Doing these 3 ‘wrong’ things with your money? I’m not worried

People who dispense advice to others—financial advisers and pundits who make their opinions known—spend a lot of time and energy criticizing certain financial decisions that frankly, I can’t get too worried about. Here are some of the big ones.

Sure, paying off a mortgage may not offer the best return on mortgage-holders’ capital at the moment, with interest rates on certificates of deposit and high-yield savings accounts above the interest rates on mortgages secured several years ago when rates were lower. I’d also agree that younger people with long time horizons should invest the lion’s share of their investable capital into higher-risk, higher-returning investments like stocks; they tend to need less of an allocation to safety, whether that safety comes in the form of mortgage paydown or buying CDs.

But one reason I’m blasé about whether someone prepays a mortgage—or buys a home with cash versus financing it—is that those aren’t the behaviors of financially unwell people. Sure, there might be outside cases of people doing this even though they don’t have adequate emergency reserves or enough money in their retirement accounts. But most people who pay off mortgages have their ducks in a row elsewhere in their financial lives, and their mortgage payoff is a peace-of-mind allocation that they’re entitled to make. I’ve yet to meet anyone who told me that paying off their mortgage kept them from other important financial goals.

This is another conservative, peace-of-mind allocation that I just can’t get terribly upset over. True, cash has underperformed bonds and certainly stocks over long periods of time, and over modern U.S. market history, cash has edged out inflation by only a hair. If a younger person is sitting on a pile of cash while also having limited exposure to longer-term securities, especially stocks, that’s almost always terrible. But more frequently, I’ve seen heavy cash stakes in portfolios of people with a different profile: Those over 50 with ample portfolios who simply prefer the liquidity, stability, and convenience of cash over bonds. ( I’ve mentioned that this has been one of my own “failures” in investing, at least on paper. ) Might such individuals be forgoing returns by choosing cash instead of bonds? Probably. Will a large allocation to cash likely see the bulk of its interest production gobbled up by inflation? Yep. But I’d argue that the greater good in this common scenario is that individuals have made an allocation to safety rather than having everything tied up in the stock market. (In the words of author Bill Bernstein , “If you’ve won the game, stop playing.”) And if their financial plans are otherwise in solid shape and they’re maintaining a decent allocation to investments that give them long-term growth and returns that will keep up with inflation (stocks), a little extra cash isn’t something I’m going to fret about.

In this case, the investor is getting the big picture right: Making retirement plan contributions, period. And if we’re being honest, the “right” type of IRA or 401(k) contribution is always going to be a guess. Investors don’t know if their tax bracket in retirement will be higher or lower than at the time of contribution, and they don’t know what will happen to tax rates on a secular level, either.

My advice: Save as much as you can afford to and give it your best guess on the contribution type. (A perverse fact of life: By the time you realize that Roth contributions would’ve been a good idea because your tax-deferred accounts have grown a lot and/or your tax bracket has crept higher, it’s usually not a great life stage to make Roth contributions.) I’ve also come to be a big believer in taking advantage of traditional tax-deferred, Roth, and taxable contributions during your accumulation years. That way, when you begin pulling money from the accounts in retirement, you can strategize about which accounts to spend from in an effort to limit your tax burden as retirement unfolds.

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This article was provided to The Associated Press by Morningstar . For more personal finance content, go to https://www.morningstar.com/personal-finance .

Christine Benz is director of personal finance and retirement planning for Morningstar and co-host of The Long View podcast . Subscribe to her free newsletter, Improving Your Finances .

Related Links:

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