Look anywhere or listen to just about anyone and they will offer you financial advice. This is good and bad. Having easy access to all of this knowledge allows for you to easily learn and take the steps needed to become financially successful.
But this also allows people who have no business writing or talking about finances to give advice. It also means that companies that are trying to scam you out of your hard earned money can give advice that makes their product or service look good. Below I’ve come up with 14 pieces of the worst financial advice ever. Follow them with caution!
14 Pieces of The Worst Financial Advice Ever
#1. Co-sign A Loan
I’m sure there is one reason why you would want to co-sign a loan. But for the overwhelming amount of times, it makes zero sense to co-sign a loan. When you co-sign a loan you are saying that you are willing to take over the loan payments if the other person stops paying.
Let’s think about this for a minute. Are you OK with paying for someone else’s car? Are you OK with paying for someone else’s education? If you answered yes to these, email me as you have just become my new BFF!
No matter how much you love or care about the other person, you should never co-sign a loan. It will end badly. Alright, 99% of the time, it will end badly.
What To Do Instead: Support them. If they need a co-signer, either they are trying to take out a loan for more money than they can afford or they have bad credit – meaning they aren’t great with handling their money in the first place.
If they are trying to take out too much of a loan, help them to find a lower cost option. Instead of a new car, look at good used cars. Maybe help them to find ways to save more money or earn more money so they can take out a smaller loan and therefore won’t need someone to co-sign.
In the case of bad credit, help them get out of debt by either setting up a snowball method to repay their debt or guide them to using an app to keep them on track. Show them that paying their bills on time and staying out of debt will improve their credit score over time. It won’t happen overnight, but it will improve. When it does, the need for a co-signer goes away.
Lastly, help them become better with their finances. The more educated they are about their money, the greater the chance they spend money on things they can afford and save a decent amount of money each month.
#2. Take Out A Mortgage For As Much As You Qualify For
I’m an idiot. OK, I’m just human and make mistakes like everyone else. A long time ago, I was looking at buying a house with a now ex-girlfriend. We went to a mortgage broker and he ran the numbers telling us how much of a house we could afford. (Side note, this was back in the early bubble days of the real estate craze). Somehow on combined salaries of $80,000 we could buy a house for over $500,000!
Driving away from the mortgage broker, we talked about how we qualified for so much of a house and how it was a joke because looking at various payments for that large of a loan was more than our current take home pay! There was no way we would ever do that.
Fast forward a few years and I am single and I buy a house for as much as I qualify for. I’d love to know what happened to that guy that was rational a few years earlier! I ended up taking in a roommate just to help me cover my costs and survive financially. It was easily the worst money move I have ever made. (Not to mention the house is currently underwater and still a thorn in my side!)
Why don’t you want to take out a loan for as much as you qualify for? Because it is misleading. Most banks look at your gross income to determine how much house you can afford. But lots of things happen between your gross income and your net income.
Taxes, insurance and retirement savings are just a few. So while a $1,000 monthly payment on a gross monthly income of $2,500 looks good, when you see that what gets deposited in your checking account is $1,800, things suddenly don’t look so rosy. Can you live on $800 a month? Before you answer that, try to live off of $1,000 a month.
What To Do Instead: Don’t take out a mortgage for what the bank says you can. The amount they give you is the worst financial advice and it needs to be changed. They are looking to maximize their profit with the least amount of risk. Therefore they will lend you as much as they can while still keeping their risk in line.
This doesn’t mean they will lend you what you can afford, but the most you can afford assuming you want to live without cable, electricity, not save for retirement and fight the birds at the park for the stale bread that people throw.
Here is an alternative for you:
Take your gross annual salary and multiply it by 3. This is the maximum house value you can buy. So, if you make $40,000 a year, you can buy a house for $120,000 ($40,000 x 3). The key in this is the word “buy”. It is not borrow. You can buy a house for $120,000 and put down a sizeable down payment, making your mortgage affordable.
Some banks now are using a multiple of 2.5 instead of 3. For me, the lower the multiple, the better. This is because you ensure that you won’t be house poor. You can make your mortgage payment and still live and save money each month.
#3. Going Into Debt For A Wedding
I don’t understand why people go into debt for a wedding. Yes I know that the average wedding now costs over $26,650, but that is just the average and it’s a number thrown out by the wedding industry. You can have a great wedding for less. You just have to be smart about things.
When you go into debt for a wedding, you are putting yourself into trouble. We all know that money is a main reason for divorce, so why start off the marriage with debt hanging over your heads? It’s like running a race with 20 pound weights tied to your ankles. Good luck winning that race.
What To Do Instead: Make a list of what is most important to you. Whatever ranks the highest, spend the money there and skip the other stuff. When we got married, we wanted to have good food and have it be like a party. So we spent money on food and the DJ. The centerpieces were cheap throwaway items. The invites were bought at Michaels for $30 (less when you use their 50% off coupons).
When planning, we sat down and thought about the last wedding that we attended. Did we mention the amazing centerpieces or the incredible invites? We couldn’t remember either. No one cares or remembers about that stuff. They want to have a good time and celebrate. Remember that everyone there is there to celebrate you.
You don’t have to do things to make them happy, impress them, or do things how they would do it. Do it your own way and spend an amount you can afford on the things that matter most to you and your spouse. Besides, if they are truly your friends and family, they won’t care about any of this stuff – they are there for the two of you.
#4. Getting Suck Into A “Great” Deal
We’ve all seen the car on Craigslist that has 125,000 miles on it for $2,000. We think that it is a steal, take it for a drive and buy it. A few weeks later, things start to go wrong. After we buy new brakes and a timing belt, then an O2 sensor, we start realizing we should have passed on the great deal. The old saying always applies: if it seems too good to be true, it most likely is.
This doesn’t just apply to used cars either. You can find this scenario with just about anything – clothes, TVs, computers, you name it.
What To Do Instead: Understand that quality and value go hand and hand. Don’t just focus on price when it comes to buying things. Look at the quality of the item as well. A higher price for a quality item can be a good buy simply because it will last longer without the need to sink more money into it to keep it in good shape.
In addition to this, do some research! When buying a used car, research to see how reliable it is. Take it to a mechanic you trust to look it over. When buying other items, jump online and search for reviews of the product. You’ll get a better sense of its quality and can make a better decision going forward.
#5. Buying A Timeshare
Back in the day, timeshares were a popular way to go on a vacation each year. You would place a down payment on a resort that would be your home resort and in return, you would get a week to go there on vacation every year. The only ongoing cost was the annual maintenance fees.
But once timeshares started to become more and more popular, things changed. Maintenance fees increased every year as older resorts needed upgrading. New businesses were born where you could exchange your week at your home resort for a week at another resort. Of course, this cost money and to book at a popular resort, you needed to do so years in advance.
The worst part, it is virtually impossible to end the contract. Selling your timeshare won’t get you anything since most people don’t want them any longer and in some cases, there is a clause in the agreement you signed that when you pass away, the timeshare goes to your next of kin! Now they are on the hook for the annual maintenance fees! So if someone tries to sell you a timeshare, don’t walk but run as buying one is the worst financial advice.
What To Do Instead: Save your money and book your own vacation. It might sound cool to pay a one-time fee upfront and then just maintenance fees each year, but it is not. First, who wants to go to the same resort every single year? Second, maintenance fees currently average around $1,000 a year (and you pay them whether or not you actually use your week or not). As I noted earlier, these fees go up just about every year to update and maintain all of these resorts.
By simply saving some money from each paycheck – it’s called automation and you can learn all about it here – you can afford to take awesome vacations. There are tons of websites that offer great deals on vacations. Heck, you could even use credit card, airline and hotel rewards points and go on vacation for virtually nothing.
My wife and I flew first class for our honeymoon for free using our airline miles. Holly over at Club Thrifty is the Queen at vacationing for virtually nothing. I’m almost tempted to use her as my travel agent from now on!
#6. Taking Investment Advice From Friends
Your friends are probably great people, but that doesn’t make them qualified to offer you investment advice. This happens when they hear about a “can’t miss stock” that you “just have to invest in”. They will tell you all of the reasons why you should invest in the company but really have no clue as to whether or not it is a good investment.
What To Do Instead: Tell them thanks, but no thanks. No investment is a sure thing and this isn’t how you want to sour a great relationship when you lose money. Plus, it’s the same reason why you shouldn’t take investment advice from “experts” on television. They don’t know your goals or risk tolerance. You need to invest based on what you want to achieve. Feel free to do detailed research on the investment advice they give you, but don’t just accept it as a guarantee that it makes sense for you.
#7. You Work Hard and Deserve It
A lot of people use this tactic to justify buying things. Most often it is “I work hard and deserve it”. Other times it is “I’ve followed my budget for 4 months, I should be rewarded”. In fact, it isn’t even limited to money. How many times do you come back from a great workout and justify ordering a pizza or having a cookie for dessert as deserving it for your hard work? We’ve all been there.
The sad truth though is that if you don’t have the money for something, then you shouldn’t buy it, even if you think you deserve it. Once you start justifying purchases, you begin to walk down the path of entitlement. Suddenly, you deserve everything.
What To Do Instead: Catch yourself the next time you try to justify a purchase. Ask yourself why you deserve it. In many cases, you will find that the two do not go hand in hand. For example, if you work for 10 hours at $8 per hour, then you deserve $80. The $80 is a result of the hours you worked and your rate of pay.
When you think you deserve a vacation for your hard work, they do not go hand in hand. Others work just as hard as you, maybe even harder and do not go on vacation. If you want to go on vacation that is fine. Just don’t take one thinking you deserve it simply because you work. You can decide to go on vacation when you take the steps to save for and plan a vacation.
#8. Focusing On Monthly Payment
This is the classic difference between the rich and the poor. The rich look long term while the poor look short term. Here is what I mean by this: two people go shopping for a new car, a rich woman and a poor woman.
When asked by the salesperson about what she is looking for, the poor woman tells the salesperson she wants a car that will cost her $300 per month. They then go and find a car that has everything she wants and the salesperson works out her monthly payment. The problem is that in order to get her monthly payments to $300, the salesperson took her loan out 8 years. Because of this, her $30,000 car turned into a $45,000 car when you add in the interest.
The rich woman on the other hand is looking to spend no more than $25,000 for the car. She looks at the cost of the car and factors the interest she will pay on the loan. As long as those two numbers add up to less than $25,000 she buys the car.
See the difference? The rich woman is focused on the total cost of the car, or the long term while the poor woman is focused on the monthly payment, or the short term. When you focus on the short term, you pay more money in the long run.
What To Do Instead: Teach yourself to look at the overall cost of things, not just the monthly payment. This includes upkeep, maintenance costs, insurance, registration, etc. In other words, look at all of the other costs involved with the item to decide if you can really afford it or are willing to pay that price for the item.
#9. Keeping Up With The Joneses
You see your neighbor with a brand new Lexus and you just have to have one as well. You get caught up after taking a ride in it and start doing some research. Next thing you know, you have a new BMW.
Then you hear your other neighbor talking about their amazing vacation and you would love to get away with your family too. So you jump online, just to see what is out there, and within a month you are laying on a beach in St. Lucia.
The problem with these two examples is that most people go into debt just to keep up appearances or to fill a void in their life.
What To Do Instead: It’s not worth it to try to keep up appearances. Take the time to understand why you are trying to keep up with the Joneses. The more you learn and understand yourself, the better off you will be both personally and financially.
Trust me, it isn’t worth it to go into credit card debt just to appear that you have money. The stress and emotional toll the debt will have on you will make you regret every single purchase. Learn to be happy with what you have.
Finally, create a plan that lists your goals you want to achieve. Maybe it is to retire by 55 or to travel to other countries every year. Whatever it is, make a list of these things and refer to the list to keep you on track. The next time you are envious of the new flat screen or luxury SUV your neighbor bought, you can see that buying the same item doesn’t fit with your long term goals.
#10. Mixing Insurance And Investing
Somewhere along the line, the insurance industry started to promote a new type of product – whole life insurance. Instead of just offering a death benefit should you pass away, whole life added in an investment component to the death benefit so you could also save money when buying life insurance. Many took advantage of this new product and began using it.
While those selling you whole life insurance will tell you all of the great things about this product, they gloss over the high costs that are embedded within the policy and they probably won’t tell you about the commission they get for selling it to you either. While there are a few cases where whole life insurance might make sense, for most people, the costs are too high.
What To Do Instead: Keep investing and insurance separate. Insurance is a vehicle for transferring risk to someone else because you aren’t comfortable taking on yourself. Investments are for growing your wealth over time. See the difference?
If you need insurance, then look into basic term life insurance. It’s low cost and does what insurance is supposed to do – provide a source of money for your dependents in the event of your untimely passing.
#11. The Stock Market Is A Scam
I hear this one more and more ever since the latest market crash back in 2008. The truth is, the stock market is not a scam. It’s just that some people see it as a scam because they don’t know how to invest. They give into their emotions and let fear and greed make all of their investment decisions for them.
This means when the market is racing higher, they invest every last penny thinking the market will never come down. When the market falls and they lose money, they take what is left out of the market and sit on the sideline. When the market gets hot again, then invest and the cycle repeats itself.
What To Do Instead: First and foremost, you need to start with a plan. Why are you investing in the first place? Once you have this figured out, you can determine your risk tolerance and how to invest. Don’t worry, I go through all of this in my how to become a stock market millionaire post.
From there, you need to keep your emotions in check. It’s a simple idea, but is hard in practice because our emotions are so powerful. You have to find ways to overcome your emotions. Turn off the television when they talk about the stock market. Remember to look at the long-term.
The best analogy I have for you is this: think of the waves from a passing boat. Close to the boat, the water is very choppy. But follow the wake out and the waves get smaller. This is the stock market. Over the short term, there are big waves or volatility. But over the long term, things smooth out.
#12. Thinking High Fees Means Better Performance
Many of us make the mistake thinking that an investment that has a high management fee means it will perform extremely well. We tie the high cost to managers who are better equipped to earn us a great return. Unfortunately the data doesn’t back this up. In fact, it is the opposite. The lower the management fee, the better the investment will perform.
This is because investments with low fees tend to be index funds that track the market.
What To Do Instead: Invest in low cost index mutual funds and ETFs. It’s not exciting or sexy to just take what the market gives you but it is what works. No professional investor beats the market every single year.
They may get on a “hot” streak and beat the market for a few years, but they always come back down. The kicker is you never know when this will happen, so you roll the dice every year.
#13. Investing Based On Past Performance
This is another investing mistake that many, including, ahem myself, have made. You cannot make investment decisions based on how a mutual fund or other investment has performed in the past. Don’t invest in a fund that returned 30% last year because you think it will earn another 30% this year. No one knows what the market will do this year or even tomorrow.
What To Do Instead: Invest in good, low cost investments that meet your asset allocation and your investment plan. When you do this, you increase your odds for successful long term investing. Don’t try to earn 30, 40 or 50% a year. Build a portfolio that meets your needs and be happy with it returning what the market earns. It’s not sexy but it works at growing your money over the long term.
#14. Saving What’s Left At Month End
The problem here is that there is never anything at the end of the month to save for the 99% of people that follow this budgeting method. We all have good intentions, but many times we see the money in our checking account and we spend it. You will never get rich by saving what is left at month end. Never.
What To Do Instead: Flip this plan around and save first and then feel free to spend everything left in your checking account. If you read my post on automating, you will see how to set up this plan and you will be on the path to wealth.
Or, you can just use a service like Digit (read my full review here) to save instead. Trust me, it’s how the rich save. By saving first, you guarantee you will save. When you automate your savings, you will never notice the money “missing” from your checking account.
4 Pieces Of Good Financial Advice
I just focused on the worst financial advice. What is the best financial advice out there? I’ve touched on many of them in this post, but here they are summarized for you.
- Save first. When you get paid, put something, anything into savings. You’ll never get ahead if you don’t save first.
- Stay out of debt. If you can pay for something in full, aside from a house or a car, you shouldn’t buy it. When you are in debt, you work to pay someone else. When you are not in debt, you work for yourself because you keep the money you earn. You don’t mail it to credit card companies.
- Invest. Even if you only invest in your 401k plan, invest something. I know $20 per paycheck doesn’t seem like much, but it adds up.
- Look long term. See how decisions will impact you long term and not just the short term. The $20 per paycheck in the short term looks meaningless. But in 40 years when you have a couple hundred thousand dollars in the bank, you suddenly have options.
You can visit my resources page for tools and services that will help you on your financial journey and improve your financial picture.
At the end of the day, there are all kinds of bad advice. This list offered up 14 pieces of the worst financial advice but there are more examples out there. Always remember that it is your money and no one cares more about it, or even as much about it, as you do. You work hard for your money, so don’t give it away so easily. Do your homework. Conduct some research. Ask a lot of questions. Once you are comfortable and things make sense, then you can move forward with it.
If the product or service is so complex that you don’t understand it or how it works or the person telling you/selling you on it can’t describe it in a way that you can understand it, then it is time to say thanks but no thanks. There is nothing wrong with walking away.
Likewise, think long and hard about other financial decisions that could have a lasting impact on your finances, like not paying off your credit card debt. Just saving yourself from making a few bad choices with you money can save you a lot of time and money in the long run.