When it comes to personal finance, we're all experts now. A good percentage of the workforce works in the finance industry and most of us have taken enough lumps in the school of hard knocks to qualify for an MBA.  Until the sobering housing meltdown, you couldn't go wrong investing in Real Estate. Like most stock brokers with yachts in the marina, the vast majority of us subscribed to the mantra that stocks have historically outpreformed every other asset class. The brokers still have their yachts but the rest of us have our battered retirement accounts. Over time, certain myths in personal finance get a cult following and many times, you might just believe them lock stock and barrel.  Here are 5 of the most common that might just trip you up.

1. If You Buy a Home, You Build Equity Fast

False.  It takes a long time to build meaningful equity in a house no matter what your real estate or mortgage broker tells you.  During the bubble, people built equity fast because of the irrational appreciation in prices.  Even if you discount the possibility of  further deterioration in the price of housing and assume that they have stabalized, on average it would take you about 7 years to break even on a house.  The average cost of selling a house is around 10% of the sales price when you factor in commissions, closing costs, and concessions.  With a 20% down, 5.5% mortgage, it will take you almost eight years to just cover those costs.  Historically, housing prices increased at a rate of inflation plus about 1%, but that was during a time of record growth in household formation with dual income Baby Boomers acting as net buyers of homes.  Going forward, we should expect fewer new household formations and we'll see boomers downsizing due to job losses and retirement.  Building up equity via home ownership is a long term endeveor.

2. If You Have Cash, You Should Always Pay Off Your Debt

Totally Untrue.  Your financial strategy should be dependent on a number of factors including your tolerance for risk, the stability of your employment, tax considerations and your total asset picture.  That's not to say that debt is not "risky" but running out of cash can be far riskier than having debt.  There are times when you should definitely keep your cash even if it means taking on debt.  If you lose your job but have plenty of access to credit, it's better to tap your credit than to use up your cash.  You never know how long it will take to land suitable employment.  That said,  when you do have to resort to borrowing you should always shop around for reasonable rates, but the maxim that you should always pay down your debt doesn't hold true in many circumstances.

3. I Don't Make Enough to Save Any Money

Please.  Let's rephrase this as "I don't make enough to pay for my lifestyle".  What percent of people reading personal finance make less than the poverty line?  A very low percentage.  With the exception of periods of unemployment, most families in America can and should save money.  Even a decade ago, you'd hear single twenty somethings that made more than $40,000 complain about making ends meet.  The usual problem was that their rent was too expensive because they chose to rent in the toniest neighborhoods.  Even if you are only able to save $50 a paycheck, there are ways to make it happen for anyone in the top 80% of earners which is most people reading this article.

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haverwench  - Keep your cash? |2010-07-16 11:34:42 I don't understand rule #2 about using credit: "If you lose your job but have plenty of access to credit, it's better to tap your credit than to use up your cash." Why? Let's say I have just lost my job, and I have $15,000 in the bank and another $15,000 available from a home equity line of credit at a nice, low interest rate of 4 percent. If I spend down the money in my bank account, I will lose that money. If I borrow through the HELOC instead, I will lose that money *plus* 4 percent interest--or more, if the interest rate goes up, as it will almost certainly do. How can I possibly be worse off with only $1000 left in the bank and no debt than with $15,000 left in the bank and $14,000 worth of new debt to pay off with interest? I don't get it. Seems to me you're better off drawing down your savings *first*, before turning to credit. Isn't that exactly what an emergency fund is for? Reply 0 0

Omiewon |2010-07-16 12:29:12 Take this scenario: You draw down your cash first, then you start drawing down on your HELOC. But your bank cancels your HELOC because they claim your equity has declined. Now you can't make your mortgage payment and you go into foreclosure because you already spent your cash. This happened to a lot of people in 2008 and 2009. 4% interest on $15,000 fully drawn is $600 a year. Since you can make 1% on your money, it's more like $450. You are going to have plenty of money in the bank to make those interest payments, but the moment you run down your cash, you are at the whim of your creditors. Same thing applies to credit cards, what happens when all of a sudden your bank cancels your credit card even when you have a zero balance. Let's just say you better have cash. When you don't have a job the #1 priority is to keep as much cash as possible. Paying a few percent interest is an annoyance, running out of cash is a nightmare. When you get a job again, you can easily cover your HELOC with the cash you have in the bank. The key here is that your credit is not necessarily guaranteed. Reply 0 0

frugal nomad  - Another consideration |2010-07-16 13:15:38 There's a practical side to this that most people fail to take into account. If worst comes to worst and you do run out of money after a long period of unemployment, you might be forced to file for bankruptcy. That's why I would start with tapping unsecured credit first, because in bankruptcy proceedings, you can often keep the house and you should always put that first. So, while a home equity line of credit might be cheaper in terms of interest. Home Equity lines of credit might also be difficult to tap if you don't have enough equity. Banks are definitely more cautious. It's a tough situation when people see household incomes vanishes or is greatly reduced and you should always take into consideration long term sustainability. Even at the risk of having to renogtiate your unsecured credit, at least you'll have a roof over your head. It's also another reason to stash money in IRA accounts and 401K accounts because they cannot be touched by creditors. So, as the article points out, these are all bad choices but sometimes they're the only choices and the worst one is to run out of cash. The essential goal is to assure cash flow until you land another job. Reply 0 0

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