Everything You Know About Personal Finance Is Probably Wrong


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Whatever the case, I feel like there’s a lot of personal finance advice being provided that’s outdated or just wrong.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:

steve think save retire

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:

building credit military dollar

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:

retire by 40 financial advisor

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:

revanche new car

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).

It’s lunacy!

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:

Borrowing to Invest

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:

401k sunscreen your green

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.

Borrowing (withdrawing and then repaying) can be done without penalty, but these loans have limits and must be repaid quickly.  You’ll also need to repay any borrowed funds with after tax money.  Then you’ll pay taxes again when you withdraw in retirement.  Not a win for most people.

Third, 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)

three year actively managed

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).

 

In Closing

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?

 

[Image Credit: Flickr]

33 thoughts on “Everything You Know About Personal Finance Is Probably Wrong

  • May 16, 2018 at 6:06 AM
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    Wow great points here, Mr. Tako!

    I was both shocked and not so shocked about how you got fired. That sounds totally unfair. You worked hard and took on more responsibilities and should be fairly compensated for that. But I guess when it comes to costs and profits, the employer doesn’t care about emotions and fairness.

    I myself have been wanting to ask for a promotion but am also afraid of getting fired. There have been so many people at my job who got laid off all of a sudden. Part of me won’t be too surprised if I showed up at my office and got a package at my desk. >_>

    Reply
    • May 17, 2018 at 9:56 AM
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      Hi Mrs. FAF! This is exactly why achieving FI is so important. We can no longer trust employers to be fair or even ethical. The mighty dollar comes first with them.

      Good luck on your promotion!

      Reply
      • May 18, 2018 at 3:03 AM
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        This is exactly what i was thinking! Not fair! I was planning on making my promotion pitch at the end of the year, now i’m strongly reconsidering.

        Do i wait for my employer to do the right thing based on the amount of value I’ve brought the company? decisions, decisions.

        How would you have done things differently in hindsight? Not asked at all?

        Reply
  • May 16, 2018 at 6:39 AM
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    Ahh yes, the bad advice from well-meaning family members.

    You should’ve heard the wide range of advice that Ms. Soon-To-Be Rational Buck and I heard when we began looking for a residence.

    It’s astounding how we take some advice for granted without really digging deeper because it’s often touted as correct. I really liked the following:

    “Repetition of a falsehood doesn’t make it right.”

    The truth is the truth, no matter what you “feel” about it. Thanks Mr. Tako, loved the article 🙂

    Reply
    • May 17, 2018 at 9:58 AM
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      Thanks Mr. RB! I think the falsehoods mainly get spread around because finance is complicated.

      Nobody likes complicated of course, they want simple “sound bites” that are easy to share. Reality is decidedly more complicated.

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  • May 16, 2018 at 7:23 AM
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    Wow, getting fired because you asked for a raise? That’s harsh. Employers have way too much power today. This is probably why wages are stagnant.
    I think you’re 100% right. Everyone need to do your own research. There are a lot of good information out there too. Don’t trust one source completely.
    Thanks for the mention!

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    • May 17, 2018 at 10:04 AM
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      No problem Joe! Thanks for sharing!

      I totally agree that employers have way too much power. In my case they were trying to take advantage of a trustworthy employee who was a hard worker. I was a sucker for falling for it.

      Reply
  • May 16, 2018 at 9:49 AM
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    Higher salaries certainly can put you in the crosshairs. When I took over a new team, I noted that one of the guys was WAY below market and my life would be miserable if he left. I argued and won a big increase for him…and then his name was always at the top of the annual RIF list (thankfully I made his case each time). Corporations aren’t evil (mostly), but they are short-sided and heartless.

    Reply
    • May 17, 2018 at 10:08 AM
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      Short-sighted and heartless? You got that right!

      In my case I never earned a “high salary”, but was just asking for roughly the media salary in my area. The crazy thing was, even if I got a raise it would have been significantly less than what the employees I was managing were paid.

      Reply
  • May 16, 2018 at 10:23 AM
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    Wow I made it to the list? Holy moly!

    I’m surprised that you got fired because you ask for a raise. That’s crazy! Or maybe you were making too much money already (hahaha kidding!).

    Reply
    • May 17, 2018 at 10:09 AM
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      I hope your kidding! I’ve never made more than the median salary for my chosen profession.

      Reply
  • May 16, 2018 at 11:03 AM
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    Ha, craptastic. The Oxford dictionary needs to get on it and make that word real.

    I learned about finances and money after subscribing to Money magazine in the mid 1990’s. Even though there was good advice in every issue, there was also bad advice too. The predominant bad advice was that actively manage funds are the way to go. They never said it that explicitly of course, but issue after issue had interviews with these super-wealthy fund managers (who’s wealth came from fees of course) who maybe got lucky and beat the market once or twice. Then they would of course lose to the market 6 years in a row after their lucky streak, but Money conveniently wouldn’t feature them after that 😉

    Reply
    • May 17, 2018 at 10:10 AM
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      I wonder if magazines see some kind of promotional fee for writing articles like that. I suspect so.

      Reply
  • May 16, 2018 at 11:35 AM
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    Living in one of the most expensive cities in the world (east coast), buying a place has always been tricky. One can easily go over budget with housing purchase. Even though our local market has always been hot (ish), and buying a house probably will appreciate (bit) more (compare to apartments), we decided we don’t want the property tax, maintenance fees that comes with a large house.

    I was secretly happy to find out one of my coworkers (whom I don’t get along with) bought a SFH a little bit just under 1M. I don’t know where she get the idea, probably think it’s gonna be a good investment (not from me for sure). Knowing she isn’t from a rich family, no inheritance, didn’t married rich, and this is probably the largest loan they can get based on their income, chances are they will be house poor for a long time…hehe…

    Reply
    • May 17, 2018 at 10:12 AM
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      I think this is often the case in areas where people have stable high paying jobs — expensive real estate!

      Unfortunately financial education is so poor in the U.S. that being “house poor” is considered OK, or even praised at times.

      Reply
  • May 16, 2018 at 11:55 AM
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    You fell for the “promotion w/o a raise” ruse not once but twice in a year? Why did you accept the second promotion? Were you fired with cause? If so, you had a strong case of wrongful termination. Two promotions in a year and then you get fired two weeks after asking for a raise?

    Reply
    • May 17, 2018 at 10:16 AM
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      Yes, I fell for it. I was a sucker I guess.

      No, I wasn’t fired with cause. They just pulled me into a meeting one day and said “We don’t need you anymore. Bye.”

      No explanation was given, and they refused to provide answers when I asked.

      Reply
  • May 16, 2018 at 12:20 PM
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    Ehhhh, most of these are pretty awful on the face of them anyway. It’s like getting financial advice from the person sitting next to you on the bus or train, with no consideration for what they know.

    Heck, I can give you medical advice but you should definitely not consider it… 🙂

    Reply
    • May 17, 2018 at 10:19 AM
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      Well, I think you make an important point here Jim. We trust medical professionals because they’re specifically trained in that profession and take oaths to help people.

      Yet most of the “financial advice” out there is from untrained people or those without your best interest at heart.

      Reply
  • May 16, 2018 at 12:37 PM
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    It’s amazing how it all comes down to one simple idea: No one will manage or understand your financial situation better than you. So you have to educate yourself not to make these crazy mistakes.

    Reply
  • May 16, 2018 at 2:59 PM
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    I think investing with debt and asking for a raise are a matter of degree. It doesn’t hurt to ask softly but to ask hard nose could leave you in the cold. The approach is more like what can I do to ultimately raise wage to compensate for work.

    Same with debt, used responsibly it can be very profitable.

    Reply
    • May 17, 2018 at 10:22 AM
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      Well, I certainly wasn’t hard nosed about it. I earned those promotions and felt justified in asking.

      Reply
  • May 17, 2018 at 6:50 AM
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    I read Wealthy Barber, Your Money or Your Life and ran a small group in my church about it, and the Tightwod Gazette (old school). Where I fell down was the investing advice I took from banks and tv shows, not realizing that they were self interested and often completely out to lunch. Early on it was very difficult to save money to invest and knowing that the vampires took plenty of it, is very craptastic. They were eating my fancy steaks while I held back and saved!

    Reply
    • May 17, 2018 at 10:27 AM
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      It’s pretty awful isn’t it? We want to believe we can trust the “professionals” or even our well-meaning friends and family. But you really can’t if you want to truly build wealth.

      Reply
  • May 17, 2018 at 10:30 PM
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    I like the input you got from the PF blogosphere! Classic piece of stinker advice from everyone!

    That sucks that you were laid off because you asked for a raise- terrible. Good thing you had “F-U” fund ready to go. It’s a powerful feeling.

    Reply
  • May 18, 2018 at 11:36 AM
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    Thanks for the mention, Mr. Tako!

    Love this piece. Yes, there are tons of bad financial advice out there. Mostly because it’s so lucrative to sell shit to ignorant people. I bet if us FIRE bloggers just threw up our hands and started pitching bitcoin funds and getting a commission for it, we’d make a TON of money. But luckily FU money allows you to the the truth and not give shit what other people think. FU money also lets you quit a job you hate and ask for a raise without worrying about getting fired (yeesh so sorry to hear that happened to you. But good thing you’re FI!). Screw bad advice. Get FU money.

    Reply
  • May 19, 2018 at 6:26 AM
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    A good friend of mine recently made this series of terrible financial decisions in real-life. Bonus points that he asked me for advice first. I of course shunned what he was planning to do, but he went ahead and did it anyways.

    I love my friend dearly but needed a space to vent, and this is the perfect place!

    Mistake 1: He and his wife owned a 2 bedroom condo. She got pregnant, they immediately decided they needed to buy a large single family so that they had space for the kid. They already had plenty of space!

    Mistake 2: They put tons of money/time into fixing up the condo before selling it. It maybe net them an extra $5k on the sale price. But they easily put at least $3k into fixing it up. NOT WORTH IT.

    Mistake 3: My friend borrowed against his 401k to use as a down payment on the new house.

    Mistake 4: So with a baby on the way, my friend has decided his Jeep is useless. He’s decided now that they are moving out to a more rural area, a truck would be perfect. But not just any truck. A truck with enough space for the little tike. So he’s planning to trade in the jeep for a new truck. Also, he traded in a car (that be bought brand new) for the Jeep 3 years ago. Also (again), he traded in a Jeep for the new car before buying it. So he’s had 2 jeeps, and one new car, and now is getting a new truck. All of this has happened over the last 7 years. I can only imagine how many thousands he’s lost due to this series of decisions.

    It’s really unfortunate when friends ask for advice and make terrible decisions anyways, but then complain about their lot in life. He travels basically full-time for work and hates it. There are many scenarios in which he could have abandoned this job long ago if he wasn’t making huge financial mistakes. But he acts as if he’s just stuck with it.

    Reply
  • May 19, 2018 at 6:26 AM
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    They are changing funds in our 401k at work, if you don’t make any decisions your money goes into a target date fund. The 2060 has a gross expense ratio of 10.78. I said ‘woah!’ Out loud at my desk when I saw that. I will of course be making sure I’m in Vanguard at 0.04-0.06 expense ratio funds.
    I just doubt many people are going to look at the cost difference involved in the rollover, relating to financial illiteracy.

    Reply
  • May 20, 2018 at 4:25 AM
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    Very nice points, Mr. Tako 🙂

    In my country, most people don’t talk about money. So, I didn’t really receive any bad advice. However, you can read so many of these on the internet, that I can relate.

    Reply
  • May 21, 2018 at 12:12 AM
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    Wait they fired you because you didn’t want to work more and more for the same amount of money? That’s a blessing in disguise because that’s a crappy employer. I hope they had a bad time replacing you because that’s a terrible way to operate.

    All these are terrible. How come no one mentioned the “you have to get a college degree or no future!!! “

    Reply
  • May 21, 2018 at 1:50 PM
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    This was a really good read. I do not like monthly bills so I do everything I can to eliminate or decrease them. I was also told not to invest borrowed funds. I think people do the best they can with what they know/have. Since, many places do not teach finance there is no shortage of misinformation. Heck, I’m sure if I keep blogging I may even make a list of yours someday! I just gotta keep rolling and getting more educated and keeping informed.

    Very sorry to hear about you losing your job. That really sucks. But that fact that you are blogging and helping others means that you were meant for bigger things.

    Kindest Regards,
    Miriam

    Reply

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