Rethinking the Good Debt and Other, Longstanding Financial Practices
May 25th, 2009There is little doubt that the conventional financial wisdom is changing amid the current economic uncertainty. Dave Copeland of the Boston Globe recently highlighted a number of thoughts that today’s families will find noteworthy.
Quoting Larry Glazer, managing partner of Boston-based Mayflower Advisors, and Adam Bold, author of “The Bold Truth about Investing,” Copeland raised a number of issues, two of which pertain directly to parents and college students.
Good Debt, Bad Debt
Glazer, presenting to 100 public school teachers in New Hampshire, insisted it was time to rethink a number of longstanding financial practices. Those educators all taught personal finance classes in the state.
Glazer informed his audience that he took exception to the longstanding notion that there was such a thing as good debt, particularly the idea that “mortgage debt is good debt.”
The financial advisor noted that many experts still touted mortgage debt as being good. This is in large part due to two current factors.
First, the interest on mortgage debt is tax deductible. Second, current interest rates on home mortgages are at historic lows. Ultimately, those experts insist investment returns over time should outpace those mortgage rates of four percent plus.
Glazer thinks differently, pushing his clients to retire mortgage debt as soon as possible, suggesting they double up on payments whenever possible. In addition, Glazer frowns on another traditional aspect of home mortgages, taking the biggest loan that one can qualify for.
“Over the past two decades, ‘good debt’ became a buzzword, and if you could get debt, you took it,” Glazer told Copeland. “That is part of what got us into trouble. Maybe no debt in retirement is the new standard for good debt. ”
Saving for College
While another conventional practice has been to insist that families begin funding a 529 college savings plan as soon as possible, Bold insists that saving for college should come only after a number of other savings options has been addressed. The author notes that many families have followed that advice and made the placement of money in a college fund their number one priority.
Bold indicates the number one priority for parents should instead be their 401(k) and IRA plans. The author insists the first priority should be to maximize retirement contributions.
Only after they have met that commitment should they consider setting money aside for college. The rationale for that recommendation comes from one simple fact.
Bond correctly notes that there are multiple options for paying for college including scholarships and grants. In contrast, there are no scholarships or grants for retirement.
Bond also notes that students can take out loans for college or families can opt for a pay as you go philosophy during the college years using the funds that might otherwise be set aside for retirement.
Current Crisis Offers Some Lessons
While Bond advocates that families make their retirement contributions the first priority, he by no means is advocating that students turn to indiscriminate borrowing for their education. The continuing theme from the current downturn is to rethink some longstanding financial strategies, especially the notion that there is such a thing as “good debt.”
Debt represents a claim on future earnings. If the current economic downturn has taught us anything, it is that borrowing represents a risky financial strategy.
Whether it is to borrow for a house or a college education, such debt should be minimized and paid off as soon as is possible.
