When growing up, we often think, “Parents just don’t understand.” Actually, they do. As a parent myself, I’ve come to realize that parents are wiser than I thought.
But when it comes to money, is it wise to listen to our parents’ advice? Your parents have seen it all—recessions, bull markets, high inflation, and housing bubbles. Sometimes even the most well-intentioned advice can use an update.
Here are five things that our parents can get wrong about money.
1. Keep 6-12 months of expenses in bank accounts and CD’s
Believe it or not, CD’s (certificates of deposit) are still a thing. Back in the 1980’s you could get double-digit interest rates with no risk. Of course, double-digit inflation took away the spending power of that money.
Now? Locking in your money for five years will fetch an average rate of 0.31%.
A classic parental move is “laddering” your CD’s so that you always have money coming every six months. If the money is not needed, you renew it for another three to five years at the new interest rate.
What about keeping 6-12 months of expenses in savings? That’s still a good move, although you can opt for a smaller amount if your job is secure and you have other places to access funds in a big emergency.
2. You need a college degree
Around 1/3 of Americans have a bachelor’s degree, climbing steadily over the years. Many of our parents would have been the first in their family to go to college! As a result, going to college is a point of pride as well as an expectation.
It makes sense—college grads earn more money on average than someone with a high school diploma. But college is a big financial investment and should be weighed with many factors, including the type of career desired after graduation.
Is college a good thing? It can be! But it is not a requirement for financial or career success.
3. You need to buy a house (and put 20% down)
Home ownership is part of the American dream. The problem with this advice is that it views renting as throwing away money. For many, renting is a great option for a season of life, especially when you’re young.
Are you ready to buy a house? Great! You don’t need to take your parents’ advice and save up for a 20% down payment. As we explain here, the 20% down rule used to be standard. Not anymore! The benefits of having a 20% down payment are far less today than in the past.
4. Debt is bad and should be avoided
Not terrible advice—after all, having no debt is better than having a lot of debt. But car loans, student loans, and a cash-out mortgage refinance can all be useful financial tools.
As we say at Stewardship, personal finance is personal—there is not a “right” or “wrong” way to manage money. Loans are a way to leverage your money to be more efficient.
5. Stocks are too risky
Your parents’ investment advice to you is likely a product of the time period in which they invested. I find that our own real-world experiences shape our views of investing.
If your parents got badly burned in the Dotcom Bubble and Great Recession, they might view stock market investing as gambling. I’ve seen young people’s IRAs invested in silver because their parents told them it’s a good investment. On the flip side, good investing experiences can also skew our investing impressions. People who bought real estate in the past 10 years think housing is the greatest investment of all time.
The lesson here is people’s investment advice is biased, often molded by their own experiences (good and bad).
The best advice our parents give
No matter your situation, there is one piece of advice that needs to be followed: an intentional effort must be made to save and invest at an early age.
How about you? What is one piece of advice you will give your kids about money?
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