Everybody receives financial advice.
Most of us don’t ask for it, but well-intentioned people offer it up anyways. Some of it is helpful. Maybe a wise parent or grandparent taught you to start investing for retirement from your first paycheck or keep an emergency fund. Much of the financial advice that has come my way however, has been less than useful.
I’ve had a lot of people offer me tips over the years, and as an adult, I’ve learned the hard way that a lot of the advice I’ve been given is crap.
Nobody gives out crappy financial advice on purpose. Usually the well-intentioned individual really believes that they are helping. Often their advice is rooted in some big mistake that they made in their life that they want to try and steer you away from.
Here are a few bits of crap advice that I have personally been given.
It’s important to build up your credit score
In my opinion, this is one of the dumbest things that you could tell a young person who is just getting started with money. But this advice is persistent. It’s something that I was told over and over when I was in my late teens. I’ve heard it offered to several others over the years. It is terrible advice.
Why this advice sucks:
- The main reason to build your credit is to increase your eligibility to borrow money. Borrowing money is a dangerous habit for a young person to get into.
- To build credit, you need to borrow money and pay it back. See above.
- The banks want you to use credit to buy things. They want you to believe that the only way to obtain nice things to to finance them, and to finance them, you need good credit. This is false. The best way to purchase anything is with real money.
- You only need a good credit score if you want to go into debt to purchase things.
Now, before you hit the comment section to tell me how wrong I am, let me say this – I know that there is value in good credit. I myself have an exceptional credit rating, and it helped me buy a house. I do not believe that young people should make this a focus. Too many young people get up to their eyeballs in debt before they even understand what they’re doing. I was one of them.
If you’re really determined to build up your credit, there are a few clever and safe ways to do it such as a prepaid credit card.
Buy a new vehicle so you have a warranty
It has been suggested to me many times that buying a new car is a great investment because you get a warranty so you’ll never have to worry about it. I have several friends who have used this argument in defense of a new vehicle purchase.
Why this advice sucks
If you do your research and buy a vehicle with low-mileage at a good price, you will always be farther ahead financially than if you had financed a new car. By buying a three year old car you are saving half the cost of what you’d pay new, and that’s not including interest on the loan.
Financial decisions are always about managing risk. Plainly, there is almost zero chance that your used vehicle will have a breakdown that will exceed the amount you saved by not buying new. I drive a 26 year old car and it has never let me down.
You need to retire early
This is a really popular idea in the blogging/make money online/work from home circles right now. When I first started this site, I noticed that a lot of bloggers are calling themselves “FIRE” (financially independent, retire early) bloggers. Everybody wants to retire early. There are stories of people all over the internet retiring in their 40s, 30s and even 20s. Though this is a nice thought, it starts to fall apart when you look closely.
Why it sucks
The idea of retirement is predicated on the assumption that you don’t enjoy your work. When you don’t enjoy what you do, you need to work as hard as you can to retire from it.
Now to be clear, I believe in retirement. It is wise to save for your retirement and I teach people to do so. That said, shouldn’t we be teaching the next generation to find fulfillment in their work, rather than trying to get out of their job as fast as possible?
For most of us, our day job is one of the main contributions we get to make to society. So rather than telling young people that they should try to retire at 30 and live on a beach or whatever, let’s teach them to seek out meaningful employment or start a business that empowers them to do what they really enjoy. when you love your work, the concept of retirement is much less enticing.
Take student loans to get through school
Most of us know that furthering your education gives you a better return on your money than you’re likely to get elsewhere. Student loans can be a good thing, when all other options have been exhausted and they’re coupled with a short-term plan for repayment. I took a student loan when I went to college, and spent eight years paying it off.
Why this advice sucks
- You probably don’t need student loans to get through school. You can save beforehand, work part-time, forgo vehicle ownership, live on-campus or with family rather than renting and budget your money to stretch what you have.
- It places a financial burden on you at the very beginning of your career, when you’re least equipped to handle it.
- It’s often the easy way out when a little more planning and patience could get you to the same place but without debt.
I know many people who have managed to get through college/university without debt, and many others who are still paying off student loan debt years later. You get to choose which camp you want to be in.
You should buy because renting is just throwing money away
As a homeowner, this one really annoys me. I spent a decade and a half renting and thinking I was just throwing money down the drain…that would be a really, really big drain. Renting is not throwing money away. Paying to have a roof over your head is one of the best uses of money. The truth is that home ownership in most markets is far more expensive than renting.
Renting can be a great way to live. If you have a good landlord and are happy with your home and the cost, do you need to buy? No, you don’t. I own my home, and I’m glad that I do. But there’s this idea out there that ownership is the best choice for everybody, and it’s not.
Why this advice sucks
- Paying to have a roof over your head is never throwing your money away.
- The responsibility of paying for a major expense is on the owner. Sometimes these can run well into the tens of thousands of dollars.
- The money you save every month by not have to pay for building insurance, repairs, strata fees etc. can be invested for a better rate of return than you will get in many real estate markets.
- It makes more sense to rent and have a healthy investment portfolio, than to be mortgage-poor and hope the value of your home rises.
What I have learned
Always take financial advice from those who you trust, understand your situation and obviously, are doing well in the area that they’re advising you. Often people give advice or tips based on their mistakes. This advice is often rooted in fear and can not be trusted. If you want to know if you should buy a home, try to find somebody who is qualified to talk on the matter. A local real estate investor, maybe your parents or a friend’s parents. Pick somebody who is wise with their money.
Question for you:
What piece of bad financial advice have you received?