When it comes to personal finance, there’s no single “right” way to do things.
Since beginning my $$$ journey years ago, I’ve been surprised by the amount of differing opinions. More controversial finance topics exist than you would think.
This past week, I met with some of the best financial educators in the country. And it reminded me just how different others’ perspectives can be.
I’ve compiled a list of ten of the most controversial finance topics in personal finance.
- Is personal finance more about numbers or behavior?
- Save money before paying my expenses or after?
- Use a credit card or avoid them?
- Start my own business or work for someone else?
- Invest in index funds or individual stocks?
- Buy a new or used car?
- Buy a home or rent?
- Take out a 15 or 30-year mortgage?
- Invest in whole life insurance or term insurance?
- Pay off my student loans first or last?
Hopefully, you’ll learn the arguments and form your own opinion about what is best for you.
In each scenario, the math says which one is better, but someone may pick the other option because of how they feel about it psychologically.
You know, the math vs. behavior argument.
Which brings us to the first big one.
1. Is personal finance more about numbers or behavior?
Watching the news and listening to expert economists talk about money would suggest personal finance is ONLY driven by numbers.
Behavior doesn’t play a role.
Them as well as many financial planners don’t discuss the topic of financial behavior such as controlling spending and sticking to a budget.
Nearly all financial educators and bloggers focus more on the behavioral side of money than the numbers. Anthony O’Neal from the Dave Ramsey team, who I met recently agrees that “personal finance is similar to the Pareto Principle. It’s 80% behavior and 20% numbers.”
Pete the Planner, who I heard from during the summer of 2017 said, “If you believe the reports, this country has a financial literacy problem. I don’t believe the reports. We have a financial behavior problem.”
My take: It’s usually more behavior than numbers.
What do you think? Is personal finance more about the math or the behavior?
Keep this in mind as we discuss the other major controversial finance topics.
2. Should I save money before paying my expenses or after?
You know it’s important to save money. Who doesn’t think that?
So, what’s the most effective way to save?
Paying yourself first or paying yourself last?
Many ultra-disciplined and frugal people pay their rent/mortgage, bills, buy food, and spend as little as possible and put every last cent in savings. They have a HUGE savings rate because they have clear financial goals and can control their spending.
On the other hand, almost every book about personal finance has the famous phrase, “pay yourself first.”
Before you pay anything, set aside a percentage, at least 10% of your income for savings.
For many, this way is easier to be consistent with saving money every month. If paying yourself first is the best strategy, why do nearly 90% of people pay their bills first and they try and save what’s left?
My take: Pay yourself first.
What do you think? Pay yourself first or last?
3. Should I use a credit card or avoid them?
I get asked this ALL the time.
This may be number one in terms of controversial finance topics.
Many young people finish high school and enter the real world with such conflicting views of credit cards. Some parents say avoid them like the plague and others walk their kids right into the bank as soon as they’re 18 to help them open their first credit card.
Which is what my mom did when I turned 18.
Dave Ramsey is famous for saying credit cards are OF THE DEVIL and if you’re ever spotted by swiping one you will be annihilated.
This is what Anthony O’Neal talked about last week and it was a heated debate.
They believe the average American isn’t responsible enough to own a credit card and it’s a guaranteed way to get yourself into trouble. You don’t need a credit score and you can buy everything with a debit card or cash.
On the other end, websites like Travel Miles 101 teach how to travel the world for free by hacking credit card sign-on bonuses. Spend a certain amount in the first 3-4 months, for example, $4,000, and use the points to travel the world.
They’ve learned how to get the most out of credit cards. Imagine if you could completely cut out the expense of travel?
My take: Use credit cards RESPONSIBLY by paying it off in full every two weeks. Use them to build your credit score and earn rewards.
Which is what I do.
What do you think? Better to use credit cards or avoid them?
4. Should I start my own business or work for someone else?
This is more of a personal life decision than a personal finance decision.
But, it relates to every area of your finances.
87% of the US population has by choice or by chance, decided to work for someone else. Many wish they could start their own business. They know the benefits but find themselves comfortably in the rat race.
Only 13% started and successfully run a business. The biggest reasons someone would venture out on their own is having no ceiling on how much they can make, tax advantages and the freedom to set their schedule
By working for someone else, your time, and how much you can make will always be limited. But, there are many benefits; matched retirement contributions, health insurance, and a consistent paycheck, etc.
You won’t have those if you’re the boss.
My take: Find a way to make money doing what you love.
What do you think? Is it better to work for someone else or have a business? Or both?
5. Should I invest in index funds or individual stocks?
One of the big controversial finance topics.
The idea of index fund investing has been around for 40 years.
Buying individual stock in one company has been around for hundreds of years.
The main argument is, should I invest all my money in a couple of companies or an entire economy with thousands of companies? In other words, the market.
Warren Buffet is famous for selecting 7 to 10 individual stocks at one time and has significantly outperformed the market for years. There’s no doubt that a few experts can beat the market.
Phil Town, the author of “Rule #1 Investing” said last week, “with some experience and education, anyone can considerably outperform the market by applying my principles.” His purpose is to help people achieve financial freedom by investing like the best investors in the world.
Statistically speaking, 98% of funds don’t beat the market. JL Collins, author of “The Simple Path to Wealth” says, “avoid the stress of trying to time the market, why not align yourself with the market?” The key is to invest in low-cost broad-based index funds such as the Vanguard VTSAX total stock market fund that has an expense ratio of 0.03%.
Related: I Don’t Know How to Invest & I’m Scared I Will Make A Mistake
My take: Align yourself with the market and lower your fees. Play around with a small amount of money in individual stocks. I am a long term investor and believe that markets are efficient.
What do you think? Is it better to buy index funds or buy individual stocks?
6. Should I buy a new or used car?
Do we need to discuss this?
Buying a new car… and driving off the lot is dumb.
It just lost a third of its value. Same with leasing, it’s dumb, financially.
Some say, “I’m buying a new car because I plan to be the only owner for the next 30 years.” In that case, you’re good.
The chances of that happening?
You’ll probably hate it after a few years.
My take: pay cash for a gently used car.
What do you think? Is it better to buy new or used?
7. Should I buy a home or rent?
In America, we love homes.
It’s the status symbol of choice. The American dream.
But, is owning a home always the best financially?
75% of Americans believe that it makes more sense financially to own a home. When you own a house, your payment each month goes to paying off the principal.
But, how much does it actually costs to get into a house and maintain it?
Closing costs, realtor fees, interest, unexpected repairs, and being tied down to one place are all things to consider.
Actual costs vary depending on the area. It typically costs 4-5% of the purchase price to sell the thing.
Related: Should You Use a First-Time Home Buyers Program?
So, when someone says, “my area is growing and I’m building up so much equity,” understand most people don’t walk away with very much after all of the costs.
When renting, you’re paying one flat payment and you never have to worry about paying more.
Renting can bring a lot of peace of mind and the freedom to move anywhere without being tied down.
The biggest problem is every time you write that rent check you might as well be sending it down the river because you are never going to see that money again.
Most people believe that owning a home is better but sometimes it truly is better to rent if you are honest with yourself.
My take: Own an affordable home. Real estate is good.
What do you think? Is it better to own or rent?
8. Should I take out a 15 or 30-year mortgage?
The word mortgage comes from the old French language and literally means, “death pledge.”
Many people sign away their lives and lock themselves down for 30 years to pay off a home.
That’s a long time!
The 30-year mortgage is the most popular. Many people take out a 30-year mortgage because of the lower monthly payments and will most likely sell the house anyway in 7 – 10 years on average.
Related: We Bought A House!
They end up paying more than double the amount of interest than a 15- year mortgage and plan to always have a house payment. This allows them to save more money in their bank account and put more towards investing.
The other end of the spectrum are the people who are trying to pay off their house as soon as possible.
I was at the doctor’s last week for my son’s appointment and the intern there mentioned that he knows a family that paid off their house by depriving their kids of vacations and clothes.
This is the perception many have of others who are super determined to get out of debt.
The doctor said, “it doesn’t make sense to pay off my home, I can get a better return in the stock market.”
Remember our math vs. behavior topic? The math says you will be more successful investing in the stock market but psychologically people love the feeling of not having a house payment.
My take: Take out a 30-year mortgage and invest as much as you can. Unless you plan to live in it until it’s paid off, then take out a 15-year mortgage and try to pay it off within 7-10 years.
What do you think? 15 or 30-year mortgage?
9. Should I invest in whole life insurance or term insurance?
This is a heated debate.
Many people have whole life insurance policies because financial advisors love to sell them. Putting your money in these allows you to build up cash that’s invested to use later if you make it to retirement before you die.
You could completely avoid having to pay taxes on any of the money going in and coming out which is a huge benefit.
Term insurance is simply renting a policy that pays out a death benefit to a loved one ($1,000,000 for example), in the event you die.
Related: 5 Must Have Insurance Policies
Authors and bloggers teach to buy term and invest the difference because the premiums are so much lower and you’re buying it to use as LIFE insurance (insurance on your life). Nothing Else.
The math says you will be better off financially if you buy term and invest the difference in low-cost index funds simply because of the fees.
All of the different types of insurance out there are like mini coopers, it makes sense for some people to drive them.
My take: Buy term and invest the difference.
What do you think? Whole or term?
10. Should I pay off my student loans first or last?
Ah, student loans. The thing many college graduates will cary with them their entire lives.
The math says it’s better to pay off your student loans last and invest the difference.
Because the interest rate on student loans is usually between 3-7%, many people feel they can earn a higher rate of return on their dollars elsewhere.
But as with the paid-off house, people love the feeling of being debt-free. Student loans are no exception. In fact, most people are more motivated to get rid of their student loans because it is a thing of the past that should be left in the past.
Related: 12 Financial Mistakes College Students Make
My take: Pay your student loans off last (besides your mortgage) unless you can’t stand having debt.
What do you think? Pay them off first or last?
Controversial finance topics conclusion
There you have it, ten of the most controversial finance topics. Economists say, human beings are rational and will always pick the most reasonable option. But, human beings are also emotional and will pick what they feel is the best option for them.
If I missed anything please let me know in the comments below. I would love to hear your thoughts!
I am doing some research for a college paper about credit cards. In your article of 10 controversies in personal finance, you mention Anthony O’Neal having a debate in February 2018 on the topic. Are you able to tell me where I can find either an article or video of this?
Thank you for any help you can provide.
That’s great you’re doing a research paper about credit cards. If you study the philosophy of Dave Ramsey and his team they are very against credit cards. You can find a plethora of information if you just google it. Here’s a video from Anthony O’Neal discussing credit cards and credit scores. https://www.youtube.com/watch?v=4qGX8GIu5Y4