Recently I asked about the worst advice you had ever gotten. And damn, you did not disappoint. So this article is dedicated to that terrible advice. And to make it not just entertaining but actually educational, I’ll be giving my views on what I think a better approach to money and personal finance would be!
1. Getting into debt to consume “Why would you have to save for a purchase if you could buy it now, and pay it off later?” Well, there are reasons for not taking out a loan or a credit card debt every single time you see something you like.
The most obvious reason this is bad advice is that debt is expensive. So, your initial purchase might end up costing you more than you intended. Think of interest payments, or if it gets really bad: defaulting and ruining your credit score.
The second reason this is bad advice is that consumption often doesn’t garner further earnings. As in, you’re buying something to have it, not to create a future income stream due to investment. A good example of investments that are often loan/debt-based is education. Buying education is an investment. It will increase your earning potential, enabling you to pay back the debt you have taken on. Buying a pair of really expensive shoes does not allow for this. Which raises the question: where is the money going to come from to repay the debt?
The last reason getting into debt to consume is a bad idea pertains to the emphasis it puts on having things now, but also having things beyond your actual budget. If you don’t have the money now, and you’re not entirely sure (or just overly optimistic) that you’ll have the money later, why do you think making this purchase is a good idea? This sounds more like impulsive buying than a well-thought out shopping trip. When impulse meets credit card debt, it’s time to learn some restraint. To exert self-control is a character trait that can in fact be trained, and will be very beneficial in aspects of your life far beyond personal finance. And you know, it’ll prevent you from having to suffer years later from terrible impulse decisions made now.
Overall, when it comes to getting into debt to consume, the better idea is to ask yourself why you’re doing what you’re doing. And once you’ve figured that out, you might be well on your way to leading a healthier (financial) life.
My advice: To cancel out the impulse wait and save up for the purchase for a bit. If you still want it days/weeks/months later whilst having to give up actual hard-earned savings for it, that seems like a fair time to buy.
2. Money is not a priority/will sort itself out Money is most definitely not the most important thing in life. But it’s up there. Especially when you’re short of it.
I don’t know which type of person gives this advice, they must be either really ignorant or really privileged. But for most of us, money doesn’t just appear and money problems don’t just disappear. They just don’t.
In a similar vein, don’t rely on other people to bail you out when things go haywire. Once you’re in a stable job or simply of a certain age, you shouldn’t go crying back to your parents (or other richer family members/friends/acquaintances) every single time you hit red. It’s just embarrassing.
I’m not saying that you can’t receive help financially. If your family (or others) is able to help you out buying your first home, set up a company or pay for your education that’s great. But if these trends continue way beyond their lifespan, are unlikely to be repaid and are expected rather than gratefully received, something is definitely wrong, and you cannot claim any type of independence. That would be delusional.
My advice: Get your sh”t in order. You need to be (financially) prepared for what life can bring. And I know life is only getting more and more expensive, but that should be a reason to get more informed on your budget, your options, your expenses, your future budgets and expenditures, investments etc. You can’t just act shocked every single time something happens that costs money. You are an adult that is in charge of their own life. This includes money.
3. Save your money, investing is too risky. Now let’s see you’re doing pretty well. You’re not in (consumption) debt and you are quite independent when it comes to dealing with your finances. You have even managed to have some money left at the end of each month. So what do you do with it?
After every single crisis people become (temporarily) more risk-averse to investing. It makes sense: you’ve just seen how others have lost it all. However, that is probably the best time to invest. But even more importantly, when it comes to savings, the interest is so low you’re effectively losing money to inflation. And if you’re saving for retirement and will continue to do so for 40 years, your money is effectively devaluing at 1.02^40 (assuming a 2% annual inflation rate), which transforms up to 2.21. Yes, 2% per year doesn’t seem too much, but ov