If you caught yesterday’s post, you know that my daughter recently had surgery and I’ve been spending time at the hospital with her. Today, while sitting in a waiting room, I found an issue of Money magazine that had an article entitled “What to Do with $1,000 Now!” (October 2015, p. 52 and 53).
I have mixed feelings when it comes to Money. Some of their advice is spot-on, but at the same time the magazine devotes a large amount of time to investments that aren’t very good for the average investor (like individual stock picks) along with some advice that just encourages wasteful spending. This article was a perfect example of both – some of the ideas were great, while others were… strange, to say the least.
Since I didn’t actually steal the magazine from the waiting room, I had to look up an approximate online equivalent of the article from Money’s website, entitled 30 Smart Things to Do With $1,000 Now.
As with the print article, some of the ideas are good ones…
For about $1,000 you can have a will, durable power of attorney, and health care directive written up. Find an estate planner at naepc.org.
If you’re 50 or older, you can put in $1,000 more in an IRA (above the $5,500 normal limit) each year. Do so from 50 to 65, and you’ll have $27,000 more in retirement assuming you get a 6% annual return, per T. Rowe Price.
Some are bad ones…
With only 10 C-notes, your mutual fund choices are limited by minimum investment requirements. Besides simply letting you in the door, these actively managed funds have relatively low fees and beat more than half their peers over three, five, and 10 years:
– Oakmark Select large blend; 1.01% expenses
– Schwab Dividend Equity large value, 0.89% expenses
– Nicholas large growth, 0.73% expenses
Would getting behind the wheel of your dream vehicle make you feel a teensy bit better about reporting to a 30-year-old boss? Then sow your oats—for 24 hours. Both Hertz and Enterprise offer luxury rentals; you can find local outfits by searching for “exotic car rental” and your city. Gotham Dream Cars’ Boston-area location rents an Aston Martin Vantage Roadster for $895 a day.
And some are just strange…
For a safer and cheaper alternative to going under the knife, try an injectable dermal filler. Dr. Michael Edwards, president of the American Society for Aesthetic Plastic Surgery, recommends Juvéderm Voluma XC, which consists of natural hyaluronic acid that helps smooth out deep lines and adds volume to cheeks and the jaw area. It lasts up to two years and costs near $1,000 per injection.
About a year ago, I wrote an article entitled 25 Smart Ways to Handle a $1,000 Windfall. In it, I outlined a lot of smart ways to actually use $1,000. Here’s a quick recap:
Idea #1 – Eliminate (or Greatly Reduce) a Debt
Idea #2 – Launch Your Emergency Fund
Idea #3 – Kick Up Your 401(k) Contributions
Idea #4 – Open Up a Roth IRA
Idea #5 – Kickstart College Savings
Idea #6 – Launch (or Add to) Your Personal Investments
Idea #7 – Invest in a High-Efficiency Water Heater
Idea #8 – Replace Old Windows
Idea #9 – Attend a Professional Conference or Convention
Idea #10 – Get a Professional Certification
Idea #11 – Replace Worn Out Items with Long-Lasting Ones
Idea #12 – Replace All Lightbulbs with LEDs
Idea #13 – Make a Will and/or Durable Power of Attorney
Idea #14 – Buy a Good Bicycle and Use It
Idea #15 – Improve Your Home
Idea #16 – Launch a Small Business
Idea #17 – Get a Home Energy Audit and Follow the Recommendations
Idea #18 – Get a Term Life Insurance Policy
Idea #19 – Donate
Idea #20 – Pay for Next Christmas
Idea #21 – Pay for (Part of) Your Next Vacation
Idea #22 – Insulate Your Attic
Idea #23 – Take a Class or Two
Idea #24 – Start Saving for a Big Future Goal
Idea #25 – Maintain Your Home and Automobile
I’m not going to say my ideas are better than Money’s… actually, wait, I am going to say it. Any of those 25 ideas is a better use of your $1,000 than “injectable dermal filler.” (I mean, seriously? Injectable dermal filler? What kind of life situation do you have to be in where that’s even on the top-10 list of smart choices for spending $1,000?)
My point is this: Some ways of spending money are smarter than other ones. Obviously, building an emergency fund if you don’t have one is a better choice for using $1,000 than “injectable dermal filler.”
The thing is that it gets tricky to evaluate which financial solution is the best one when they seem kind of similar. For example, if you have $1,000, is it better to put it in your own Roth IRA or a 529 plan for your child? What about putting it in your 401(k) at work? Those are the kinds of questions that it becomes very easy to get bogged down in.
On top of that, you have financial media sometimes giving you really strange suggestions about what to do with your money. Injectable dermal filler? Nope. Random individual stocks? Not really a good idea, either.
How, then, do you separate the good financial advice from the bad? For me, I apply a set of eight rules to any financial advice that I read or hear or see. Good financial advice has to be strong on at least one of these points and not violate any of the others; if it doesn’t meet that threshold, I don’t trust the advice.
1. Good financial advice results in a strong likelihood of a positive return
In other words, if you use your money and time in this manner, it is rather likely that you will wind up with more money than if you didn’t take this advice.
This is the category in which frugal advice is pretty strong. Simple things, like buying a generic product instead of a name-brand product or learning to make your own meals, are pretty much guaranteed to make you spend less money, thus causing you to have more money in your wallet after following that advice than you would if you didn’t follow it. There may be other reasons for not following a specific frugal tactic, of course, but that doesn’t mean it’s not a good suggestion.
This is also where things like highly risky investments completely fail unless they’re supplemented with something else. Someone telling you to invest all of your money into Bitcoin or precious metals is guiding you down a path where there is a really strong chance you’re going to lose money. Investing in those things can still be good advice as long as they consist of a small part of your overall investments, meaning that if you do lose out on those kinds of investments, it doesn’t sink your whole ship and it’s buoyed by safer investments.
Note that this doesn’t guarantee a positive return, but that over most time periods, you’re going to end up with more money than you had before. Investing in stock index funds is pretty good advice, although they do carry some risk of having a down year. However, the historical record shows a clear positive growth rate for almost every stock index fund.
2. Good financial advice doesn’t ignore well-known options that are probably better in most situations
This is what I think about when I think about insurance advice. Quite often, I’ll find glowing reports about the wonders of universal or whole life insurance. Certainly, if you look at such packages through a particular lens, they look like a real bargain.
However, if you sit that same investment down next to, say, a similar term life policy with the money you saved going into a stock-based index fund returning 7% a year on average, it quickly doesn’t look like that good of a deal. Even very optimistic projections from such an insurance policy usually don’t stand up against a term life insurance policy and a good investment option with the remaining money.
On the surface, a whole life insurance policy might be good financial advice, but if you dig in much at all, it quickly becomes mediocre advice because there are better options out there.
For financial advice to be good, there must be a significant reason why that particular piece of advice is better than other options for the same situation. If you don’t have that reason – or the advice is intentionally excluding a pretty obvious alternative option – then the advice is questionable at best and advertising at worst.
3. Good financial advice looks at long-lasting things, not temporary things
Most of the time, buying things in general is pretty awful financial advice, except for when you have a very clear use case for that item that can’t really be fulfilled by anything else. Spending some money on forks if you don’t have any is probably a good idea, but buying a $300 handbag when you have several already? Probably not such a good idea.
If the advice does center around buying things, the question shouldn’t be how it will affect your life today. The question should be whether it will have a positive effect on your life a year from now or five years from now. If you can’t make that case at all – or if that case is a real stretch – then it’s bad advice.
Naturally, there are specific pieces of advice that are good for people in very specific situations and bad for others. If you are in a career like acting or modeling where physical beauty writes the checks for you (at least in part), then cosmetic surgery might be a good temporary choice as it will extend your career and more than pay for itself. For the rest of us? It’s pretty bad advice.
4. Good financial advice spreads out your risk rather than concentrating it
In general, the more you actually know about something, the more sense it can make to concentrate your money in that area. If you have a ton of specialized knowledge, for example, you might be able to make a killing buying and selling specific items. However, if you don’t have a ton of specific knowledge and you’re just relying on tips from others, you’re just concentrating your money in one place without the knowledge to back it up and you’re begging to go broke.
This is where things like specific stock picks fail. Whenever a magazine article gives a one-paragraph reason for why you should invest all of your cash in the stocks of Allied Amalgamated Sprockets, that’s not nearly enough knowledge to actually know whether to invest in that company. Sure, it might be a starting point for doing a lot of research into Allied Amalgamated Sprockets, but on its own, that information could be junk. You don’t know enough about Allied Amalgamated Sprockets to know the difference.
That’s why the best advice for investing in things like stocks is to diversify as much as possible. Rather than investing in one or five companies, you should invest in hundreds or thousands at once. That’s exactly what an index fund does – it just buys a little bit of a lot of different companies, so when you invest in a stock-based index fund, you’re already diversified (at least within stocks).
If you’re talking about a very small amount of money, this isn’t that big of a deal. If the amount of money you’re looking at is trivial to you and it wouldn’t be a problem if you lost it, then feel free to take a big leap into this kind of advice. However, don’t concentrate your money into one specific investment unless you know exactly what you’re doing.
5. Good financial advice improves your life and/or the life of those you care about over the long term rather than the short term
A big vacation might improve your life for a week, but then you return to the same challenges and struggles that you already have. Often, you return to a life where your financial situation is worse, adding to your life’s stress level and making your choices more difficult than before.
On the other hand, if you instead take that money and use it to build an emergency fund or pay off debt, you make your life better for the foreseeable future. You lower your stress level and open up your choices a bit for the future.
That’s why it’s almost always better to take a windfall and invest most of it into improving your financial situation. Sure, you could use a little bit to do something fun and improve your life in the very short term, but if you use most of it for long-term improvements, your life will simply become better. There is nothing better that you can do with your money than genuinely minimizing and eliminating long-term worries and stresses.
6. Good financial advice doesn’t earn more money for the advice-giver than other advice he or she might give
This goes out to all of the unscrupulous salespeople out there.
Quite often, a sales pitch for a financial product extols the virtues for a particular financial option. You’ll hear about how great this particular mutual fund is or how amazing this life insurance package is.
However, what they don’t tell you is that these options almost always have alternatives available that provide the exact same thing – or something better – with lower fees and costs.
For example, a life insurance salesman is likely going to compare the policy they want you to buy to a generic term policy. Yeah, this term policy might be a little cheaper, but look at how much this whole life policy earns for you! What they don’t show you is what you could be doing with the money you save on that term policy.
Many financial advisors do the same thing when it comes to showing off investment options. They’ll show you the options that they sell and maybe one or two more carefully selected “loser” options that look awful in comparison. How does their investments compare to, say, an index fund like the Vanguard Total Stock Market Index?
I am always wary when I’m being pitched an investment by someone who stands to earn money from that investment. Where is that profit coming from? It’s coming out of the returns I could make.
7. Good financial advice is agreed upon by more than just one guy on a random website or television show or magazine article or radio show
I see and hear almost constant claims about how this investment product or that investment solution is amazing and will utterly transform your financial life. Those radio and television ads proclaiming some kind of magical solution to whatever your financial problem is, whether it’s debt or investments or anything else, are just unbelievable to me.
Here’s the truth: If a particular piece of financial advice is truly good advice, it won’t take long for it to enter the public arena. Most truly good ideas are like a genie in a bottle – they will eventually slip out and become ideas that everyone can try and test and evaluate, and the good ones (like spending less than you earn and diversifying your investments) stick around.
So what exactly are you being sold when you buy one of these financial information products? Usually, you’re being sold information that’s already publicly available – it’s just packaged in a different way. Occasionally, you instead get an idea that flat-out doesn’t work or has some kind of crazy requirement (like a bunch of money already in the bank) that most people can’t meet.
If you really want some good financial advice and strategies, the best place to go is your local library. Remember, the vast majority of people out there have never picked up a personal finance book. By doing that, you’re already ahead of the game.
8. Good advice doesn’t encourage you to buy things unless they strongly fulfill the previous rules
Rare is the financial advice that encourages you to spend your money on something that isn’t clearly a financial investment or an investment in your long-term future (like education). If a piece of financial advice is encouraging you to buy a specific material item, be very wary.
That’s not to say that such advice isn’t sometimes good. The advice to buy a late model used car from a reliable manufacturer is good. The advice to replace any well-worn items in your house with a quality reliable version of that item is good, too.
What isn’t good is spending a lot of money on a type of item you’ve never used because you’ve heard it will make your life easier or change your life in some other way. What isn’t good is spending a lot of money on something that won’t clearly have a regular use in your life. Those types of purchases rarely pay off.
A lot of the financial advice out there is good stuff. Spend less than you earn. Save for retirement in a tax-advantaged retirement account (like a 401(k) or Roth IRA). Buy a reliable late model used car if you need a car. Try generic products and see if they fit your needs. Those types of things are tried and true and it’s easy to see the benefits.
The problem is that good advice is often mixed in with strange and questionable advice. You’ll hear three pieces of good advice from someone, then they’ll toss in something that doesn’t make any sense. You’ll listen to a largely good financial radio show and then the commercial will want you to buy some financial advice package for just four easy payments of $49.95.
Be smart when you’re thinking about using your money. Be smart about where the advice is coming from and who it is coming from. When in doubt, do more homework and make sure that the idea makes sense from a lot of different perspectives and angles. When you have some money in your pocket, use it for something that will provide lasting positive impact on your life.
Here’s a final hint: Injectable dermal filler is probably not the answer you’re looking for.