Have you ever been given bad financial advice?
I guarantee that you have, even if you weren’t aware of it.
The question is…did you listen to it?
Here are 14 bad pieces of advice you should reject:
“Buy a house. It’s a good investment.”
We are told by the media and various gurus that buying a house is a sound investment. Turns out, it’s actually usually a terrible investment. Between the money you spend on your principal and interest, let alone the yearly costs of property taxes, insurance, maintenance and repairs, your house will most likely give you a terrible return on your investment, if any return at all.
Per the Federal Housing Finance Agency, home appreciation for this last year was higher than usual, an average of 6%. If you’re paying 3% or 4% interest on your loan, that’s not giving you a great return, without even accounting for the other money you have to dump into the home. There are plenty of good reasons to buy an owner-occupied, turn-key house. But as “an investment”? No.
“Buy the biggest house you can afford.”
Many people buy a bigger house as their income increases. In fact, some people buy a small, unsatisfactory “starter” house with the assumption that they will trade up with the next big pay raise.
But who needs all that space? If there are 5 people in your family, is there any reason to have 8 bedrooms? Do you really NEED a bathroom for every single room?
What if, alternatively, you buy a small, comfy house to make your home? Then, when you actually outgrow it (what are the chances you had TWO sets of surprise twins?!), then you can “trade up”. But there is really no need to buy more house than you need.
“Don’t buy used, buy new!”
Did you know that most cars lose 20% or more of their value in the first year? And up to 60% in the next 4 years?
If you try to sell your brand-new $40,000 truck just one year later, you can maybe sell it for $32,000. And if you sold it after 5 years, you could maybe get $16,000. Is it worth losing almost $5,000 a year in depreciation to have a brand-new truck?
Or would it be better to buy a 10-year-old truck for $9,000 that will depreciate much slower? Seems like the better value to me.
“Get an auto loan.”
Building on the depreciation discussion…Now imagine that as your car is losing thousands of dollars in value per year, you are still making payments of thousands of dollars a year, hundreds of which is just interest.
Wouldn’t it be better to save up a stack of cash to pay outright for your next car? No interest, no paying towards a diminishing asset, and no money tied up in payments.
Find out more about why you should never finance a car here.
“Lease a new car every couple of years.”
My parents leased cars for most of my life, and I liked it. Trading up for a different, newer car every couple of years? What’s not to love about that?
Oh, yeah, the hundreds of dollars a month they were paying for a car that wasn’t even theirs.
If you want to make smart money decisions, you should not spend hundreds of dollars a month to rent a car that you will get no value from in the end. Let me reiterate…spend your money on slightly older cars and pay cash. You can save yourselves thousands in unnecessary payments and interest in your lifetime.
“Credit cards are for emergencies.”
NO! No, they are not. Your emergency fund is for emergencies. You should have actual money set aside for emergencies, not rely on the option to incur debt and pay gobs of interest on that emergency.
The one time I racked up credit card debt was because I needed to replace all 4 of my tires at once. The stress of that unforeseen expense was magnified tenfold because I knew I was going to have to pay 18% interest for every month I kept that balance on my card. It weighed on me heavily for the next few months until I was able to pay it off completely.
If I had had that money set aside beforehand, it would have been a minor stress. That money would have already been in an untouchable account, so I would have considered the money already “gone”. Forking over the actual money would not have been a huge deal. Lesson learned.
“All credit cards are bad.”
Bet you weren’t expecting this one! Despite my disdain for credit card debt, I’m here to tell you: Credit cards are not the devil. In fact, credit cards can do amazing things for you. AS LONG AS YOU PAY THEM OFF EVERY SINGLE MONTH.
If you don’t EVER incur debt, credit cards offer some great bonuses.
First, I like paying for everything with my credit card, because the transaction is automatically tracked in my Mint account (this does work with debit as well). It’s much easier to track my spending when I don’t have to manually enter cash transactions!
Second, credit cards have given me a lot of cash back, discounts, and travel miles. Getting cash back from my credit cards was like getting FREE money. I used it to pay off the credit card, or to take my honey to dinner or to the movies. I’m all for splurging with your credit card cash back. Now I’m focusing on the travel rewards, which will hopefully be even more lucrative than cash back rewards.
“Traveling is too expensive.”
Traveling does not have to cost you thousands. Utilizing some travel hacking credit card bonus strategies, you can fly around the world for very little (read about the Mad Fientist’s <$1,000 around-the-world trip here).
If you would like to stay away from credit cards, I don’t blame you. But there are still ways to save.
Do your research and find the best deal on flights, accommodations, and activities. Rent a cheap AirBnb instead of a ritzy hotel. Find a rental with a kitchen so you can cook at home instead of going out every meal. Focus on free activities instead of expensive sight-seeing. Walk or use public transportation instead of renting a car or using taxis. Stay in one place for 3 weeks, instead of flying to a new place every 3 days. Go to less expensive destinations like Mexico or Thailand, instead of pricey destinations like Hawaii or China. Make it a game to save money wherever you can while traveling.
“Let’s go out to lunch!”
I don’t think this is necessarily “advice” that people give, but I think it’s something that 85% of the population does. Every single job I have had has had a fridge and/or microwave in the breakroom. There is no reason you can’t take a lunch from home to work.
My husband drives around all day and doesn’t have access to a fridge or microwave. But he STILL takes a sandwich in a cooler lunchbox every single day.
If you are of the tribe that goes out to lunch every day, think of how much you’re spending. If you are buying “cheap” meals, you are still probably spending at least $5 a day. $5 a day X 5 days a week X 50 weeks (you have vacation time, right?) = $1,250 a year. But if you’re spending more like $10 a day, you’re spending $2,500 a year just on lunches for one person.
To put that in a frugal perspective, our overall food budget (groceries and eating out) for the entire year is $2,640. Don’t kill your budget by eating out every day!
“Extreme couponing can save you millions.”
Ok, I’m not sure that’s the actual claim…but the point is, extreme couponing may not be saving you as much as you think.
I’m all for using coupons…if 1) I can find them quickly, 2) they are actually a good deal, and 3) it’s something that I need, in a quantity that I will actually use.
Here’s an example of a good coupon: I open my Smiths app, see that there’s a $1 coupon for two tubs of ice cream. I buy ice cream every couple of weeks (and yes, for me it’s a NEED), so I know that 2 tubs is a reasonable amount that will be eaten.
Here’s an example of a bad coupon: I spent 3 hours looking through my ads and the neighbor’s ads, and found 3 coupons that I can stack to get me $1.50 off Rice-A-Roni. I do have to buy 15 boxes, but I get to save $1.50! No. In my remaining lifetime, I will probably not eat 15 boxes of Rice-A-Roni. That means they will have to move with me, they will expire, or I will end up selling them for 10 cents at a garage sale. Nor is 3 hours worth of work to save $1.50 a great deal. And, the coupons were for regular priced Rice-A-Roni.
But, surprise! Rice-A-Roni is on sale for 30 cents off, and I only have to buy 2 boxes. So the $1.50 for 15 boxes of regular priced rice is not a good deal to begin with.
Watch yourself, those stores are sneaky. And it’s easy to spiral out of control with the couponing. Couponing = good, within reason.
“Stocks are too risky.”
What about the Great Depression?! What about 2008?! Stocks are definitely not the most conservative investment. There is, of course, an amount of risk associated with buying stocks. But are they too risky? I don’t think so.
There are many ways to minimize your risk in the stock market. The first is to hold your investment for a long time. Yes, people definitely lost money in 2008. Undeniably, stock prices did (and do) drop. But if you hold your portfolio for long enough, the stock market evens out again, and even climbs. The people who stayed the course and did not sell off their stocks in 2008 have regained and exceeded their pre-2008 values. After all market downturns in the past, the stock market eventually started rising again. So sure, you (and your portfolio) will probably live through a recession or depression. But if you hold those assets for a long time, your portfolio will recover.
The other way you can mitigate risk is to own low-cost index funds. These funds try to match an index like the S&P 500 or Dow Jones. They are funds full of stocks from a wide range of companies. That means that if one company, or even industry, is doing poorly, you will still own part of all of the other companies in the fund. It’s the easiest way to diversify within the stock market, plus it has historically great returns.
“You should buy stock in companies you use and enjoy.”
This isn’t the most terrible advice. But it’s not the best, either. By picking individual stocks, you are putting all of your faith in a few companies. Sure, if you had bought Google stocks years ago and kept all of it, you would be a very rich person right now. But if you had purchased Blockbuster stock, you would probably be curled up in a ball, crying.
You cannot know which companies are going to succeed and which are going to fail. And just because you love a company or they have performed well in the past, does not mean they will continue to do so.
So, once again, I’m going to suggest the index fund. Put your faith in the overall U.S. or international market, instead of a few companies. You’ll be glad you did.
“Put your kids first.”
You want to give your kids the best. You don’t want them to have to go into $100,000 of debt to get a college education. What a noble cause. But only a smart cause if you have set yourself up first.
Do not contribute to a child’s education savings until you have a healthy nest egg for yourself. Your child may thank you for helping out with school…but they will not thank you for living in their basement for the last 40 years of your life because you didn’t save enough for retirement.
Helping kids is great. But make sure you help your future self first.
I realize that I may have too many Parks and Rec references on this blog, so I hope you don’t think I’m a maniac.
Here’s the back story of “treat yo’self” for those who don’t watch it: Two characters have a running annual date to have a “treat yo’self” day. They go shopping and if they find ANYTHING they want, the other will urge them to “treat yo’self”. They buy expensive clothing, jewelry, shoes, meals, etc. It’s great fun to watch, but makes me cringe to think of actually doing that in real life.
Richard Paul Evans said it best in his book The Five Lessons a Millionaire Taught Me About Life and Wealth (one of my favs BTW): “Equating spending with happiness is the first step to financial self-destruction.”
Ain’t that the truth? You don’t “deserve” to spend your money on something frivolous because you had a great or terrible thing happen to you. That’s life. Great and terrible things happen every single day, and if we go on spending binges every time, we will end up with nothing.
Don’t treat yo’self. Consider things you actually NEED (or even really want!) and find ways to make it happen. Spend mindfully and you will avoid the guilt that comes with unnecessary or unwise purchases.
Don’t listen to the fools out there.
Newflash: most people you meet and interact with are not perfect geniuses. You will be getting bad advice left and right for your entire life. It’s your job to figure out if it is really the best for you.