6 Pieces of Bad Financial Advice You Shouldn't Follow
Financial advisors can be good or bad, and there are ways of zeroing in on the better folks among them. That's well worth doing, but it's also good to remember that we need to be wary of bad financial advice -- because it may be coming at us not only from professional advisors, but also from well-meaning friends, neighbors, and relatives, or from financial books or gurus on TV.
Here are a few examples of bad financial advice. The list is far from comprehensive, though, so be sure to keep your critical thinking cap on when you tend to financial matters.
1. In addition to the home you live in, buy another and rent it out to collect income and build home equity. This can work well for some people, but it's far easier said than done, and is not a good idea for many. Being a landlord involves a lot more than you may have imagined, such as dealing with empty and income-less properties at times, dealing with troublesome tenants, having to make expensive repairs, and not always being able to sell when you want to for a price you want.
2. Don't borrow money for college. This is bad financial advice because in general, folks with college degrees earn more, and in these recent days of high unemployment, more educated workers were less likely to be unemployed. Yes, being saddled with a lot of student debt can make life difficult, but many schools are quite generous with financial aid and there's a good chance you won't be paying or even borrowing the full sticker cost.
3. Pay off all your debt before you start saving for retirement. It's easy to see the logic here, if you're looking at hefty interest rates. The stock market has averaged roughly 10% annually over many years, while some credit cards have charged more than 20% annually. Tackling debt first can actually make sense, but only if you do the job quickly, such as in a year or two. If it's going to take you many years to pay off your debt, then you'll be forgoing many years when your retirement account could have enjoyed compounded growth. Procrastination can be deadly to your retirement. Perhaps work on both goals at the same time -- that's better financial advice.
4. If you can borrow money for, say, 8% and then invest it and earn 10% or 15%, go ahead. This is the logic used by many who invest using margin -- in other words, borrowing from their brokerage. It looks like a compelling proposition, but for most of us, it's bad financial advice. After all, you'll be on the hook for that 8%, guaranteed. But the gain you hope to get via your investments is not so guaranteed. Even great stocks can fall for a short or long while, as can the entire market. And fat dividends can be reduced or eliminated. This is usually a risky thing to do. Also a bad idea: if you're already saddled with debt and you want to try to pay it off by investing with borrowed money.
5. Go ahead and make the most of your assets -- perhaps start a business by borrowing against your home, or borrow from your 401(k) account, or cash out that 401(k) account when you change jobs. These arrangements have turned out well on occasion, but they're risky. Most of us will not be able to live comfortably on Social Security. We'll need a nest egg of our own. If you cash yours in, you might end up without one. If you borrow from it, even if you pay that sum back in a few years, you'll have lost out on some valuable compounding years. If you put your home up as collateral, you might lose your home. This is risky financial advice.
6. Buy a lot of gold. It may be surprising to see buying gold among pieces of bad financial advice, but gold has just not been a great long-term performer at all. Sure, it's had some great runs, and has delivered a lot of value to those who timed it well. And even now, many smart people think it's a buy. But many others think alternatives such as stocks make more sense.
There are lots of other pieces of bad financial advice. Taking time to read up on financial topics and to learn more will help you recognize and avoid many of them. But there are some quick and easy red flags that will help, too: Beware of outrageous claims and promises, steer clear of high fees, avoid investments with rules that are too restrictive, and don't expect to get rich quickly.
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