Financial Advice to Avoid When Setting Your Financial Goals
There is an abundance of information out there about how to spend, save and invest your money. Whilst most of these "advisors" will rate their advice as being the most sound, having the biggest impact or simply just being great, the information we receive needs to be critically analysed. By doing so, you empower yourself to make more educated and grounded decisions from an objective point of view as far as your financial goals are concerned.
This goes for both the hardcore saver as well as your average Joe wanting to organise their personal financial affairs. Financial advice is a very individual thing though, so knowing whether it's good or bad can often be difficult to decipher. In light of this, I wanted to share some of the worst financial advice I've come across and why I disagree with it so that you can critically analyse it for yourself.
"Get a better credit score by keeping money on your credit card"
This just isn’t true. This is how credit cards snowball their way into our lives and it all starts with trying to keep a little amount on there to give ourselves a better rating. A credit rating is based on your ability to pay off debt so the best thing you can do is pay it off. Keep this in mind, a credit card is not a necessity, you shouldn’t use it if you only want to get a good credit rating. It is an emergency card that comes at a premium so use it sparingly. If you still think you need the power that comes with a credit card, think again, cash is king.
"Investing is practically gambling"
It’s a known fact that when gambling the odds are stacked against you from the word go, how else would Las Vegas exist? Basically the house always wins. However, when you invest your money into a company or into the market, which is supporting hard working individuals who want that investment to grow, you become part of the house and not the player. You’re not necessarily throwing your money away when you invest, instead you are trying to increase its value but you must prepare yourself for dips in the market (especially if you invest in stocks).
Ultimately nothing will beat a hardcore saver as far as risk minimisation goes, however investing can be good for your finances as well as the economy. Thus, it should never be avoided all together if you're looking to grow your savings over time. As a general rule though, if you can't afford to lose the money you've set aside, then don't invest.
"Buying property is always a good investment"
People every year spend billions on their homes whether it’s buying, maintaining, fixing, furnishing or selling. However, if you were to put that same amount of money into a variety of well-selected investment opportunities you would minimise the risk of putting all your eggs into one basket. This in turn increases your chances of growing your wealth at a quicker rate. Unless you are a property developer, then for the average person a home can easily become a money pit. Times change, fashions and styles change and markets grow, so if you are not in-trend then things may not turn out so well when it comes time to sell.
There are of course some exceptions to this, for example, where somebody is generating sufficient levels of income through renting their property. But buying a home, sitting on it and simply expecting it to make money is very short-sighted. A house is the most expensive thing most of us will ever buy and they come without any guarantees. When you're ready to sell, it certainly isn't a sure thing that you will make a profit. Once you have factored in the ‘making an offer stage’, closing the deal, associated legal fees, agent fees, maintenance costs and potentially development costs you could be looking at zero profit. If this happens you have basically rented your home to yourself.
"To save more you need to earn more"
Whilst this sounds logical, it’s not necessarily true. Yes, it does help to earn more money and keep your costs down, but it all boils down to budgeting at the end of the day. You can still live frugally and live well it just requires more patience and perseverance. In other words, “Work smarter, not harder.”
If you want to make progress with your savings you need to agree a savings rate, which is a percentage of your take home pay to put aside every month. The market average is about 10% but why not aim for higher (according to this article, if you could put away 50% you'd be able to retire in roughly 17 years!). To help put things into perspective, if you were to put away $2,259 per month from the age of 25 then you would have just over $1,000,000 by the time you were 65 years old. If on the other hand you were 35, then that monthly figure would need to increase to $6,079 per month for 30 years to accumulate the same amount.
As you can see from this, the earlier you start thinking about savings and your financial goals, the better!