As I was growing up and in my early professional years, I would often hear financial advice from people in my life who wanted to steer me down a smart path. Most of it was good. Some of it was disastrously bad.
Since I started The Simple Dollar – and especially since I’ve gone full-time with it – the amount of advice has actually increased (I think people figure they’re simultaneously helping me and also giving me material for articles). Again, most of it was good. Again, some of it was disastrously bad.
Recently, I was asked by a person interviewing me for the single best – and the single worst – piece of personal finance advice I’ve ever heard. The best was easy – spend less than you earn. The worst? I listed several, and thought of more later on.
Here are eight terrible pieces of financial advice I’ve been given with a straight face over the years. For each one, I’ll spell out why it’s wrong and also rewrite it into genuine good financial advice.
Carry a Credit Card Balance
This advice is all about preserving a good credit rating. The idea here is that you’ll improve your credit card rating if you keep a balance of some kind on your credit card month after month, and the better credit rating will make it worthwhile.
Why It’s Wrong
First of all, the actual balance on your credit card makes up only a tiny fraction of your credit score. Yes, credit utilization – which is the part that carrying a balance is involved with – is one component, but so is payment history, the length of your credit history, the types of accounts you have, and how many credit inquiries you’ve had recently (people checking on your credit). In fact, most credit score systems focus primarily on payment history above the other factors, not the credit utilization.
In fact, most credit scores prefer that you remain below 30% of your credit utilization. In other words, they want you to have a balance equal to 30% of your credit limit at the absolute maximum. Carrying more than that actually hurts your credit score.
Beyond that, carrying a balance causes you to incur interest fees, which is money straight out of your pocket, plus you run the risk of late fees and a negative impact on the payment history part of your credit score if you’re ever late.
A much better strategy is this one: use a credit card with a good bonus program and pay off the balance in full each and every month. If you do that, you get all of the credit benefit of having a credit card, you avoid having finance charges, you run no risk of late fees, and you reap the benefits of your bonus program. If you want to use a credit card, that’s the way to do it.
Go to College
Many families assume that college is an automatic choice for virtually everyone out of high school, pushing students of all kinds straight from their secondary education into a college or university setting. Without question, a college degree offers financial benefits, but is it an automatic imperative?
Why It’s Wrong
If you manage to complete a degree in a program that leads to a good job or that you are truly passionate about, college can be worth it. It’s also worth it if it provides a genuine opportunity to grow as a person. Those are good reasons to go to college.
However, almost half of college students wind up dropping out of school. This means that not only are they facing the significant student loans that college often incurs, they’re doing it without the financial benefits of a college degree. That’s disastrous, and you have roughly a 50/50 shot of winding up in that situation.
Not only that, if you’re not sure what you’re doing in school and haven’t really figured out what your natural talents and interests are, you have a good chance of getting a degree that isn’t very useful to you. Remember, 60% of college graduates can’t find a job in their field.
My advice to my children is this: unless you have a real reason to go to college that you can articulate and understand, strongly consider going to a trade school instead. Don’t dive into the expense of college if you’re not sure of your study skills or don’t know why you’re going or if you’re just drawing a major out of a hat.
Career paths such as electricity, plumbing, and carpentry offer lots of opportunities for work that pays quite well and your costs for schooling are relatively small as well. Plus, the door isn’t closed on college; you can choose to go to school at a later date once you’ve figured out why you’re going.
Renting Is Just Throwing Money Away
If you pay rent, the money you’re paying simply goes straight into the pocket of the landlord. So, isn’t that just a waste of money? Many people encouraged me to get into a mortgage almost immediately after graduating from college so that I wouldn’t throw my money away on rent.
Why It’s Wrong
Homeowners “throw away” a lot of money, too. Mortgage insurance, property taxes, homeowners insurance, homeowners association fees, and home and property maintenance costs all just disappear into the ether when you own a home. Those costs almost always add up to far more than the cost of rent for a similar property.
Another problem is that a mortgage can be a careful balance beam to walk. A home is fairly hard to liquidate – you can’t just go to the bank, sell it, and have cash in your hand immediately – so if things go wrong, you can be in a real pickle if you have a large mortgage.
There is the factor of an increase in the value of your home while you’re a homeowner, but unless the housing market is absolutely hotter than fire or you have a very small mortgage compared to the value of the house, it won’t make up for the difference between your monthly costs in a rental versus your monthly costs in a mortgage.
There’s also the factor of permanence. If you end up needing to move for work or for some other reason, it’s easy to move out of a rental. On the other hand, if you have a house, you’re going to be dealing with trying to sell it at the same time you’re making other big changes in your life.
My take on this situation is that unless you’re going to be living in the same place for five years or your monthly mortgage payment is at least 25% less than what your rent would be, you should strongly consider renting, not buying.
There are definitely situations where buying makes sense. If you’ve got a very steady job and are willing to buy a “starter home” during a period with low interest rates, a mortgage and a home can make a lot of sense. If you’ve received a nice windfall or have been saving a lot of money and can end up with a small mortgage – or none at all – after you buy, home ownership makes sense.
Outside of that, be careful. It might not make financial sense to buy.
Invest Your Money In Gold/Bitcoin/Silver
Gold is a great hedge against inflation, they say. Bitcoin and other cryptocurrencies are the future, they say. You need to put your money into these things for retirement, they say.
Why It’s Wrong
First of all, gold is incredibly volatile, even more so than the stock market. Five percent daily shifts in value aren’t unheard of, nor are 50% drops in a year. It also doesn’t correlate with inflation, or much of anything else.
Bitcoin is even more volatile than gold, and it hasn’t been around long enough to correlate with anything clearly.
These investments jump and drop in value so strongly and so often that you just can’t rely on them as an investment as a small scale individual investor. They’re just too volatile.
A much better approach is to use a diversified investment approach for retirement. Own a lot of stocks. Own some bonds, too. You can own a little gold if you want, but it’s not necessary.
The easiest way to do that all at once is to simply buy a target retirement fund. It’s diversified for you with things that have a long history of relative stability and things that have a long history of actually being good hedges against each other so that you don’t lose a lot of your value if the stock market dives or if the Euro dives.
Retiring Early Should Be Your Goal and You Should Center Your Life Around It
Retiring early happens to be my goal. It’s something I personally value very much. But does it need to be your goal?
Why It’s Wrong
Not everyone wants the same things from life. When I describe what I’d like to be doing in 10 or 15 years – working on a novel and volunteering for a couple of local charities – it appeals to some people, but not to everyone.
Some people imagine themselves higher up in their field in 10 years. Some people imagine themselves in a new career path in 10 years. Other people imagine themselves running a business in 10 years. Those are all valid and worthwhile paths. Not everyone should follow the same path because we’re all different people with different desires and motivations.
Instead of focusing just on early retirement, a better approach would be to figure out what your real long-term goal is that excites you, then save money and spend consistent time and energy to reach that goal.
No matter what your goal is, many of the core principles remain the same. Spend less than you earn consistently. Save the difference. Get rid of debt and minimize your monthly expenses. Doing these things gives you the financial flexibility to make a lot of big leaps in your life if you want to do it. That leap certainly doesn’t have to be a leap into early retirement.
There Is Good Debt and Bad Debt
Many financial writers like to characterize debts as being either “good” or “bad,” using a number of characteristics to make that judgment. Is there such a thing as “good” debt?
Why It’s Wrong
Simply put, there is no such thing as good debt. There are occasionally good reasons to borrow money, but as soon as you have that debt around your neck, it becomes a weight holding you down.
What’s a good reason to borrow? If you’re borrowing money for the purpose of directly increasing your earnings over the long run (as in a student loan) or decreasing your expenses over the long run (as in your first mortgage), it can make sense to borrow.
However, once that exchange is made, the debt becomes something that’s dragging you down and your new mission should be to minimize the interest rate on that debt and to pay it off as quickly as you realistically can. Eliminating a debt means eliminating a monthly bill that’s clogging up your cash flow. It also means that you’re no longer losing money to interest, even if it’s small.
Instead of buying into the idea of “good” debt and “bad” debt, instead decide that it’s okay to borrow money that directly increases your income or decreases your expenses over the long haul, but focus on getting rid of the resultant debt as fast as possible. There may be good reasons to borrow on occasion, but there is no good debt.
You Should Cancel Your Whole Life Insurance Policy Immediately and Get a Term Policy
Insurance salesmen are always happy to convince you to buy a whole life policy, and they usually have a very good argument as to why you should buy it. Unfortunately, many people discover that the whole life policy they bought a few years ago doesn’t really meet their needs. They ask for help and the response they hear is to cancel that policy immediately and get a term policy. I heard this advice myself several years ago related to a tiny policy I had since childhood.
Why It’s Wrong
There are a number of reasons why that knee-jerk plan to drop your whole life insurance policy might not be smart.
First of all, the charges are front-loaded. This means that if you’ve had the policy for a few years, you’ve already likely paid off all of the commissions on the policy and your returns are actually pretty good. The first few years are the painful years for most whole life insurance policies.
Many policies have “surrender charges” that last for the first 10 years (or so) of the policy. This is how they motivate people to last beyond those first few years of awful returns. If you surrender the policy in that early period, you’ll be hit with a fine.
Many policies – especially older ones – actually have pretty good guaranteed returns once you’re past that period of initial charges. There are many policies from the pre-2000 area that have 6% annual guaranteed returns. If you have that, you should probably stick with it.
This one’s easy: If you have a whole life policy that’s more than a few years old, it can actually be worthwhile to just stick with it, depending on the guaranteed returns. What you need to do is study your policy see what kind of returns are guaranteed within that policy. If the returns are strong compared to what you can easily get elsewhere, stick with the policy.
I still recommend that people not get such a policy in the first place as a term policy is a better bargain over the long haul, but the worst period for the whole life policy is the first few years after the purchase. Once that’s already sunk into the policy, it’s actually not a terrible idea to stick with it.
Buy New Cars Because They’ll Last Longer
A new car comes with a big fat warranty and will likely last you for at least 100,000 miles – and often much more than that. You can keep driving a new car for a decade or more, which is many more years than you’ll get out of many used cars.
So, shouldn’t everyone just buy new cars? This is the advice given to me by a neighbor of my parents several years ago.
Why It’s Wrong
The problem is that most of the depreciation in the value of a car occurs in the first few years of ownership. A good, very rough rule of thumb is that a car will lose half of its value every four years. So, let’s say a car is $25,000 new. After four years, that same car would cost you $12,500. After eight years, it would cost you $6,250. After twelve years, you’re just north of $3,000.
Let’s say you’re going to drive that car until it hits the 15 year mark. That’s the equivalent of getting rid of a 2000 car right now, which is reasonable for a well-built car that is driven a reasonable amount each year – 10,000 miles or so.
If you buy a new car, that’s $25,000, and you’re going to get 15 years out of it. You’re paying $1,667 per year of use of that car.
If you buy a four year old used car, that’s $12,500, and you’re going to get 11 years out of it. You’re now paying only $1,136 per year of use of that car.
If you buy an eight year old used car, that’s $6,250, and you’re going to get 7 years out of it. You’re now paying only $893 per year.
If you buy a twelve year old used car, that’s $3,125, and you’re going to get 3 years out of it. You’re paying $1,042 per year.
The sweet spot here isn’t with the new car. It’s with the used car. The sweet spot will actually be with some form of late model used car – not a junker, but not a used car, either. The exact point depends on the model, but it’s almost always a late model used car.
Again, the good advice here is clear: buy late model used cars. You won’t get quite as long of a lifespan as you would with a new car, but you’re saving so much on the purchase that it makes up for the somewhat shorter lifespan.
Many of the financial “nuggets” that get passed around and handed down are true, but many are misleading or outright false. Some pieces of advice – like spend less than you earn – make immediate and clear sense, but others aren’t as clear. Some advice is just wrong. Other advice depends on the person or situation. Other pieces of advice are very debatable (even some of the “better” answers I give here are debatable).
The single message that you should take home here is that you should do your homework. You’ll often find that the little pieces of advice you get aren’t strict rules you can easily follow. That can be frustrating, but as you learn about the ins and outs of the situation, your understanding of personal finance as a whole grows and you end up more in control of your situation in the end, making better decisions and eventually saving more money.