Think For Yourself

We all admire the wisdom of people who come to us for advice.
— Arthur Helps

Let’s say you have a friend who mentions that he is considering taking out a loan from his 401(k), and wants your advice on the idea. What do you think of this? Good idea? Bad?

The conventional wisdom among grand financial sages like Suze Orman is that this is a spectacularly bad idea, and you should never ever ever do it. Ever. So naturally you should caution your friend against it, right?

Well, not so fast. After all, if you’ve read this blog for a while, you might have some notion of my general opinion of conventional wisdom. You might also imagine that I look on any statement the includes the word “never” with great suspicion. So you may be predicting that this article ends with me saying 401(k) loans aren’t so terrible after all.

And it’s true — while Miss Orman offers some reasonable advice from time to time, she’s way off the mark on this one. 401(k) loans are generally ill-advised, but there are without a doubt some circumstances where they can be perfectly good tool.

But that’s not what this post is about.

The truth is that Suze Orman’s opinion is irrelevant, and so is mine, because neither of us know about your friend’s particular financial circumstances, and to come to a definitive conclusion about whether a 401(k) loan makes sense or not, we’d need to know things like:

  • What he wants the money for
  • His income
  • How long he is likely to remain at his current job
  • How far off retirement is for him
  • His current marginal tax rate
  • His likely marginal tax rate at retirement
  • Whether he carries any other debt, and at what interest rates
  • The makeup of is entire investment portfolio, inside and outside of the 401(k)
  • The ins and outs of his 401(k) provider’s loan program and its terms

And that’s just for starters. Do you know the answers to all of these questions? No? Well that means your opinion probably doesn’t count for much, either.

Now imagine you’ve switched places with your friend, and you are the one seeking advice. Doubtless your coworkers, friends and family would all have opinions on whether a 401(k) loan would be a good idea for you, but unless the person you confide in knows all of the above details, or at least has the sense to ask about them, you’d be best advised to take their opinion with the proverbial grain of salt viagra online canada mastercard. Make that two grains of salt if the person in question isn’t wealthy themselves, and three grains of salt if the person is wealthy, but inherited the money or married into it.

Unfortunately, there’s really no substitute for learning about money yourself. No one will ever know as much or care as much about your finances as you do. So the best advice I can give you is not to seek advice at all. Seek knowledge, instead.

One Comment

  1. Knowledge takes time, patience, dedication and hard work to achieve. All too often do people search for the short cuts, the “5 tips”, the advice. All of which (as you mention) can never account for all your specific quirks and caveats. As a result they’re often swept up in the marketing and hype . I always thought this quote was still very true today

    “Be not swayed by the fantastic plans of impractical men who think they see ways to force your gold to make earnings unusually large. Such plans are the creations of dreamers unskilled in the safe and dependable laws of trade.”

    Few people also realise that in order to get good financial advice the person they’re seeking it from must be financially stable as you said. It’s the equivalent of asking the 40 year old virgin “how do YOU pick up chicks?”. It always amuses me too because finance and investing is one of the biggest topics that you see EVERYONE have an opinion on, even though none of them know the first thing about economics, finance or even the topic they’re “advising” on.

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