Here’s a rule of thumb: If doing something can be a paid profession that requires a license (e.g. surgery, flying a plane, being a financial advisor), then avoid taking advice about it from lay people. You wouldn’t listen to your buddy Carl if he told you it’s fine to fill your dental cavities with Elephant glue; you’d want an actual dentist. Yet strangely enough, most of you don’t think the same way when it comes to your retirement or savings. That leads to taking bad money advice, like:
1. Pay Off Your Home Loan as Soon as You Can
First, you should know that some home loans are bundled with pre-payment penalties*.
The bank issuing the loan was counting on the interest they’d earn, and you’re not getting away without paying some of it. The amount of the penalty is usually around 1.5% of the loan amount.
(If you want to dodge loan packages like that, speak to our mortgage specialists at MoneySmart. Everything is free. Because we have self-esteem issues, and flaunt our expertise just to feel useful. See, this is what a finance degree gets you.)
Second, you have to consider the interest rate. A simple example:
Let’s say I have around $50,000 in my bank account.
I also owe $50,000 on my home loan, which has an interest rate of 1.6%. On my friend’s misguided advice I pay off the entire home loan, leaving me with almost no money.
A few months later, a financial crisis strikes me (e.g. car accident, expensive surgery, wrote a disagreeable blog post about CPF) and I need cash. My recourse then is probably a personal loan, which is going to be around 12% interest.
In effect, I traded a debt with 1.6% interest rate for a debt with 12% interest rate.
2. Make a Tight Budget to Deal With (Every Financial Problem in Existence)
This is 50% right. My problem with this advice is that it’s often premature. The advice to budget should come after the advice to earn more.
I’ve said many times before, you won’t get far in life with a “budget first” mentality. Your first response to tight finances should always be to actively seek higher pay, side-income, or better investments.
You can’t budget your way through everything. If you make $2,500 a month, you are not ever going to budget your way to a $155,000 Masters Degree overseas. But let’s take a not-so-obvious example:
Let’s say you want to buy a new pair of sneakers – the kind that makes you run faster, jump higher, and alters your performance so much your species is scientifically half-cheetah. They tend to cost about $500.
You can make a tight budget and raise $500 by cutting out movies ($11), good lunches ($20), after work beers ($60), video games ($50), etc. You can give up all of that and be miserable for months. Or you can do a single freelance project one weekend (e.g. polish up someone’s website for $500).
Which sounds like the happier choice?
3. Wait Till You Have $1 Gazillion Before Investing
There are some random “rules” flying around, about how much you cash need to accumulate before you start investing. $5,000, $10,000, and I’ve even heard $150,000. A further assertion is that, without this amount, there’s no point investing because you’ll just lose all the money.
What you need to know is that “get rich and then invest” is a method taught by no school of finance ever. And while I am not on Warren Buffet’s level, I am 99% sure it’s supposed to be the other way around. The whole point of investing early, with what little you have, is so that one day you will have that much money to throw around in trading accounts or whatever.
4. Try to Make Money Dabbling in Forex, Without Any Education
Some people will tell you to skip reading the books, ignore the pricey courses, and just figure Forex out for yourself. Don’t.
Most uninformed Forex dabblers close their accounts after as little as a year. Forex is a 24/7 market, it is extremely volatile, and you can make or lose huge amounts of money in minutes.
A small handful of people (and I mean small) become successful without an education, working it out by trial and error. But most dabblers just succeed in turning their stomachs into an ulcer farm. My inbox is crammed with stories about Forex dabblers who lost their jobs because they checked charts every 30 minutes, or those who’ve gone on Xanax because they woke up worrying about their money at 4 am every morning.
If you want to make money on Forex, then pay for the education. And take the time to do your homework. Don’t believe it’s “easy” because there’s “only four main currency pairs” to pick.
5. Let Your Life Insurance Double as Investment
This is a convenient way to invest. “Convenient” is not the same as “good”.
Insurance policies with a savings component (i.e. not term insurance) often have a high Effect of Deduction. A large chunk of your returns are swallowed to pay for the insurance salesman’s commission, and to the insurer itself.
The returns from an insurance policy (either 3-5% or 7-9%) are comparable to what you’d get from many other investments, like blue chips. However, because of the money the insurer takes, you often make far less than you would if you’d used other investments.
At times when the market is bad, you stand to lose even more; because the insurer will still take its huge cut, regardless of how good or bad the returns are. Many of these companies are profitable because of the fees they charge you, not because they have genius fund managers.
If you’re serious about growing your money, don’t opt for the convenience of these schemes. Also, a one size, or investment, fits all mentality is not going to work either. Take some time to learn about investments, and be more active in managing your own wealth.
What’s the worst financial advice you ever got? Comment and let us know!
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