Advice is nice to get, but only if it's actually helpful. With personal finance, there is no shortage of opinion on virtually everything. From savings to spending, emergency funds to investments, debt to retirement, there is an opinion out there about it all.
Over the years, I've been the lucky (and unlucky) recipient of both wise advice and downright stupid advice. In this article, I am going to recall the three worst pieces of financial advice that I have ever received.
1. Renting is throwing your money away.
By far, this is the worst piece of advice I have ever received. The theory is rent does not build equity, and as a result, you will never make any money on your home if you continue to "pay someone else's mortgage.” In reality, the truth is not nearly this simple.
While it is true that renting never builds equity, renting also doesn't bury us under a mountain of debt, either. Homeownership is an expensive proposition for most of us. Mortgage interest is not cheap and, over the life of the loan, can easily double the cost of the home. It doesn't stop there, homeowners pay property taxes as well. For example, in New Jersey property taxes add up to more than 2.3% of the home's value. With a median home value in the state of over $307,000, we are looking at north of $7,300 in property taxes alone!
Homeowners also maintain homeowners insurance. Depending on where you live, insurance can set you back close to $2,000 a year. Moreover, these expenses do not include the yearly cost of maintaining the home, replacing appliances and performing renovations.
Lastly, opportunity cost. Renters have the option of finding another place to live when their lease is up. This provides the flexibility to move to bigger or smaller places as their finances allow (or require). Homeowners also have the option of moving, but the process is much more complicated, time-consuming and costly. Realtor fees of 6% are common when selling a home, further increasing the cost of owning a home.
In general, homeownership is much more expensive than many of us may realize, and renting is an excellent option for many people.
2. A student loan is "good debt."
Nationally, Americans are saddled with more than $1.3 trillion in student loan debt. More than 10% are delinquent on their loan payments. While student loans provide a means to increase earnings over the course of your career, those loans still need to be paid back. It often takes quite a number of years before we begin to truly "make money" due to our student loans and the interest we’ve incurred.
The truth is that debt is a burden, plain and simple. Building wealth is much tougher when we owe money, even if the debt was used to fund our educational pursuits. This situation can quickly become difficult to manage.
I do not believe there is ANY debt that can be considered "good." There are debts that may be wiser to accept (in the case of student loans), but calling a debt "good" simplifies the issue. It’s important to consider all the factors at play, including your choice of school, major, and cost of living. Sometimes people end up over borrowing or taking on student loan debt to obtain a major that won’t directly translate into higher earnings.
While obtaining a college education is often a wise choice, it’s even better when you can complete it and still stay debt free. Starting our careers off in debt can have profound consequences, and can be tough to overcome.
3. Always pay off your debts before investing.
As we previously covered, debt is bad. Upon coming to that realization, it’s easy to focus entirely on paying off those debts as our number one priority. While there is tremendous wisdom in paying off our debts as quickly as possible, ignoring investment opportunities along the way may not be the best option.
In my case, one of my investment accounts over the past five years has a 9.2% rate of return. Thus, it makes much more sense to invest as much as I can in this account rather than pay off a 2.7% interest auto loan. Of course, your performance numbers may vary, so be sure to do a little research before making your final decision.
Overall, it’s important to do your own research and check a variety of sources for that financial advice you listen to. People have different income levels, spending habits, personalities, and financial situations. This means that the right decision for one person may not always be the same for you. Think through a variety of options before choosing the best course of action for your specific situation.