There’s a tonne of bad financial advice out there. You’ll quickly find it going viral on social media sites like TikTok and renowned channels on youtube. Unfortunately, some come from well-meaning family members, while some is unsolicited advice from friends and colleagues. Worse still, some professional financial advisors get it wrong too. These pieces of advice, if adhered to, could result in irreversible financial mistakes for a lifetime. So, here’s a list of terrible financial advice going viral to avoid.
In This Article
- 1. Don’t invest till you’re debt-free
- 2. Just short the stock market
- 3. Only buy crypto
- 4. My partner manages the money, so I don’t have to
- 5. Don’t use credit cards (only pay in cash)
- 6. Whole life insurance is a good investment
- 7. 401(k)s are a scam
- 8. The stock market is too risky/ is rigged.
- 9. A home is always a good investment.
1. Don’t invest till you’re debt-free
Some financial advisors suggest that you should get rid of debt first before saving or investing. I think this is terrible financial advice. I understand that it’s easier to focus on one financial goal at a time. However, it would be a mistake to wait until you’re debt-free to start investing for this reason: you’d miss out on the power of compounding.
The compounding effect works by growing your investment exponentially. They say the best time to invest was yesterday, and the next best time is now. This is because time is your best friend when it comes to investing. Invested money starts growing immediately. If you direct all your money towards debt, you’ll be missing out on the exponential growth. It’s possible to work towards more than one financial goal at a time, i.e., paying off debt and investing towards retirement.
Read More: How to Minimize Student Loan Debt.
2. Just short the stock market
Shorting the market or shorting a stock means investing in such a way that you’ll profit if the market falls or if the stock price declines. It involves borrowing shares from a broker and immediately selling them to another investor with the hope of repurchasing them at a lower price when the market drops. In other words, if you believe that the market will fall, you can make money by short-selling that market.
Hedge funds and prominent investors such as Michael Burry have made lots of money shorting markets. However, shorting is notably risky and is not for everyone.
Here’s the main reason you should stay away from short-selling: unlike traditional buying of stocks, where the most you can lose is the amount you paid for the stock, the amount you can lose with short-selling is limitless.
Let’s look at an example: Say you borrow 10 shares of a company then immediately sell them at $10 each; you’ve just made $100. Remember that you still need to return the borrowed shares, so you wait for the price to drop to repurchase them at a lower price. However, the market is unpredictable, and the shares rally up to $50 each. You now have to buy back the shares at $500, making a loss of $400. If you decide to wait a bit longer and the price rises to $100, you might have to repurchase them at $1000, making a $900 loss. This could go on indefinitely, and the potential losses are limitless, not to mention the interest you’ll be paying for the borrowed shares.
Read More: Gamestop Short Squeeze Explained. Reddit vs Wall Street
3. Only buy crypto
Many of these people offering cryptocurrency trading are scammers and do not have your best interest at heart. They’ll suggest that you need to go ‘all in’ in order to maximize your results. Never fall for this kind of financial advice as it’s the quickest way to lose your money. I understand that there’s a lot of FOMO(Fear of Missing Out) out there but keep in mind cryptocurrencies are still extremely risky.
The best advice for investing in crypto would be this:
- Only allocate a small percentage of your investment into cryptocurrencies, for example, 5%
- Stick to the mainstream coins like Bitcoin and Ethereum. The majority of the other coins can be easily manipulated, and the rest are just a scam.
- Be in it for the long haul. Avoid swing trading.
- Don’t buy just because a coin is cheap. A low price doesn’t mean it’s a bargain. It’s probably cheap for a reason.
Read More: Should You Invest in Bitcoin or Other Cryptocurrencies?
4. My partner manages the money, so I don’t have to
Life is full of responsibilities, and it makes sense to divide them up with a partner. However, this is no excuse to hand over all financial matters to your better half.
If one partner is left to take care of the bills and the investments, over time, they’ll grow to be more financially literate, leaving the other one behind. In the event of a separation or divorce, the one lagging might not be able to successfully manage their finances independently. They might have to start all over because they forgot to build their credit score or even end up racking thousands in credit card debt after the separation.
It’s therefore essential that both partners stay on top of their finances even if one of them is responsible for paying the bills.
Read More: How to Stop Living Paycheck to Paycheck
5. Don’t use credit cards (only pay in cash)
The advice not to use a credit card is often given in good faith. After all, you can never fall into high-interest debt if you don’t use a credit card. However, adhering to this financial advice could have adverse effects on your finances.
Using a credit card is the easiest way to build a credit score, an essential tool to build wealth. For many people, their home is their most significant source of wealth. But in order to get a mortgage on a home, you must have a good credit score. And if you don’t use a credit card, you can’t build a credit score and will therefore have a hard time finding a mortgage lender and a challenging time building wealth.
While it’s good to be careful, it’s also important to realize that tools such as credit cards can have both positive and negative effects on your financial life.
The best advice on credit cards would be to develop good personal finance habits that will help you avoid the negatives and maximize the positives.
Read More: Why am I broke all the time? 10 Reasons why and how to fix it.
6. Whole life insurance is a good investment
With standard life insurance, you pay a monthly premium, and when you die, the insurance company pays the agreed-upon amount to your family. With whole life insurance, however, things get a little bit advanced. A part of your contribution is directed to a tax-deferred investment account that grows over time and can provide cash. Insurance companies use this to attract customers, touting that the insurance policy is not only a way to provide financial security to your family but also a good investment tool. And here’s where I disagree.
While a good tool for leaving a financial legacy, whole life insurance is not a good investment tool. That’s because the returns are much lower and the fees too high compared to other investment vehicles such as index funds.
Term life insurance policy – that doesn’t include an investment part – might be a better and cheaper plan for you than whole life insurance.
7. 401(k)s are a scam
One of America’s most popular retirement plans has been labeled a scam by some critics. While some of their arguments are legitimate, others simply aren’t. 401(k)s are not a deliberate attempt to rob anyone of their hard-earned money. Instead, they are plans intended to help you save up for retirement in a diversified investment portfolio, some being better than others.
Benefits of 401(k)
- Tax advantages
- Some employers offer a ‘matching contribution’ plan in their compensation package.
- An easy and consistent way to save for retirement through deductions
- You benefit from compound interest.
- You can move it with you if you change jobs.
The only reasons to be concerned about 401(k) plans are when the fees are too high or when you have limited investment options in the plan. Be sure to assess an employer’s 401(k) plan. Please find out about their terms, fees, and investment options. If the terms are not favorable, consider alternative accounts such as IRAs, SEP IRAs, or solo 401(k)s.
8. The stock market is too risky/ is rigged.
Pump and dumps, insider trading, high-frequency trading, naked short-selling, etc. Yes, the list of wrongdoing in the stock market is endless, and it’s always a game of cat and mouse between the SEC and Wall Street firms which keep finding new ways to make even more money.
But you should never let this turn you off from investing. Despite its problems, the stock market hosts the largest companies in the world, allowing you access to some of the wealth generated by these businesses.
There are a few rules, if followed, can protect you from losing money in the stock market. They are:
- Invest, don’t trade. Trading is short-term, while investing is long-term. In the short run, the stock market is highly volatile, and while you might think that you’re smart enough to play the market, some Wall Street traders may have better tools to manipulate the market in their favor.
- Be boring. Don’t chase quick returns. Research the companies you choose to buy and have a plan for each investment. It will help you stay calm during excessive market volatility. Warren Buffet once said ‘Be greedy when others are fearful and fearful when others are greedy. ‘
- Verify anyone you give your money to. Before choosing a brokerage, make sure they are registered with the proper regulators.
Read More: 5 Things to Do When the Stock Market Crashes.
9. A home is always a good investment.
In most cases, buying a house is a sound financial decision and a key component of household wealth. However, it’s not a good investment. Actually, it’s not an investment at all.
This is because, rather than making you money, a house takes money from you every month. You need to pay insurance, property taxes, and maintenance as long as you live in it. Even though the house might appreciate over time, the increased value might not be enough to offset all those costs.
An investment is considered to be something you have control over, i.e., you can buy it whenever you feel it’s a bargain and sell it whenever you’re likely to maximize your returns. You can’t sell your primary residence simply because the house has gone up in value, and you want to make a profit. Your home serves a more important purpose: to provide shelter.
Be careful about buying too much house. A large, expensive house means high property taxes, high maintenance costs, expensive insurance, and higher mortgage interest. Furthermore, large mortgage payments take away money that would rather be used to invest. As a result, many people find themselves ‘house poor’ because all their money is locked up in home equity.
For these reasons, it’s better to buy a cheaper home and use the extra money to invest in an index fund that would grow and give you better returns.
Read More: Should I Buy A House Now Or Wait? 3 Factors to Consider.
The above examples are the most common pitfalls people fall into after getting terrible financial advice.
Of course, you can’t control the kind of financial advice that comes your way, but if you’re aware that not all financial advice is good, you’ll avoid making life-altering mistakes.
One reply on “Terrible Financial Advice Going Viral To Avoid.”
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