How did you learn about personal finance? When you were a teenager did someone sit you down and explain the financial “facts of life” to you?
You probably didn’t get a formal financial education — Most people don’t. Maybe you picked up a number of personal finance lessons from your parents or relatives. Or, perhaps you didn’t have good role models early-on in life and had to learn the ropes on your own. The school of hard-knocks as it were.
Whatever the case, I feel like there’s a lot of personal finance advice being provided that’s outdated or just wrong.
Don’t believe me?
I’m not alone in thinking there’s a lot of bad advice out there — I recently reached out to my Twitter friends to see if they’ve received any really bad personal financial advice.
The responses were painful, plentiful AND horrific! Let’s take a look at some of the worst offenders…
Buying A Big House
The first stinker on the pile of financial offal has to be one of the worst pieces of financial advice ever, and it comes to us by way of Steve at ThinkSaveRetire:
Thanks for sharing Steve! I’ve definitely heard this rotten financial advice before.
For some reason many people believe that houses are investments and they conveniently forget the interest, taxes, buying costs, selling costs, and maintenance expenditures that come along with owning a home.
It’s ludicrous. Buying a big expensive house with debt is NOT what you want to do. Houses do not produce money, they consume money.
And for all you folks with your hands in the air right now trying to tell me about leverage and how housing prices “always go up” — Yeah yeaah! I’ve heard it all before.
Housing prices don’t “always go up”. Sometimes they go down too. Just ask homeowners who live in the Detroit area. Thousands of homes were simply abandoned because there were simply no buyers when the population declined.
Changes in local laws can also cause home prices to decline. FireCracker over at Millennial Revolution recently penned a piece about price declines in Toronto due to changing laws. It can happen anywhere — even economically successful cities like Toronto.
Yes, it’s true that in certain high growth markets (like San Francisco, Las Vegas, or Seattle), long-term homeowners will probably do well when they sell. Those regions of the world have experience incredible growth where housing prices have risen at rates much faster than inflation.
I can’t deny those areas have had really good runs, but remember — housing is very much a local commodity that responds to supply and demand. Your financial outcome is going to depend entirely upon demand for housing in your local area and the supply of homes available.
Typically homes appreciate very slowly, roughly at the rate of inflation.
According to long-term data in Robert Shiller’s book Irrational Exuberance, the average annual home price increase for the U.S. during the 1900 – 2012 period was 3.1% per year. Only slightly better than inflation at 3.0% per year.
Building Credit With Credit Cards
OK, this next terrible piece of financial advice was shared by Military Dollar, and oh-boy is it a stinker:
No. Just NO. You absolutely DO NOT need to hold a credit card balance to build credit. Absolutely NOT!
Never in my entire life have I held a credit card balance and I have a incredible credit score. Nearly the maximum possible credit score of 850! Banks are willing to loan me incredible sums of money even though I haven’t held a job in nearly three years.
I did this by simply using a credit card once in awhile and paying off the balance in-full every month, and on-time. Do this for awhile and eventually banks and credit card companies will be willing to loan you WAY MORE than you could possibly need to borrow.
Never carry a credit card balance. Enough said.
Asking For A Raise
Ok, I’m sure you’ve heard advice similar to this about getting a raise at work:
“Want a raise at work? — Work hard, exceed expectations, document your achievements and then ask for a raise. You have nothing to lose by asking!”
Actually no, that’s not ALL there is to it. You DO have something to lose — your job. I’m living proof of it!
I once worked for a company where I received TWO promotions in less than one year. I was a star employee that was given multiple teams of people to manage due to my work ethic. The only problem was I didn’t receive a raise to go along with those promotions.
Even though I was working harder because of the increased responsibility, I was making the exact same amount of money. This didn’t sit terribly well with me.
So I looked-up on Glassdoor what the market rate for my position would be. Then, I asked my manager for a raise comparable to what other managers in my local area were making. Seems fair, right?
Within two weeks of asking for a raise, I was fired from that job.
So yes, you do have something to lose when you ask for a raise. Never forget that you as an employee are replaceable.
Hiring new employees does have a cost, but sometimes that cost is less than paying market rates for current employees.
Be careful when asking for a raise, OK?
Get A Financial Advisor
Many a new college graduate has started a new job to hear the advice, “Now that you’re working you should get a Financial Advisor to help you invest. They’re free!”.
Joe from Retire By 40 reminds us just how bad this advice is:
I’ve actually written about how terrible these free financial advisors are before — I called them financial-vampires because they feed on your finances like vampires feed on blood.
Most of the time these financial advisors are not going to be fiduciaries. They DO NOT have your best interest at heart. Rather than setting you up with some extremely low cost index funds, these “advisors” often put you into high-fee mutual funds or funds-of-funds with front-end loads. These funds generally achieve sub-par performance.
That means you end-up losing huge amounts of money to fees and “loads” that do nothing but feed the financial vampires. These “free advisors” profit by selling those funds to you. They receive payment indirectly from the mutual fund via incentive payment schemes. They’re called 12b-1 fees, if your curious.
I’ve even seen this behavior from “non-free” financial advisors — Meaning they profit from you twice. Once when they charge you their “advice fee” and once again when the mutual fund takes their 12b-1 fee. While this is technically legal and they do have to disclose everything, I still think it’s wrong.
In my experience, if you really want to make money you need to be a DIY investor.
Buying New Cars Is Easier
If you’re not a “car person”, you’ve probably heard some terrible advice about buying cars. This one was sent to me by Revanche:
Argh! While new cars definitely have a warranty period (when most defects are covered), that same period also coincides with the largest amount of depreciation you’ll ever experience as a car owner — The first few years after you purchase always has the largest drop in value.
In a sense, you’re paying a HUGE sum for that warranty.
So yes, you could take out a $20k car loan and buy a brand new car. Any problems with the car will be covered in the first few years by the warranty… but it’s gonna cost you!
Not only will you pay a much higher price for the car, but you’ll be paying car loan interest and you insurance will be higher (to cover the higher value of the vehicle).
Instead, you can pay as you go by purchasing a quality used vehicle with cash. You’ll pay considerably less for the vehicle up-front, have a smaller insurance bill, and you’ll keep your money until something actually breaks on the car.
Yes, an older car might be in the shop once in awhile. That’s life. Things break. The financial reality is that YOU get to hold the cash instead of the car dealer.
Hopefully that means you’ll do something smart with the cash instead.
Investing With Debt
This next horrible piece of financial advice comes from my blogging-buddy Bob over at Tawcan, and it’s a doozy:
Yep, that’s some top-drawer bad advice Bob! Most people (who are not astute investors) need to stay very far away from debt.
Remember: Asset prices can go both up and down. They can go up or go down for years, sometimes even decades It doesn’t matter if it’s stocks, real estate, or even baseball cards — markets can move in any direction and stay that way longer than you can stay solvent.
You will lose if the market moves against you, and unfortunately most of us can’t accurately predict the future.
So unless you’re a very astute investor, never buy stock “on margin”. The same goes for investing in rental real estate — you really need to know what your doing before you invest with debt. It can absolutely destroy you financially.
My buddy Jim over at RouteToRetire recently shared the story of buying his first rental property. It didn’t go well, and he ended-up losing $18,500 (roughly 27%) of his investment. Outch! Investing with debt isn’t easy folks, and it could have turned-out far worse for Jim.
For most of us beginner investors (of which I count myself), avoiding debt when investing is probably the best thing to do.
The 401k Savings Account
Fellow blogger SunscreenYourGreen threw this craptastic piece of financial advice my way, and it’s so bad I just HAD to include it:
OMG this is terrible advice on so many levels! First of all — a 401k is not a savings account. A 401k is a retirement account! You’re not suppose to withdraw funds until you reach the designated retirement age.
Anybody who withdraws 401k money before that age will pay a 10% early withdrawal penalty on-top of your income tax rate. You do not want to do this except under the most dire of emergencies.
Secondly, buying house is not a great financial move. It’s a giant expense. You’ll be trading good financial assets for a giant loan. Maybe you’ll see a little appreciation someday far in the future, but there’s no guarantee.
It’s like taking one step forward (with a positive net worth) only to take four steps backward into debt (when you buy the house). It’s completely asinine.
This is exactly why I recommend people save-up the entire purchase price before they buy a house. THEN put the money into the stock market and get your home loan. More than likely the stock market is going to outperform the real estate after all fees, taxes, interest, and maintenance are accounted for.
Keep your money in the better financial asset and maintain a positive net worth!
Actively Managed Funds
Got someone telling you to invest in an actively managed fund? Maybe they’re also telling you how they beat the market last year? Yup, this is nonsense of course! (But thanks for sharing it Laurie at ThreeYearExperiment)
So first, let’s talk the elephant in the room — any actively managed fund you invest in is not going to consistently beat the market. Period. Maybe it will one year, but don’t expect it to happen every year. It’s probably just luck.
Yes, it’s true that a few individuals around the world can beat the market consistently — Guys like Warren Buffett once did, but they’re usually running hedge funds not some lowly mutual fund. You probably don’t have the financial resources to invest with them.
Instead, I say, “Get used to not beating the market”. Be comfortable with it. Even index funds don’t beat the market (once you factor in the small fees).
OK OK! I could keep doing this all day! There’s TONS of bad financial advice out there, and I don’t want to stop!
But this post is already getting too long! What’s a blogger to do?
If you’ve made it this far you probably get my point — most common financial advice is terrible and probably wrong (but often repeated).
Repetition of a falsehood doesn’t make it right.
If friends and family give you financial advice, they probably mean well. I don’t doubt that. But it’s probably for the best if you ignore the advice. Market conditions and economic conditions can vary wildly from what your Aunt Jemima experienced in Arizona back in the late 1970’s. She may have made a fortune buying long-term bonds back then. Interest rates were super high and anyone who bought long-term bonds did extremely well.
What worked for her in the past probably won’t work for you in the present. Today, that advice is probably wrong.
That advice might have worked for one person with a specific skill set at one time in a specific market, but it isn’t likely to benefit YOU.
In most of these situations it’s best to thank them for the advice, and then start thinking for yourself!
Yes, there might be a few mistakes along the way. It happens. I’ve made my fair share of investing mistakes over the years. That’s just part of the learning process. Don’t lose heart after a setback. Just keep learning.
Have you ever received any terrible financial advice? Care to share it in the comments?
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