Dangerous Financial Advice You Should Avoid
Financial concerns remain one of the most common sources of stress for Americans, with worries about day-to-day expenses, healthcare costs, saving for retirement, and other financial responsibilities taking a toll on mental well-being.
According to a survey conducted by the American Psychological Association (APA) in its "Stress in America" report from 2020, nearly 3 in 4 adults (73%) reported feeling anxious about money at some point in their lives, and almost a quarter of adults (24%) said they felt anxious about money most or all of the time.
This information highlights the importance of getting the correct advice from the right people. Taking the wrong financial advice can lead to significant monetary losses, undermining one's financial stability and future security.
Misguided decisions based on inaccurate advice can also result in missed financial opportunities, long-term debt, or even legal ramifications.
Where does bad financial advice come from?
People often receive bad financial advice from the following sources:
- Friends and Family: While loved ones generally have good intentions, they might not always be well-versed in financial matters. Their advice often comes from personal experiences or anecdotes rather than solid financial principles or research.
- Social Media and Internet Forums: With the rise of social media platforms, there's an overflow of information. While some of it can be beneficial, a significant portion can be misleading or outright false. "Financial gurus" on platforms like TikTok, Instagram, and even Reddit might not always have the credentials to back up their claims.
- Sales-Driven Financial Professionals: Some professionals, such as those selling insurance policies or specific investment products, might prioritize their commissions over a client's best interests.
Where does bad financial advice come from? – Cont’d
- Seminars and Workshops: Free seminars and workshops can sometimes be a front for selling financial products or services. Attendees might be given advice slanted towards purchasing what the presenter is selling rather than what's necessarily best for them.
- Television and Radio Shows: Some TV and radio personalities make bold claims or predictions to boost ratings, but they might not always be based on sound financial analysis.
- Unreliable Online Publications: There are numerous financial websites and blogs. While many are reputable, others might offer advice based on trends or unverified information.
- Get-Rich-Quick Schemes: These are often touted by charismatic individuals promising high returns with little risk. They prey on people's desires to achieve quick financial success.
- Informal Community or Group Gatherings: In some cultures or communities, informal financial advice might circulate during gatherings or events. While the intent might be to help, the advice might be outdated or not applicable to everyone.
To safeguard against bad financial advice, it's essential to do your own research, consult with certified financial professionals, and be wary of anyone promising surefire results or pressuring you to make quick decisions.
While there are many solid pieces of financial counsel, some common advice can be not only misleading but downright dangerous for your financial health.
Here are some pieces of advice that sound good on the surface, but can be risky if followed without careful consideration.
"Credit cards are evil; avoid them at all costs."
While it's true that misusing credit cards can lead to debt, they can also be tools to build credit and earn rewards if used responsibly.
A Bankrate study showed that over 55% of U.S. adults have credit card debt, but the key is not to avoid cards, but to understand how to use them.
Building good credit can be vital for securing loans at favorable rates in the future.
"Investing is too risky; just save your money."
Amnaj Khetsamtip, Shutterstock
Investing carries inherent risks, but the potential for returns can outweigh those risks over the long term. The S&P 500, for instance, has historically returned about 7% annually after inflation.
By avoiding investments entirely, you risk missing out on these potential gains and could lose purchasing power to inflation.
"Always buy a home; renting is throwing money away."
Homeownership is often touted as the 'American Dream.' However, it's not always the best choice for everyone.
A study by ATTOM Data Solutions found that in 18% of U.S. counties, renting is more affordable than buying. Consider factors like mobility, maintenance costs, and market conditions before making a decision.
"You're young; you don't need to worry about retirement yet."
The power of compound interest means that the earlier you start saving for retirement, the better. According to the National Retirement Risk Index, over 50% of households are at risk of not having enough to maintain their living standards in retirement.
By starting early, even with small amounts, you set yourself up for a more secure future.
"Play it safe and keep all your money in a regular savings account."
While having an emergency fund in a liquid account is wise, hoarding all your money in low-interest savings accounts can be detrimental. With average national savings rates below 0.05%, according to the FDIC, and inflation averaging around 2%, your money loses value over time in such accounts.
"You need a big emergency fund before paying off debt."
While having an emergency fund is essential, waiting to pay off high-interest debt can cost you more in the long run. It might be more strategic to save a smaller "starter" emergency fund and then focus on paying off high-interest debt.
"It's okay to carry a small balance on your credit card to improve your credit score."
This is a common myth. Carrying a balance doesn't boost your credit score. In fact, the Credit CARD Act of 2009 found that consumers were paying over $10 billion in avoidable interest due to such misconceptions.
It's better to pay off your balance in full each month and keep your credit utilization low.
Final Thoughts
When it comes to financial advice, always approach with caution and conduct your own research. While some common tips can be beneficial in the right context, understanding the broader picture and seeking advice tailored to your personal situation is key.
Remember, what works for one person might not necessarily work for you, so being informed and cautious is paramount.
