Personal finance advice is EVERYWHERE and not all of it is good. In fact, some of it is downright terrible. When seeking out advice make sure you're turning to a trusted (and ideally credentialed) authority. We hear all kinds of advice our clients have been given that could actually hurt them financially which means you've likely heard them too. Here's 6 pieces of financial advice you should probably ignore.
Bad Advice: Buy gold for safety
Why it's bad: First of all gold is highly volatile. It doesn't grow food, generate cash flow, house a business, etc. therefore it is difficult to value. Furthermore, gold has just barely kept up with inflation. Gold really isn't even a good long term investment. There is little evidence to support that gold will protect you in any way in the event of an economic collapse.
Bottom line: A diversified portfolio is important and can contain some portion of gold or other precious metals (talk to your financial advisor about an allocation that makes sense for you). If you're looking for safety, focus on your emergency reserve.
Bad Advice: Carry a credit card balance to build credit
Why it's bad: This little tidbit of misinformation revolves around building your credit score. While credit card usage is part of your credit score there are several other factors involved such as length of usage, payment history, credit inquiries, and so on. In fact, your credit score is impacted by the balance-to-limit ratio. According to VantageScore, your ratio should be no more than 30%. Carrying a balance higher than 30% of your limit can actually negatively impact your score.
Bottom line: There are schools of thought out there that say it’s a great way to build credit but really it’s a great way to develop poor habits. Using a credit card is fine but be sure to pay it off each month.
Bad Advice: Put an Annuity into an IRA
Why it's bad: The money inside an IRA is tax-deferred, meaning you don’t have to pay tax on the capital gains and income each year so long as the money stays in the account. For the majority of annuities, the money is also tax-deferred. So the benefit of the tax deferral is muted in an annuity if you put the annuity into an IRA. Often times this is recommended because the only assets available to purchase the annuity are inside an IRA and thus the salesman is limited to that recommendation.
Bottom line: Annuities can serve a purpose in some consumers' financial situation. But often they are the only recommendation. So be careful when you’re considering an annuity that it's appropriate for your financial situation.
Bad Advice: My uncle's cousin's neighbor is a financial advisor and guarantees an income stream
Why it's bad: Nothing in finance is ever guaranteed. It's that simple. Investing, while risk-level varies, is still a risk.
Bottom line: Do your due diligence. Choosing a financial advisor is a vital part of your financial well being. Plug plug plug: Check out Wela's services. You can learn more about what we do and the people behind our services here.
Bad Advice: If you need money just borrow it from your 401(k)
Why it's bad: You won't need the money for quite some time right? You're just borrowing it from yourself right? WRONG! Don't forget you're going to be penalized for taking the money out early. Borrowing from your retirement will only hurt you in the long run. Your 401(k) is for your retirement. No matter how much you think you need this money now, imagine how much worse it will be when you're 70 or 80 and you're running out of cash. Borrowing from your 401(k) also means you're missing out on the benefit of compounding interest. Even worse, your contributions could be suspended. Some 401(k)s won't allow you to continue contributing until you pay off your loan. There are even more compelling reasons to support this a terrible idea that involve, heavy taxation, being forced out of your plan, and trouble with the IRS! Read about them in this article from CNBC.
Bottom line: Borrowing from your 401(k) is never a good idea. Like, ever.
Bad Advice: If you can make monthly payments, you can afford it
Why it's bad: Well technically speaking, if you need to make monthly payments, you can't afford it. That's why debt exists; to allow you to purchase things you can't afford outright (like a car or a house). Just because you can afford monthly payments on something like a new mattress or an iPad doesn't mean you can afford it. Most financing on big ticket items comes with interest so you're ultimately paying more on the item in the long run. Even if the payment terms are interest free you're still making a monthly commitment that's negatively affecting your cash flow and putting you at greater risk should an emergency arise.
Bottom line: Keep your debts to a minimum. If you really want a big screen TV or a new mattress put the money aside and save up until you can afford to purchase it outright.