An advice can simply be good or bad. In finance, financial advisors can be good or bad, either. And there are ways of zeroing in on the better folks among them.
That’s well worth doing, but it’s also good to remember that we need to be wary of bad financial advice — because it may be coming at us not only from professional advisors, but also from well-meaning friends, neighbors, and relatives, or from financial books or gurus on TV.
There are times when an advice seems to make sense.
You know…
Advice that seems to be logically sound. Advice that seems to be intuitive.
On a closer look, however; or unfortunately, as events unfold, the seemingly benevolent advice suddenly puts you on a very difficult situation.
In this article, we list down bad financial advice which seem to look sound and well, but may end up hurting your financial health in the end.
Here are a few examples of bad financial advice. The list is far from comprehensive, though, so be sure to keep your critical thinking cap on when you tend to financial matters.
1. Aside from your home, invest on another one and rent it out for extra income.
Seems like a sound advice.
Indeed, for some, yes. This can work well for some people, but it’s far easier said than done, and is not a good idea for many.
Consider this.
Being a landlord involves a lot more than you may have imagined. It involves dealing with empty and income-less properties at times, dealing with troublesome tenants, having to make expensive repairs, and not always being able to sell when you want to for a price you want. Think about the extra cost of owning a real estate property like an apartment or a condominium unit. You will have to pay for the insurance, the homeowner’s association dues, or the mortgage.
Pro tip: Say you buy a condominium unit in the metro and rent it out. Carefully scrutinize your finances and look at the cost of owning an estate. Project a cash flow and be realistic about your assumptions. See if you can get returns on your investment. If yes, then fine. If not, getting a property to be leased might not be a good idea after all.
2. Don’t borrow money for college.
This is bad financial advice because in general, folks with college degrees earn more, and in these recent days of high unemployment, more educated workers were less likely to be unemployed.
Yes, being saddled with a lot of debt can make life difficult, but many schools are quite generous with financial aid and there’s a good chance you won’t be paying or even borrowing the full sticker cost.
Pro tip: If you can hustle and joggle school with an job, do so. There are people who have done this. This is beneficial for you in the long-term as exposure in the labor market will give you skill sets you will use later on in life. This will also help you build connections and networks that will help you in your professional career.
3. Pay off all your debt before you start saving for retirement.
It’s easy to see the logic here, if you’re looking at hefty interest rates.
The stock market has averaged roughly 10% annually over many years, while some credit cards have charged more than 20% annually.
Tackling debt first can actually make sense, but only if you do the job quickly, such as in a year or two. If it’s going to take you many years to pay off your debt, then you’ll be forgoing many years when your retirement account could have enjoyed compounded growth.
Pro tip: Procrastination can be deadly to your retirement. Perhaps work on both goals at the same time — that’s better financial advice.
4. If you can borrow money for, say, 8% and then invest it and earn 10% or 15%, go ahead.
This is the logic used by many who invest using margin — in other words, borrowing from their brokerage.
It looks like a compelling proposition, but for most of us, it’s bad financial advice. After all, you’ll be on the hook for that 8%, guaranteed. But the gain you hope to get via your investments is not so guaranteed.
Even great stocks can fall for a short or long while, as can the entire market. And fat dividends can be reduced or eliminated. This is usually a risky thing to do.
Also a bad idea: if you’re already saddled with debt and you want to try to pay it off by investing with borrowed money.
5. Savers are losers.
Umm. Well. No. I outrightly say, no, this is not the case. Of course, nobody becomes truly rich by saving money in the bank only. In order to be rich, you should invest money.
But it does not mean saving in a bank is a loser’s move. As a matter of fact, learning how to save money is the foundational financial discipline everyone should master and hone.
Never forget, as well, that when your all of your money is invested onto something (because you hated saving cause you believed it’s for losers) all of your money is at great risk!
The returns may be higher in investments. The principle remains, the riskier, the higher the returns. But never miss the part which says “riskier”.
Pro-tip: Learn the habit of saving. It’s a foundational skill for wealth building. Then ensure proper financial protection by creating an emergency fund, and getting health and life insurance.
Afterwards, that’s the time you should invest! At this point, make sure to invest regularly and as much as you can afford.
6. Buy a lot of gold.
It may be surprising to see buying gold among pieces of bad financial advice, but gold has just not been a great long-term performer at all. Sure, it’s had some great runs, and has delivered a lot of value to those who timed it well. And even now, many smart people think it’s a buy. But many others think alternatives such as stocks make more sense.
There are lots of other pieces of bad financial advice. Taking time to read up on financial topics and to learn more will help you recognize and avoid many of them. But there are some quick and easy red flags that will help, too: Beware of outrageous claims and promises, steer clear of high fees, avoid investments with rules that are too restrictive, and don’t expect to get rich quickly.
7. Credit cards are bad. Don’t get one. Or else, you will be debt-ridden.
We hear a lot of horror stories involving credit cards. Yes, credit cards may have facilitated the ruin of some people’s lives.
But it isn’t the credit card’s fault, right? It’s the user’s lack of discipline.
If you don’t have a credit card, then you’re missing out on the opportunity to do financial leverage.
For example, you can use a good portion of your money for other things first when you buy something on zero-interest installment, as compared to paying full in cash. This is especially helpful for entrepreneurs.
Moreover, if you have a credit card, then you don’t have to bring lots of cash in your wallet. Additionally, you’ll enjoy perks from the reward points you’ll earn from it.
Pro tip: Credit cards are for people who have the discipline to control their spending. But when used right, it can give you financial leverage in the long-term. If you have a great credit history, getting a loan (for whatever purpose, hopefully for investment) will be a lot easier!
Sources:
Time (2017). Terrible Financial Advice: Top 10 Tips You Shouldn’t Follow. Available online at http://business.time.com/2012/08/23/terrible-financial-advice-top-10-tips-you-shouldnt-follow/
Hamm, T. (2015). The Eight Worst Pieces of Financial Advice I’ve Ever Received — and Why They’re Wrong – The Simple Dollar. [online] The Simple Dollar. Available at: https://www.thesimpledollar.com/the-eight-worst-pieces-financial-advice-ive-ever-received-and-why-theyre-wrong/ [Accessed 9 Sep. 2017].
Maranjian, S. (2017). 6 Pieces of Bad Financial Advice You Shouldn’t Follow — The Motley Fool . [online] The Motley Fool. Available at: https://www.fool.com/investing/general/2013/04/29/6-pieces-of-bad-financial-advice-you-shouldnt-foll.aspx [Accessed 9 Sep. 2017].
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Ready To Be Rich. (2016). 7 Bad Financial Advice That a Lot of People Follow. [online] Available at: https://fitzvillafuerte.com/7-bad-financial-advice-lot-people-follow.html [Accessed 9 Sep. 2017].
Hannah, S. (2016). 4 examples of bad personal financial advice and why you should ignore it. [online] The Province. Available at: http://theprovince.com/opinion/columnists/4-examples-of-bad-personal-financial-advice-and-why-you-should-ignore-it [Accessed 9 Sep. 2017].
Ty J. Young, Inc.’s Retirement You Earned. (2017). 5 Types of Bad Financial Advice You Shouldn’t Follow – Ty J. Young, Inc.’s Retirement You Earned. [online] Available at: https://www.retirementyouearned.com/2017/05/29/5-types-bad-financial-advice-shouldnt-follow/ [Accessed 9 Sep. 2017].
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