worst pieces of financial advice

I grew up feeling like I didn’t get enough of a money education. Sure, I learned a little bit from watching my parents with their money. Perhaps I heard something about money in school. However, I really didn’t get a good education into how to save, invest, and grow my money until decades after I was out of school. Along the way I got some of the worst pieces of financial advice around. Not knowing better, I followed some of it. It’s happened to many of us. But let’s help those that are just starting out (or those of us who are older but still need the help!) and talk about how to avoid some of the worst pieces of financial advice.

Here are 7 of the worst pieces of financial advice around:

1. Divert Student Loan Money to Invest In Stocks

Way back in 2006, we wrote about Jim Cramer’s advice to use his law school loan money to invest in stocks. At the time, people were lauding him for doing this. Why? Because he happened to be really successful at it. He made a lot of money in the stocks that he chose. However, that’s not necessarily what’s going to happen for you. Here are a few reasons why we think that this is one of the worst pieces of financial advice:

  • Tuition loans are for your education. The majority of your income in life will come from your career. Therefore, you should use the money, as intended, to invest in your career.
  • While it’s not technically illegal to invest your student loan money, it might not be legal either. Investopedia points out that it’s both a legal and moral gray area. Moreover, you may have to pay back earnings if you invest federal student loans (as opposed to private loan money.)
  • Ultimately, you have to repay your student loan money. If your stocks don’t do as well as you hoped, then how do you plan to do that? It’s a risky investment strategy.

2. Owning a Home Is Always Better Than Renting

This is one of the most common money misconceptions out there. Yes, for some people, home ownership makes the most financial sense. However, this depends on a variety of factors including:

  • Where you live
  • How much house you need
  • Likely frequency of moves
  • Property and HOA fees in your area
  • Ability to get a good home mortgage

I owned a home for about ten years. Then I moved to San Francisco where the cost of owning a home is absurdly high. I’ve been a renter for fifteen years. At some point along the way, I realized that financially it made just as much sense to rent as to own.

Sure, of course, I don’t have the investment / collateral of my own house. Yes, sometimes it does feel like I’m throwing money away each month. However, I save money and piece of mind in so many ways including:

  • Property taxes here are huge. I don’t have to pay them.
  • Whenever there’s damage of any kind in this old, old building, my landlord has to deal with repairs.
  • I don’t have any HOA fees.
  • Renter’s insurance is often less costly than homeowner’s insurance.
  • I have rent control. Therefore, I can predict my payments regardless of the market.

For me, renting offers a lot of options. It gives me peace of mind. Sure, there are ways I could make money if I bought a home. However, homes also cost money. It’s not always a win-win to buy.

3. Use Your 401(K) to Repay Debt

CNBC lists this as among the worst pieces of financial advice. They go on to note that it’s almost never a good idea to pull money out of your 401(K). Of course, sometimes there are good reasons. Occasionally you’ll find exceptions where it makes sense to take the penalty and retrieve that money. However, you’re losing your own money when you take it out of a 401(K) early.

If you’re doing it to pay off debt, then you’re doing yourself a disservice. You’re not giving yourself the best financial leg up. While you’re helping yourself get out of that feeling that you’re drowning in debt, you’re not thinking about how you’ll feel in the future. There are many ways to negotiate easier debt payments. Moreover, you can scrimp, save, and take on extra work to repay debt. Explore all of those options before you just dig into your retirement savings.

Similarly, CNBC notes that you shouldn’t refinance your mortgage to repay your debt either. If you default on your credit card debt, then you have issues, of course. However, those issues aren’t as big as if you can’t make your mortgage payments down the line. You could lose your house. Don’t do it.

4. Let a Professional Manage Your Money

Obviously, you might want to get professional assistance for money management. However, listening to a professional without doing your own research is terrible advice. At best, you might come across a money manager who just doesn’t write know what they’re doing. At worst, you could come across a scammer who could cause you huge losses. In fact, this is one of the biggest financial mistakes that celebrities make. Don’t you make it, too.

Instead, get guidance from your professionals, but use that as a starting point for managing your money. Make sure that you educate yourself in your finances. Come to those money meetings with an opinion. Communicate until you fully understand all of the choices that the professional recommends. Work WITH your money manager and other finance professionals. However, don’t let them do all the work for you while you assume it’s all just going to be okay.

5. Turn to Tik Tok for Financial Advice

Back in mid-2020 and continuing through today, reputable sources are letting you know how much great personal finance information is available over on Tik Tok. Forbes, WSJ, CNN, CBS, and Buzzfeed have all done viral articles about the personal finance influencers taking over this social media platform. Yes, there’s a place for that. It’s great that more young people are learning about money in a fun way.

However, just like you shouldn’t let a professional manage your money without doing research on your own, you certainly shouldn’t take Tik Tok advice without digging further. Vox is one of many media publishers who have created important articles about how some of the worst pieces of financial advice ever are coming out of Tik Tok. This platform can be a fun starting point to learn about money. However, you shouldn’t take the advice without doing further research.

6. Just Pay Your Minimums Every Month

In the aforementioned, CNBC article, they also cite this among the worst pieces of financial advice. The idea here is that many people think their credit is okay as long as they make their monthly minimum payments on time. Now, don’t get us wrong: you should definitely always make on-time monthly minimum payments. However, that alone is not enough. Obviously, if that’s all you can do, at least do that. However, you should always strive to pay off as much debt as possible each month. Ideally, you’ll live within your means, which means that you can repay your credit card balance in full each month. If you don’t, then your credit score takes a hit. Moreover, you can soon find yourself drowning in debt. Therefore, don’t mistake the rule to pay your monthly minimums with the idea that you should ONLY pay the minimum.

7. Never Use Credit Cards

On the flip side, some people receive advice not to use credit cards at all. The thinking is clear: if you don’t use them, then you can’t get into debt trouble with them. However, failure to use credit cards is a long-term financial mistake. We live in a society in which you have to establish credit. If you ever want to buy something expensive, then chances are that you aren’t going to have enough cash to do so outright. Therefore, if you want a good car, education, house, etc. then you might need a loan. If you need a loan, you have to establish credit. Therefore, the advice to never use credit cards at all is bad advice. Instead, build your credit by using credit cards. And yet, don’t waste your money on interest by paying off those credit cards in full each month.

Exception: if you have a long history of misusing your credit cards, then you might want to stop using them for a period of time. If you can’t use them responsibly, you may do yourself more harm than good. Work with a money therapist or other professional to help you re-learn how to use them responsibly.

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