O'Connor: Here's one dumb way to dump debt
Thanks to modern technology — and the fact that your average Internet-connected American has the attention span of a tsetse fly and the guile of a week-old meatloaf — you can learn a lot on the Internet.
A lot that's wrong.
You can learn that California is building a $587 billion high-speed rail link to Hawaii. Or that spider eggs were used to stuff Beanie Babies and now are hatching all over America. You can even discover that hundreds of thousands of Thanksgiving turkeys are contaminated with Ebola.
The problem is that's all as fanciful as saying the new Senate Republican majority will approve a $50 billion wildlife preserve for undocumented gay baby whales.
And then there's the investment advice.
'Greetings from Nigeria!'
When it's not wholly impractical, most personal finance advice on the Web runs the gamut from blatantly obvious to trivially useless. But now I've run across a post from a blogger who writes about her family finances that's so dangerously deluded I swore it must've come in an email from a Sub-Saharan prince.
I'm not going to identify this writer because, when I asked about the details of her advice, she emailed very little, then clammed up, claiming she didn't want to "share my family's entire financial history." (Did I mention that she already was writing — ON THE INTERNET — about her family's finances?)
The topic of her proud post was she had eliminated $18,000 of debt in one fell swoop, by selling a newer hybrid sport utility vehicle to a dealer for the amount owed on the car, then buying an older SUV with cash to replace it. So far so good, except for the source of the cash: a nonexempt withdrawal from her 401(k) retirement account.
Assuming she paid $6,000 for the car she describes and is in the 25 percent tax bracket, that means our blogger withdrew $8,100 to cover the purchase plus income tax and a 10 percent early withdrawal penalty that, for some mystical reason, she thinks she won't have to pay. That's $2,100 in taxes; however, the cost of paying the car loan at the current average 4 percent interest rate over four years would be $1,500 in interest, so she just paid $700 more.
In addition, that $8,100, if left in her retirement account for another 30 years, would, at an average 7 percent return, grow into nearly $62,000 before taxes. In other words, this savvy money mama just cost herself more than three times the amount of the debt she so cleverly vanquished. With that kind of financial acumen, she should be working for the Congressional Budget Office.
Cabbage soup for the Visa bill
From the little information she posted, the blogger and her family aren't in financial distress, and if they were, raiding a retirement account to wipe out debt would be an even stupider move. Instead, they're in thrall to debt-cutting guru Dave Ramsey. While I respect Ramsey and much of his advice, (and, in fact, he has counseled against such raids on retirement accounts) he takes a good idea far too far, eschewing bankruptcy even in dire cases and quoting Scripture: "the borrower is slave of the lender."
The result is that many of his online fans make being debt-free their be-all and end-all, taking what sometimes is already extreme advice to patently ridiculous extremes.
Look: Any debt is a burden, even so-called "good debt," such as car loans, student loans and mortgages, and part of any smart financial plan is deciding to get yourself largely debt-free. It's understandably tempting to look for quick fixes, but just like a crash diet is dangerous to your health, a crash debt diet is dangerous to your wealth. Plus, people who get out of debt with one big, easy move, such as selling a home or getting a windfall, are likely to get back into trouble since they haven't fixed the basic financial problems that got them into debt in the first place.
Aiming to get your debt balances to $0.00 is as good a goal as dropping 40 pounds. Just do it with the financial equivalent of eating more fruits and veggies and 30 minutes of daily walking: stop adding new debt, boost your savings, and make a plan to methodically pay off your balances, instead of wrecking your assets by declaring a total debt jihad.
Which brings me to one thing the Internet is good for — looking up Bible verses. Such as Proverbs 13:16, which seems tailor-made for any blogger encouraging folks to plunder their retirement funds and hike their tax bills just to pay off a completely manageable short-term debt: "A wise man thinks ahead; a fool doesn't, and even brags about it!"
Brian O'Connor is author of the award-winning book, "The $1,000 Challenge: How One Family Slashed
Its Budget Without Moving Under a Bridge or Living on Government Cheese."