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 over 40 years, that’s a big devaluation.
The stock market on the other hand, does a bit better. Return rates here range from 6-8% annually. Some portfolios do worse, some do better (rarely). But investing in the general market should keep you relatively close to that rate. You’re beating inflation, and the markets do actually recover from downturns (read: crises) as well.
My advice: do look into investing. If you’ve got “some money lying about” which you won’t need within the next 10 years, it’s a good option! If you want to stay low-risk, invest in the general market. I wouldn’t advise specializing in certain portfolios too early on, especially not if you’ve got no real clue of how investing works.
4. You need to invest everything. Saving is a waste! This advice is the opposite of what we just discussed. And as mentioned before, if you invest all, you stand to lose all.
It’s not the probability of losing money that I find the most disturbing part of this advice. It’s the blatant disregard for the short-term need of money. Also known as liquidity.
Issue with investing is, if you do it on a personal level (micro finance), it does take quite a while to create a notable profit, given that you often have to take transaction fees into account. It’s not very profitable to invest money for less than 5 years, and have to pay most of the profit made in transaction fees and other often unseen costs. And because of these two things (time and cost), investing money is not always the best option. Especially if you’re not sure when you’re going to need the money.
When you have garnered savings that could sustain you for the next 20 years on your current consumption level, it’s fair to say that you could have started investing earlier. But if you have savings that would be completely drained after needing to replace your washing machine, an insurance claim or <6 month loss of income, investing all of that (or any of that) is a terrible idea. You need to have at least a buffer that you can always access to pull you through unforeseen mishaps.
So although the interest on a savings account is terrible compared to long-term inflation, if the money in there will never see the light of the day 5-10 years from now, it’s really not that big a deal. It’s going to be a much bigger deal if you find out that you need to access money that has been locked away. That’s going to be an unnecessary expensive hassle.
For a lot of young(er) people, the uncertainty of where to live (city, country, continent) can massively strain their ability to invest, because moving is expensive and accommodation prices (rent, mortgage) continue to rise. So, this is just not advice that works great for this generation.
My advice: determine how much money you think you’ll need in the short-term (say 5 years) and make sure to work towards that buffer first. It’s great if you have extra, in that case look into investing. But if you don’t, focus on making it to the end of the month first.
5. Buying a home is the best investment you can make. It is true that if I had managed to buy several houses about 50 years ago, I’d be “rolling in that coin” if I had managed to sell them now (well, before the 2008 crisis). But I didn’t manage to do that. So, yeah. Shame, isn’t it?
I get why people think buying a home is a good investment. It gives stability and ownership, and mortgages do tend to be cheaper than rent nowadays. But you do need to qualify for a mortgage. And you need to be relatively stable. Why? Because buying a house is commitment to that mortgage. Which is often about 30 years. Of course if you sell the house again, you also no longer have the mortgage (assuming you sell at initial value or profit), but that might take a while. Not all houses sell as easily as TV estate agents make you believe. I’m looking at you Phil and Kirstie…
In other news: there are people who are actively buying up property to rent it out. As such, it’s a lot closer to the idea of what an investment should look like. In this case you’re buying a house rather than a home (there’s a difference). But don’t be mistaken here either: house maintenance costs money too, even when you have decent renters in the house. And renting property out isn’t a risk-free business either, who says you’re going to end up with decent renters? You could end up with the spawn of Satan for all you know! So, it really depends on the financial situation of the individual whether this is a good idea per se. Because this is a LONG game. Counting the initial down payment for a mortgage, plus its monthly costs, plus maintenance costs will end up with a hefty initial investment before rent even comes in. If you’re up for this type of time line, I wish you the best of luck. If you’re not up for this, look into other options for making passive income.
My advice: this one is tricky, because it so heavily depends on the individual. The best advice I can give: don’t underestimate the costs associated with getting, owning and maintaining a home or house. And ask yourself whether you’re really willing to commit for several years. If you’re not, renting a home, or finding different income streams might be more advisable.
In conclusion Surprisingly enough, very extreme one-size-fits-all advice doesn’t work. Some advice has a core truth to it, some just doesn’t. Other advice just shifts with the times. It might have held true 50 years ago, but it’s just terribly outdated, if not damaging for current generations.
My best advice is always this: do your research, ask around, shop around and see what works for you. If you’ve got any questions in the meantime, you know where to find me!
Also, quick spoiler: you send me so much bad advice that I’ll be releasing a part 2 in a week’s time. So stay tuned!