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The Worst Financial Advice You’ve Ever Heard

The Worst Financial Advice You've Ever Heard

Originally aired 7/14/2021

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With over 120 cumulative years in the financial industry, trust us, we’ve heard some bad advice. In this episode, we’re talking all about the worst of the worst and how you can take steps to avoid a financial fiasco!

You’ll learn:
– 5 of the worst pieces of financial advice we’ve ever heard.
– How to make sure you don’t fall victim to bad financial advice

Downloadable Content: 

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SHOW NOTES

Your Love is Like Bad Medicine

  • There’s an avalanche of financial information online (and from real, live people), but not all of it is good advice. In fact, some it is downright dangerous to your financial health.
  • On today’s show, we’re talking all about bad advice and how to avoid a financial fiasco!
  • Bad Tip 1: Debt is no big deal
    • Some bogus advice we’ve heard over the years:
      • “Once you cut up the credit card, you don’t have to pay it.”
        • Cutting up a credit card does absolutely nothing to affect the balance you owe. You could set all your credit cards on fire and you’d still be responsible for paying them off.
      • “Student loans are no big deal – you can easily pay them off whenever.”
        • As anyone with student loan debt can tell you, it can be a huge financial burden.
        • The worst time to have debt is to have it early.
          • It’s the best time to invest that money instead.
          • And… when is whenever?
        • Going to school can definitely be worth it (and graduates do tend to earn more on average), but it also depends on your career and goals.
        • In addition, instead of relying solely on loans, it’s a good idea to talk with your school’s financial aid office, apply for tons of scholarships, and consider other ways to reduce the costs of your education, like taking some courses at a community college or choosing a state school over a private university.
        • Relying on the government to take care of your needs, whether it’s student loans or otherwise, is not good financial advice.
          • The government has more debt than they know what to do with.
        • “Can’t afford it? Just get another credit card!”
          • Living on credit cards without a source of income to fully cover your expenses could lead you into a debt spiral and tank your credit score.
          • If you can’t afford it coming out of your checking account, you don’t need to put it on a credit card.
        • “You’re always going to have a car payment.”
          • We often hear people think this of not just their working life, but in retirement, too!
          • According to Fortunly, the average monthly payment for a car loan is $467.
            • That’s over 30% of the average Social Security benefit!
  • Debunked with the Rule of 72
    • The average interest rate for a credit card in 2020 was over 16%.
      • Using the rule of 72, and using 16% flat for simplicity’s sake, you find that all it takes is 4.5 years for a credit card company to earn double your money.
    • You have to realize that ALL debt has a financial and emotional weight to it. It puts a drag on your cash flow and can cause anxiety.
      • Our society has desensitized us to the dangers of debt.
      • Most millionaires agree that the best way to get and stay wealthy is to avoid personal debt.
      • According to the Federal Reserve, American household debt hit a record $14.6 trillion in the spring of 2021.
        • If that’s not a big deal, we don’t know what is.
  • Free Download: Debt Snowball

Risky Business

  • Bad Tip #2: Gamble your required income
    • Okay, you may not have heard this one in exactly these words, but you may have heard some form of it like:
      • “Let’s go to the casino and double your paycheck.”
        • Generally, casino games are stacked in favor of the house. Sure, it’s possible to win, but losing is quite a bit more probable. If you do enjoy gambling, it’s usually best not to wager anything that it would hurt to lose — so probably not your whole paycheck.
        • The lottery jackpot is similar.
          • You only have a 1 in 13,983,816 chance of winning the lottery jackpot, yet people bank on it every day.
          • More than two-thirds of millennials are waiting on a winning a lottery jackpot to secure their retirements, according to a survey by STASH, a consumer investing app.
            • Thirty-one percent of Americans don’t invest because they think it’s risky, but 39%, including 59% of millennials, feel it’s reasonable to think of the lottery jackpot as a potential means of retirement, according to the survey.
    • This is the next big thing – invest now and wait for the payout.”
      • Odds are you’ve heard this around the watercooler at work, but we’ve got a bit of a hot take for you: if the guy at the watercooler knows about it, you’re probably already too late to reap the benefit from large gains.
        • This happened with GameStop!
        • Everyone expected this to become the norm with apps like Robinhood, but now Robinhood faces FINRA’s biggest-ever penalty.
    • We’re all for having a little fun as you invest, but you shouldn’t gamble with money you need to live on (whether that’s money for now or for retirement).
  • Bad Tip #3: Avoid risk at all costs
    • While we don’t suggest you gamble away your money, we also don’t suggest you let it sit in a savings account without the ability to grow.
    • You may have heard:
      • “The stock market is going to crash again – get out while you can.”
      • “Only make ‘safe’ investments.”
    • Ultimately, one of the biggest risks in investing is trying to avoid risk! Risk and reward go hand in hand. And the younger you are, when time is on your side, the more risks you can afford to take.
  • The truth: avoiding market risk causes you to accept inflation risk!
      • A Social Security analyst has speculated that the COLA for 2022 (which will be announced in October) could be as much as 6.1%.
        • That’s the biggest increase since 1983
        • Big driver: CPI increase of .9% for the month of June
    • Our strategy: Buckets
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Take the Money and Run

  • Bad Tip #4: You can avoid taxes
    • You may have heard this said in a form of:
      • “Don’t put money into a Roth. You’ll have to pay taxes on it now.”
      • “You can have a tax-free retirement.”
  • The easiest way to explain the difference between using a Roth or traditional retirement account is this: Do you want to pay tax on the seed (Roth) or pay tax on the harvest (Traditional)? 
    • Personally, we’d rather pay tax now on the smaller amount, versus taxes later on the growth.
    • The best scenario for a ROTH IRA investor is to start early. Roths are great vehicles for young people to save for retirement.
    • When you start young with a Roth, you give yourself a long time for tax-free compounding to take place.
  • Just a heads up – the government will get their money.
    • Once you have a large amount of money in pre-tax accounts, you need to understand there is no way to AVOID taxation of those assets.
    • There are some strategies that involve blending withdrawals from non-qualified and qualified accounts that COULD reduce the amount of taxes you owe, but you will still owe taxes on the qualified portion.
  • There is no doubt that the threat of higher taxes is real.
    • But the fear of higher taxes has caused an explosion of pitches from a variety of characters trying to sell you on the idea of dodging the IRS and creating a tax-free retirement.
    • These people target folks who have built a substantial amount of retirement assets and often the solutions they offer aren’t in your best interest.
  • Remember, never make an investment decision solely on tax reasons.
    • The investment has to make sense on its own merits because there is no guarantee that Congress won’t change the tax laws in the future, potentially blowing up your strategy.

Gimme All Your Lovin’, Don’t Let Up Until We’re Through

  • Bad Tip #5: Don’t worry, you don’t need to understand what we are doing. We are the experts, just give us your money and let us take over.
    • Red flag alert!
      • If you hear this from a financial “expert,” RUN as fast as you can in the other direction.
    • You want the people on your money team to educate you on your financial options and investments.
      • If your advisor can’t explain to you in plain English exactly what you’re buying and why you need it, find someone else who will.
    • Now, this isn’t to say you need to be a financial expert yourself and understand all the complexities of a comprehensive financial plan.
      • This is to say that your advisor should be able to answer your questions as to what you’re investing in and why.
      • If you took your car to a mechanic and he said you needed your motor replaced but he couldn’t explain to you why it wasn’t working, you’d likely get a second opinion. The same should apply here.
  • What’s the plan?
    • A written financial plan can help you identify steps you need to take toward your goals and help you stay on track.
      • You can fend off a lot of bad advice when you have a filter to run it through. Your financial plan on paper, on purpose, can act as the first line of defense!
    • A trusted financial advisor can also help you stick to your goals and adjust them as needed.
  • The best plans hold up on the road.
    • It’s not uncommon to feel a tremendous weight lift from your shoulders when you put a plan in place that’s built specifically for you, on paper, on purpose. But the experience doesn’t end there.
    • Plans have a kind of time-release effect, like some medications do, meaning that you feel the effects when you give them time to work.
    • There’s simply nothing like when the wheels of a plan meet the road.

FINAL THOUGHTS

    • The 5 worst financial tips we’ve ever heard:
      • Debt is no big deal
      • Gamble your required income
      • Avoid risk at all costs
      • You can avoid taxes
      • Just give us your money and let us take over
  •  
    • Make sure you have someone to bounce your ideas off of.
      • Having a trusted friend, family member, or advisor who understands your financial goals can help you avoid a financial fiasco from bad advice.