There’s no denying that our finances are a vital part of our lives.
The way you manage your money decides how you live your life today, tomorrow, and in the future. Therefore, it’s no surprise that there is an abundance of financial advice available.
You can find it online on countless personal finance websites and social media outlets or offline when talking to friends, co-workers, or financial advisors. You can even read it in books, watch it on TV, or listen to it in podcasts. No matter where you turn, you can find someone giving you advice on managing your money.
While lots of advice is practical and helpful, there is a lot of bad financial advice dispensed as well.
6 Pieces of Bad Financial Advice
Below are some examples of common bad financial advice, why you shouldn’t always follow these tips, and what you should do instead.
1. Sell Your Paid Off House and Invest the Proceeds
If you’re mortgage-free (or close to it), someone may have told you to sell your house so you can invest the money you make on it. Before going this route, consider whether selling your paid-off house would help you achieve your long-term financial goals.
“If you’re sitting on a highly appreciated asset and need the equity for living expenses, it may not be in your best interest to sell due to capital gains taxes,” says Hayden McCoy, financial planner and tax strategist at Synergy Wealthcare Solutions, LLC.
McCoy also suggests that you take the cost of selling your home into consideration as sales commissions can take a large chunk of your profit, cutting into the money you’ll have to invest.
Related: How to Manage Your Money (Without Losing Your Mind)
2. Whole Life Insurance Is Important for Young, Single People
If you’re young and single, you may have heard that you need whole life insurance. “Whole life insurance is sold to young single individuals as a retirement option. When in reality, putting money into an actual retirement fund, such as a 401(k) or an IRA, would be a better option, “ explains Jared Andreoli, Certified Financial Planner™ at Simplicity Financial.
The main purpose of whole life insurance is to protect your family financially in the event that you pass away early. So why would you buy a policy as a single person with no financial dependents? “Because an insurance agent wants to make their commission,” says Andreoli.
Life insurance is important to have at any age, so consider taking out an affordable policy that’s relevant to your current situation instead.
Related: Where to Get Free Financial Advice That Doesn’t Suck
3. Buy a Home and Don’t Waste Money on Rent
If you’re renting your home, someone has probably told you that you’re throwing your money away on rent and you should buy a home instead. “These people don’t consider your personal situation and ignore all of the expenses that come with homeownership,” explains Michael Caligiuri, Certified Financial Planner™ at Caligiuri Financial.
When you buy a home, you’re responsible for more than just the mortgage. You’ll have to pay interest, property taxes, homeowner insurance, home repairs, higher utility expenses, furniture — the list goes on. Depending on where you live, buying a home can be quite an expensive undertaking that you’re not financially prepared for.
“People just assume that housing prices are going to increase and believe the stock market is riskier. The truth is that there’s no guarantee the house you buy will go up in value and putting money in the stock market can allow you to invest in a diverse manner,” explains Caligiuri.
If it makes sense for you to rent, regardless of your reasons, don’t buy a house simply because someone else thinks it’s a good idea. Rent isn’t a waste if it saves you money and aggravation.
4. Stop Spending Money on Daily Starbucks Coffee
If you spend a few bucks a day on Starbucks coffees, someone may have suggested that you stop and use the money elsewhere, like investing or savings. What they don’t realize is that there may be value to that coffee beyond the money spent.
According to Tara Unverzagt, financial planner at South Bay Financial Planners, it’s not about saving money, it’s about spending money to live your idea of an amazing life. The $5 you’re spending might be your socialization or relaxation time, which makes it worth the expense.
If Starbucks coffee is important to you, spend the money. But if it’s eating up $35 per week that you’d rather save to take a year off to travel, cut it from your budget.
5. Fees Are Irrelevant as Long as Investment Performance Is Good
Some people feel that investment management fees are no big deal. They believe that as long as your investments are performing the way you want them to, you shouldn’t stress about any fees you pay. However, it’s important that you know how much you’re paying, and if you’re concerned, maybe you should be.
“You should pay close attention to all fees, including management fees, sales fees, and transaction fees. Remember that no investment manager has outperformed 100% of the time,” explains Betty Wang, Certified Financial Planner™ at BW Financial Planning.
Paying attention to fees doesn’t mean you should go for the cheapest investment. It does, however, mean you should consider what you’re paying for and explore all your options. If you find that you’re paying higher fees than you’d like, consider making a change.
Related: Financial Infidelity: 4 Signs Your Partner Isn’t Being Honest About Money
6. Credit Cards Are Only for Emergencies
There are some people who use cash to buy everything and believe that credit cards are only for emergencies. Others think that no one should ever use a credit card under any circumstances.
But if you use a credit card for your regular purchases, this advice might bother you. “The truth is that when they are used appropriately, credit cards can help you increase your credit score and earn rewards,” says Nicole Middendorf, CEO of Prosperwell Financial.
If you make your payments on time every month, you’ll demonstrate that you’re a responsible borrower, which helps you with securing loans for things like a mortgage or car. Timely payments can also leave you with cash-back rewards or credit card points you can use for things like airfare and hotels.
As long as you’re smart with your credit cards and pay them off in full each month, there’s nothing wrong with using them on a regular basis. “If you use credit cards, you should not be carrying a balance month to month. If you are, you’re living beyond your means,” says Nicole Middendorf, CEO of Prosperwell Financial.
Always Seek a Second Opinion
“My mother got a divorce after 35 years of marriage and had to start managing her own finances, so she hired a financial planner,” says McCoy.
“He took advantage of her vulnerability and gave her a load of fear-based horrific advice that caused her to lose thousands of dollars and make a series of very poor financial decisions. Almost four years later, she’s still living with the consequences of following that bad financial advice,” she explains.
Bad financial advice can take a serious toll on your finances now and in the future. It’s important that you don’t believe everything you hear, and that you consider the source of the information and advice. Do your research, speak to multiple people, and consider your own common sense and knowledge before taking anyone’s advice.
A little research and critical thinking can save you a ton of money, time, and stress.
