12 Pieces of Dumb Financial Advice That Most People Believe, According to Experts
Have you ever received unsolicited advice that turned out to be kinda bad? Check out this roundup of bad financial advice that you and your partner should feel free to ignore.
Finding terrible advice is very easy today. Many gurus proclaim something as the best and another expert says the opposite. Who should you believe? According to Certified Financial Planners, Advisors, and other money experts, here is the advice you should avoid.
“Your Company Isn’t All That”
A common mistake is a firm blinding conviction that your company’s stock will continue to rise. When you are rewarded with an equity compensation package, including incentive stock options, restricted stock units, and discounted shares through an employee stock purchase plan, it’s sometimes hard to notice the risk stacking up.
You can wake up one day and have 80-90% of your net worth in a single stock, especially if your company has seen exponential growth. Diversifying away from your employer’s stock can be difficult, but carrying this outsized concentration risk can instantly wipe out your net worth.
“Become a Landlord”
You should put your old home up for rent after moving into a new one. We hear this from clients at least once a week. In most cases, it’s a wrong financial and lifestyle decision. Being a landlord can be time-consuming and frustrating.
Also, tying up hundreds of thousands of dollars in a low or negative-returning investment can be a costly mistake. Treat it like an investment decision and know your different rates of return, how to properly use leverage, and why continuously setting the correct rent is crucial.
“Invest in Familiar Companies”
This advice can cause many investors to concentrate their portfolios on just a few familiar names. Many times these names happen to be large stocks that trade at premiums. Focusing too heavily on these names could translate into lower expected returns for an investor who primarily concentrates their portfolio on just these names.
Instead, consider utilizing Index Funds or ETFs, which allow you to gain exposure to a diversified basket, including names you might not have heard of but have the potential to deliver outsized returns. The benefit of doing this is the enhanced diversification benefits.
“A Tax Refund is Better than Owing”
Many people believe that a tax refund is a good thing. They also assume that any tax balance due means the tax preparer isn’t skilled at his job. This assumption couldn’t be further from the truth. A sizable tax refund means you loaned money to the government for free (when you could have been earning interest).
It’s better to monitor your tax liability throughout the year and adjust withholding or estimated tax payments as needed.
“Pay Off Debt Before Investing”
The dumbest financial advice I hear comes from recognized financial experts. It’s always the same: Pay off debt and have 3-6 months in an emergency account, then consider investing. This advice seems reasonable on the surface, but there’s no reason someone can’t pay off debt while investing or put money into a savings account and an investment account.
Don’t put off investing because some guru told you. You could lose out on years of potential gains. Instead, look at your financial goals and determine an allocation for debt repayment, savings, and investing based on those goals. It may take longer to pay off your debt, but you will be making incredible gains with your investments in the meantime.
“Keep Your Mortgage for the Tax Write-Off”
One lousy piece of financial advice I’ve heard is not paying off a home mortgage early because of the tax deduction on interest. I know it may make sense for some individuals, but in many cases, the small tax break you get is minuscule compared to the annual interest you pay.
However, there are some excellent reasons not to pay off your mortgage early, such as if you were lucky enough to lock in a 3% or lower interest rate. Then, it might make sense to invest instead.
“Keep a Small Credit Card Balance”
One lousy piece of advice roaming out there is “keeping a balance on your credit card is good for your credit.” There are zero reasons to keep a balance on your card if you have the funds to pay it off in full each month.
Instead, make on-time payments and keep your utilization low (the two most important factors of maintaining a good credit score).
“As a Rule of Thumb…”
“Rules of thumb” as a basis for every financial strategy is an example of dumb financial advice. “Rules of thumb” do serve a purpose. However, they should be tailored to you.
For example, the 50/30/20 rule. 50% of your expenses are fixed, 30% are variable, and 20% to savings. While an excellent start, it is not a one-size-fits-all. Instead, consider translating this to you: Over 30% as you start (you are hitting this!) Over 20% as you start a family or a business and lastly, over 10% as you get closer to your end goal (part-time retirement or significant life change)
“Never, Ever File Bankruptcy”
Despite what many people think, bankruptcy can be a viable debt repayment option. No, it shouldn’t be something you aspire to, but if you are drowning in debt, it is a possible course of action that more people should consider. Bankruptcy isn’t going to be the right choice for everyone. It depends on your specific situation, as well as where you live.
(For example, in the US, you cannot include your student loan debt in your bankruptcy, but you can in Canada after seven years.) Do your research, talk to professionals, and see if bankruptcy is the right path out of debt for you.
“Booking Flights on a Tuesday Saves Money”
Don’t believe this disproven “travel hack” is the golden ticket to help you save money on your next vacation. Flight prices are highly volatile and vary widely based on several factors, many of which are unpredictable. The quickest way to overspend is by having a fixed destination and date in mind, even if you book on a Tuesday.
Instead, sign up for price drop alerts through a service like Scott’s Cheap Flights or AirefareWatchdog, and keep your dates and destination options wide open. Jump on a cheap flight when the opportunity arises, and you’ll save hundreds (or more!) on your vacation.
“Stay Away from Credit Cards”
When financial experts caution the public against using credit cards, they keep one of the best-kept secrets from the masses. Signing up for and utilizing travel rewards credit cards opens up a world of opportunities you may not have considered you could ever afford otherwise.
Learning this secret unlocked experiences I’d only dreamed of having. I’ve been able to travel to places I’d never have visited without the help of this savvy hack.
“A Savings Account Will Help You Retire”
One of the dumbest financial moves is to leave all of your money in a savings account or checking account. People feel that if you can save enough in that account, you will have enough to retire. The worst part about this advice is that money barely grows.
The interest rates are barely 1%, and inflation historically is around 3%, but much higher now. As inflation grows each year, that money will have its buying power eroded. It is best to invest that money instead of letting it sit there and do nothing. The time that has been wasted just sitting in a checking account could have been used to grow the money.