your credit card is likely to fail you in those situations. Cash is king. Build a cash emergency fund and don’t view it as an investment. View it as an emergency-only tool.
Debate #7: Do You Really Need a Budget for Personal Finance Success?
Some might argue…
Yes! A budget is an essential tool for personal finance. It enables you to clearly see – and to clearly track – where your money is going. It also allows you to make spending decisions up front, when you’re not in the heat of the moment and tempted to spend more money than you should on something fun or something that seems like a “good deal.” There are many forms of budgeting and, in the end, most people who are financially successful do it in some way, shape, or form.
On the other hand…
No! A budget is just a substitute for common sense. If you can simply get your non-essential spending under control and choose not to spend money on frivolous things all the time, a budget really isn’t necessary. For many people, a budget feels like shackles – it requires conformity to a rigid structure and will quickly create a feeling of resentment and a desire to “break free,” which sometimes creates even more problems.
My take is that the process of actually making a proper budget – which includes tracking your spending for a few months without a budget and then figuring out how you actually spend money and what you spend it on over the course of a month by sorting all of that spending into categories – is a powerful personal finance project all on its own. I believe it’s something everyone should do. If that process essentially shows you that you should be cutting back in some areas, then that budget has done its job, whether you stick with it over the long term or not.
Debate #8: Should You Combine Finances When You Get Married?
Some might argue…
Yes! The reality is that married couples are already financially dependent on each other whether they have chosen to merge their accounts or not. They’re sharing the bills that allow both of them to enjoy a modern life. If one of them starts making bad financial moves, then the other one will eventually be impacted by that and that person deserves to know that their partner is making such moves. Combining finances allows both parters to always be aware of their full personal financial state, and not combining them opens the door to uncertainty. Combine them and you’ll both be better off.
On the other hand…
No! Even in a marriage, one’s partner should not have complete control over one’s spending. Your individual finances are your own and as long as you take care of whatever financial responsibilities are yours, the rest of the money is yours, too. Besides, it is very difficult to surprise your spouse with anything if you’re just taking money out of a shared pool. Where’s the surprise in that?
My take is that couples are usually better off combining their finances. Like it or not, once you’ve reached the point of being married, you are financially dependent on one another, and the bad moves of one person affects both of you. The other person has a right to know if you’re making big spending mistakes that will eventually impact them, and the surest way to do that is to combine finances. For the purposes of gifts or surprises, it makes complete sense for both partners to have a small amount taken out of the shared budget for private spending.
Debate #9: Should You Give Kids an Allowance?
Some might argue…
Yes! An allowance is a great tool for children to learn the ins and outs of basic money management and spending choices. A regular allowance simulates the normal cash flow that a household has, so that children can learn how to plan ahead with their spending choices. Not having an allowance denies this lesson; having an irregular allowance confuses this lesson and adds unnecessary complexity. The point of the allowance isn’t just to hand kids money. It’s to teach them self-control and how to plan ahead with their spending.
On the other hand…
No! An allowance is merely a giveaway to children. They should be expected to perform tasks in exchange for that allowance. This teaches them how the world works – you work in exchange for your income. Without that lesson, a child comes to expect a handout without having to do anything, and the modern world really doesn’t work that way. An allowance is indeed a tool for teaching children about how the world works – the world requires you to work for your money.
My take is that both ideas make sense and both should be used. In our house, we give our children a very small regular allowance that they can rely on and plan with. Unconnected to that allowance, we have some basic household behaviors that we expect – clearing your plate after a mail and so on. However, in addition to that, we also give out chores with small financial rewards associated with them and encourage them to take on small entrepreneurial opportunities.
Debate #10: Should You Invest in the Stocks of Individual Companies?
Some might argue…
Yes! When you invest in a mutual fund, it is impossible to know the dealings of each individual company in that fund. On the other hand, by investing in individual companies, you can carefully follow their business practices and their financial reports and have a strong grip on the health of those specific companies that you’re invested in. When you invest in stocks, you’re investing in businesses, and you owe it to yourself as an investor to know what those businesses are.
On the other hand…
No! Ordinary investors generally aren’t privy to the most recent dealings of a company. Only insiders know for sure what is happening there, and they’re likely to take advantage of unfortunate situations well before you can get out. You’re never going to beat a big investment bank or an institutional investor when it comes to news on a specific stock – in fact, you’re likely to be left holding the bag. Instead, it makes sense to invest in a broad-based index fund that owns the stocks of lots of companies. That way, you’re not so much investing in specific companies but investing in the idea of American capitalism and ingenuity, an engine that’s been chugging along for hundreds of years.
My take is that you should invest most of your money in broad-based index funds, like the Vanguard Total Stock Market Index. If you’re compelled to invest in individual stocks, take a small amount of your overall money that you would be devoting to investing and use that to buy individual stocks. However, you should assume that any of your money that you choose to invest that way is at a very high level of risk, as you’re competing against groups with very large amounts of resource and influence.
Final Thoughts
As you can see, personal finance is far from a “cut and dried” thing. There are many, many issues on which good people disagree and, in many of those situations, there are good reasons for different viewpoints.
Often, those different viewpoints simply come down to different levels of personal risk tolerance. Some people are more willing to accept personal risk with their finances, while others are more conservative in their personal financial choices.
Sometimes, those viewpoints have more to do with a person’s own psyche. Is a person fascinated by detail and nuance? Or are they happy just looking at the broad picture of a situation? Again, neither one is necessarily right or wrong, as it varies from person to person.
In the end, though, all of these approaches still rely on the bedrock of a few core personal finance concepts. Every single one of these disagreements comes down to different ways of implementing the core idea of spending less than you earn and saving for the future. Virtually everyone agrees on the core message.
We all just do it a little differently.
The post Not All Voices Are the Same: Ten Common Personal Finance Disagreements appeared first on The Simple Dollar.
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