If Michael Jordan sat you down to give you some advice on playing basketball, would you listen? Of course you would! He’s the greatest player of all time (sorry not sorry LeBron). But if your neighbor Dave tried to give you basketball advice (he’s an avid watcher, but never played a game), would you listen as intently?
Sometimes it’s difficult to know who to trust when it comes to financial advice. In fact, we’ve actually covered a whole episode on folks you probably shouldn’t listen to. For this article, let’s dissect some of the most ridiculous pieces of money “advice” we’ve heard. Do any of these words of wisdom sound familiar?!
Notoriously Bad Financial Advice
We all have that uncle who’s an expert on every topic and that broke friend who’s always spewing out financial advice. Here are the most common phrases and bits of advice people throw out that are horribly incorrect…
“Renting is a waste of money”
This is one my mother used to say, “Renting is just flushing your money down the toilet.” And every realtor you’ll ever meet will tell you that the best and quickest path to building wealth is through real estate and homeownership…shocking I know! However, contrary to popular belief, buying a house doesn’t always make financial sense.
In most markets across America, it’s actually cheaper to rent than to buy a home. Hidden costs like property taxes, repairs, and maintenance (just to name a few) are some of the expenses that comprise the joy of homeownership. Renting has none of those costs. And in most places, it’s far less expensive than buying a home even before including those additional costs.
Even though renters aren’t building equity, having lower monthly housing payments can allow them to funnel excess money into other investments. This rent vs. buy calculator can be helpful when you’re trying to decide which is best for you. Renting can really pay off depending on your financial situation, where you live, and your likely ownership timeline.
“Credit scores don’t matter much”
If someone tells you that credit scores don’t matter, run the other way! Having a below average credit score can affect your life in ways you might not realize. In fact, your score can impact whether you’ll get approved for credit cards, mortgages, auto, and other types of loans.
Earning a high credit score can help you secure the best terms and interest rates for a loan – potentially saving you thousands! Landlords, insurance companies, and employers might also do a credit inquiry when you’re applying for an apartment, car insurance, or job.
Whilst you don’t need a “perfect” score, it definitely pays off to keep trying to improve yours.
“You can’t reach financial freedom with a 9-to-5 job”
You’ll hear a lot of so-called experts say the only path to wealth is to start your own business and be your own boss. Then they’ll drop the favorite buzzword, entrepreneur on you. But not everyone is wired to be an entrepreneur. Did you know that only 10% of U.S. workers are self-employed?
It’s true that folks can certainly achieve financial success without a 9-to-5, however the majority of individuals need a steady paycheck, medical coverage, paid sick days, and hopefully a company-sponsored retirement plan like a 401(k). And if there’s a company match offered by your employer, take that free money!
You really can become a millionaire by investing solely in your workplace and individual retirement accounts. No entrepreneurial endeavors necessary.
“Avoid all debt at all costs”
I don’t know many people who are in a financial position to pay cash for large purchases such as a house or a car. While us money nerds debate the concept of good debt vs. bad debt, my dad would say, “There’s reasonable debt and unreasonable debt.” Smart guy, right!?
While some debt can be debilitating, you can also use borrowing to your strategic advantage. We’re all for reducing your overall debt load over time, but we need to understand that not all debt is bad. And you’re sacrificing other things when you pay it off as quickly as humanly possible, namely saving, investing, and liquidity.
Avoid consumer debt at all costs, putting fun toys and clothes purchases on a credit card that you can’t pay off in full at the end of the month. Remember that it’s not the worst thing in the world to take on debt in order to get an advanced degree or to buy a home. Keep it within reason, of course. But there’s no need to avoid it like the plague.
Related: Strategies to pay off your mortgage early
“Never use a credit card”
Speaking of debt, it’s true that credit card interest rates are at an all-time high (with some in the 20% to 30% range) making it much easier to dig yourself into a deeper financial hole. On the other hand, credit cards can be a beneficial financial tool if used correctly. Paying off the balance in full each month and utilizing a card with sweet rewards and perks might help turn your credit card into a friend rather than a foe.
Avoiding credit cards entirely isn’t exactly sensible for many folks, especially when you consider that they can help you establish credit. Plus, they are one of the best tools to help rebuild your credit score.
If you want to know how to use credit cards to your advantage, check out our credit card best practices.
“Carry a balance to improve your credit score”
Here’s another head scratcher. I once overheard a coworker say he was carrying a credit card balance [and paying the interest] for the sole purpose of improving his credit score. He said his financial advisor suggested it to maintain a credit card balance between 40-60% of his limit.
This couldn’t be further from the truth.
In reality, you can improve your credit score by simply using your credit cards responsibly (GASP!). The first rule of responsible credit card use is to pay your balance in full each month! You must avoid those dreaded compounding finance charges. However, some folks are convinced that you must carry a revolving balance in order to reap the benefits – which is the opposite of what you want to do.
“You have plenty of time to worry about retirement”
When you’re 22 years old and starting your first “real” job, odds are you aren’t thinking about retirement. In fact, many folks in that stage of life have been told they should put off retirement planning until you’re more established in your career. Unfortunately, that’s bad financial advice! Because it will force you to save much more aggressively down the road as your timeline to retirement grows shorter. Basically, it’ll reduce the role that compounding can play in your life.
When you’re in your 20s or even 30s you have the most precious commodity on your side…TIME! By saving and investing your money instead of spending it, you’re seizing the power of compounding interest in your favor. If you give your money time to work its magic you’ll witness what started out as small contributions turning into a big retirement nest egg over the long haul.
“Always trust financial advisors”
There are a lot of good, trustworthy financial advisors out there. And while it’s not a bad idea to work with an advisor, especially if you’re facing a major financial decision, you should never take an advisor’s words as gospel. And the truth is, DIY education or turning to an accredited financial coach for help might be a superior option.
Many advisors earn their living through commissions, meaning they earn their salary based on the products they sell you. This easily becomes a conflict of interest, and can lead to upselling of investments (and insurance products) you don’t need!
I know several people who have endured huge losses because they blindly trusted their advisors and followed bad financial advice. We recommend having at least a basic knowledge of your finances as well as knowing the differences between the types of fees financial advisors charge. If you’re going to hire one, go with a fee-only advisor for sure. XY Planning network is a great place to turn.
Pro tip: Here’s an email script to break up with your financial advisor!
“Making more money is the only way to have more money”
Do you feel like no matter how much money you make it’s never enough?! It’s true that some folks simply don’t earn enough money to get by. In fact, some reports cite that as much as ~60% of Americans live paycheck to paycheck. However, for some individuals no amount of money would ever be enough. Because of poor money habits, undisciplined spending, and lifestyle creep.
If you’ve found yourself unable to keep a budget, managing small amounts of money ineffectively, it’s highly likely you’ll do an equally poor job of managing a greater amount. As I always love to say, “It’s not the amount of money you make but the MARGIN that matters the most.” More specifically, your ability to save and invest will determine your financial success, not your income. The higher your savings rate, the more likely you’ll be to achieve higher levels of future wealth.
“Borrow from your 401(k) to pay down debt”
Debt can certainly feel overwhelming, but withdrawing from your 401(k) early is rarely a wise idea. The short-term relief you may feel from paying down debt is not worth the long term consequences of taking money out of your retirement savings early.
If you dip into your 401(k) before the age of 59½, you’ll owe both federal income tax and a 10% penalty on the amount that you remove. Additionally, you may be on the hook for state income taxes. Ultimately, borrowing from your retirement plan to pay off debt reduces returns and delays your retirement goals. It’s a great way to go broke.
Related: Check out our post on creating a debt payoff plan. Also the snowball vs. avalanche methods to pay off debt faster.
“Your kids need life insurance”
The thought of something tragic happening to your kids is every parent’s worst nightmare. Life insurance companies know this and use that fear and anxiety to sell you life insurance for kids.
The sole purpose of owning a life insurance policy is to replace the income of the person who passed away. Few kids are earning an income. Which makes life insurance unnecessary for your little tikes.
Instead of paying life insurance premiums, you can put that money in an emergency fund instead. (Or start building an investment account for your kids!) If a medical emergency does arise with your kids, you’ll at least have savings put away to cover expenses and not interrupt your finances.
“You should earn less money to pay less in taxes”
Have you ever witnessed a coworker get a big raise then complain about having to pay more taxes? This is one of many common tax myths that is perpetrated on the general public. Folks assume that their tax bracket equates their tax rate. But that’s not the case. This is when marginal tax rates enter into the equation.
Fortunately, America has a progressive tax system. It taxes the first dollars you earn at a lower rate than the dollars earned later in the year. So for everyone who’s fretting over getting a fat raise, you will only pay the higher tax rate on the dollar amount that is in the next bracket, not your entire earnings. So celebrate that victory instead of cursing it!
The Bottom Line
Without a doubt, there’s no shortage of terrible financial advice out there, and some of it may even sound good. Money misinformation seems to be coming at us from all sides these days, from social media nonsense to well-intentioned advice from industry pros. Other times, it’s erroneous advice about saving, spending, borrowing, or credit building. Whatever the subject, all inaccurate financial advice has one thing in common: it never benefits the person receiving it.
It’s important to remember that sound financial advice will come from reliable sources and will be tailored to your personal stage of life, needs, and goals. Do your homework before letting someone else’s recommendations influence your financial decisions. Doing so can help you avoid some major financial hazards down the road.
