A few days ago, a reader wrote to me stating that he had opened up a $10,000 CD for 18 months, whittling his checking account down to $2,000 while his savings was practically nonexistent. He asked me for advice on what to do next.
I suggested to him that he just keep the CD for now unless he absolutely needs it, but I also asked him where he got the idea to open a CD. Right now, CD rates are barely better than savings account interest rates and if he’s actually converting most of his liquid cash into a CD, he’s putting himself at risk in the event of an emergency.
His response? The guy at the bank recommended it.
Now, I don’t know why this guy at the bank recommended such an action. Maybe the bank has some sort of sales quota on CDs or something like that. From what I could see of this reader’s story, investing in a CD didn’t make a whole lot of sense, but there may be elements that I don’t know.
My purpose here isn’t to criticize the bank teller. Instead, the reason I’m sharing this story is to encourage you to be very careful with any financial advice that you get.
If you are making a decision about how to invest your money, the more information and the more suggestions you have, the better. Why? It’s the consensus of those recommendations that should point you to where you should go.
Naturally, a financial advisor should have more weight than Uncle Joe. However, that doesn’t mean that you should absolutely trust the word of a financial advisor. If you find a lot of information that indicates that your financial advisor is leaning in a questionable direction, it’s likely that you shouldn’t take the advisor’s advice.
(This doesn’t hold as true when it comes to self-evident choices. You don’t need to consult an array of advisors when trying out frugal tactics, obviously. It’s usually very clear how most money-saving tactics work. The focus here is on investing choices and what to do with your money when you start saving it.)
There are a few basic principles that I tend to follow when it comes to making money decisions.
First, if I’m not yet sure what to do with my money, I’ll put it in a savings account for the time being. Yes, a savings account doesn’t give a great return, but that’s not the point. A savings account has three huge advantages. First, your money is liquid, meaning that you can easily access it when you do make a decision. Second, your money – up to $250,000 – is insured by the FDIC, meaning you won’t lose it even in the event of a bank failure. Third, you’re not going to lose money while it sits in your savings account – there’s very little risk involved. It is a great place to hold money while you make decisions.
Second, I never make a financial choice unless I thoroughly understand it myself. I simply will not put a dime of my money in an investment option that is not 100% clear to me. If I can’t explain it in detail, my money’s not going there, even if it seems to be the best investment on earth.
Third, if I’m making a significant financial decision – investment, insurance, or anything else that has the potential to have real impact on my life or the life of my loved ones – I look for a variety of sources for information on that decision.
This usually means a trip to the library, quite honestly. I’ll grab several personal finance books and see what they have to say on the issue. I’ll see if I can find information from personal finance publications like Kiplinger’s and Money. I’ll also check a number of blogs online that I have read for a long time and I value the writer’s thoughts. Beyond that, I’ll usually ask for advice from a few people in my life that I know are reliable and make good choices on a consistent basis.
Most of the time, these sources all point more or less in the same direction and that’s good enough for me. If they don’t, then I’ll contact a fee-based financial advisor and see what he or she has to say about the situation. So far, this has happened twice out of many different financial decisions I’ve made.
The time spent learning about the ins and outs of the decision I’m making – insurance, retirement plans, and so on – makes me feel a lot better about whether or not I’m making the right choice, and I’ve not yet felt as though I’ve made a major mistake. (Not only that, it usually ends up providing ideas and source material for The Simple Dollar.)
Don’t let your bank teller or your Uncle Joe steer your financial decisions. You can certainly listen to them, but do your own investigating until you understand the ins and outs of the options before you. If you can’t make heads or tails of it, then you’re better off playing it as safe as possible.
It’s only your future, after all.