Bad financial advice
Financial advice you should ignore
Whether you’re just starting out as an adult, or are already financially secure, you’ve probably heard your fair share of unwanted and unsolicited financial advice. In case you haven’t already learned it, the wealthier you get, the more interesting that advice can become!
Some financial tips and advice can function like ‘Chinese whispers’. That is, what may start as a well-intentioned message is passed on again and again, changing a little each time it is passed on, and by the time it reaches you it can end up communicating something vastly (and dangerously!) different.
Our financial advisers have heard their fair share of this sort of thing, so let’s look at the top seven pieces of financial advice you should ignore:
1. Never use a credit card
Credit cards can be like knives – if used correctly they can be very useful, but when they are used poorly, they can hurt you. Using a credit card is not the same as paying off bad credit card debt, so if you are not carrying forward an unpaid balance every month, credit cards have plenty of benefits that make them well-worth using.
2. Buy the cheapest house on the street
Buying the cheapest home on the street because you think you have the greatest potential for gains in value is not necessarily sound financial wisdom. You can easily fall into the trap of ‘keeping up with the Joneses,’ and buy a home you can’t really afford to put too much money into home modifications.
As with any big financial decision, it pays to keep in mind that the price is just one part of the overall picture.
3. Go to university, a student loan is a good debt
We agree that it is important to invest in yourself, but is university the only right answer? Of course not. Student debt is still debt, so keep that in mind before you take on any. Under current NZ law, student loans are interest free so long as you remain in NZ. But this is still a large chunk of debt that usually takes years to repay. Worldwide student loan debt is getting so bad that reputable sources are now beginning to suggest that student loans could cause the next global financial crisis.
Before starting any program of studies, ensure that the time spent achieving the qualification, and the qualification itself are both worth it.
4. The share market (stock market) is like gambling
The S&P 500, which is a measure of the largest share market in the world, has posted annual increases over 70 percent of the time since 1929. Including dividends, the average return has been nearly 10 percent.
When you look at age, goals, and risk profile you can construct a portfolio of assets (including shares) as a part of a plan to achieve what you really want in life – your major goals such as retirement or financial freedom. This moves you away from speculative investing – comparable to gambling – and towards an overall plan of action to reach your financial goals.
5. Property always goes up in value
Thankfully, since the global financial crisis (GFC) struck a decade or so ago, you’re much less likely to hear this piece of advice about homes. That’s for good reason – during the GFC home values in the world’s largest housing market, the United States, fell an average of 29%.
Closer to home, here in NZ we face an interesting situation where high housing prices is creating social and political pressure to make homes more affordable. This means that most people now agree that in years to come, property prices won’t increase in the same way they have in years gone by.
6. Stop buying lattes and you’ll be a millionaire
People who don’t like to have fun love may enjoy reminding you that this small purchase you make regularly is ruining your financial future. Of course, spending five dollars here and there can drain your bank account quicker than you might realise, but your regular trips to the local café probably aren’t the reason you’re not a millionaire, which is what some people might try and scare you into thinking.
7. Your home is your biggest investment
Owning a home is a big decision and is not something that should be taken lightly. But viewing your home as your biggest investment can be damaging. For example, if you spend most of your life believing that your home is (or should be) your biggest investment, you’re likely to overspend on a house and associated maintenance and renovations etc.
In the long-term, other investments can outperform the appreciation of your residence, so if you have too much of your net worth tied up in a home, you could be missing out.
Many financial commentators, including the famous author of “Rich Dad, Poor Dad”, Robert Kiyosaki, have even gone so far as to say your house isn’t an asset as all. The logic behind this is mainly because most owner-occupied houses don’t put money in your pocket like an investment will, but instead take funds out of your pocket with all the associated costs such as rates, insurance, mortgage payments, and maintenance.
The bottom line
To recap, here are the top seven pieces of bad financial advice that you’ll do well to ignore:
- Never use a credit card
- Buy the cheapest house on the street
- Go to university, a student loan is a good debt
- The stock market is like gambling
- Property always goes up in value
- Stop buying lattes and you’d be a millionaire
- Your home is your biggest investment