Some common advice doesn’t make financial sense when it’s thought through
It seems like everyone that’s ever made money think they can offer financial advice to all their friends, family, and others they meet. And while it’s often done with the best intentions, these advice aren’t always as accurate as you might think.
Yes, certain financial tips work, such as the most basic trading rule of all times: never invest using funds you can’t afford to lose. It’s such an important rule that even online brokers, who want you to trade more, teach it to their clients.
However, as it turns out, a lot of financial advice is not only incorrect but they don’t even make financial sense. Therefore, we looked at four of the most common financial advice that doesn’t actually work and that will probably end up hurting you in the end.
We asked Adam, head of content at BullMarketz, to put together a list with his best tips.
- Paying Back Debt is A Priority
Let’s get this straight: paying back debt is a priority and it always should be. Although, the level of priority is not the same for all debt.
For example, paying back the money you borrowed from others should always be prioritized, because that’s what decent people do. The same goes for bank loans with bad terms as well as your credit and bills.
That being said, certain debt is not necessarily as time-sensitive. In most countries, mortgages and student loans have very low-interest rates so there is no point in stressing. Also, you can almost always deduct student debt, meaning it can help your overall economy to not pay it back just yet.
But don’t get us wrong. If you can pay your debt back you should, just don’t rush it all, especially not if you can wait.
- Save 10 Percent For Your Retirement
This is a rule that everyone has been told and that way too many people share with each other. The problem is that it doesn’t work and there is no math to support it, as seen here.
In fact, saving 10 percent of your income from the age of 30, with an average income and considering inflation and potential investments, will land your retirement fund at around $500,000 by the time you reach 65. By the time you’re 75, most of that money is gone even if you cut back on your expenses and start living a more modest lifestyle.
So instead of saving 10 percent, you should save more. But if you really want to have enough by the time you retire, you should contact a professional investment strategist to help you.
- Increase Your Net Worth by Investing in Property
If you buy a property or a house your net worth automatically goes up, correct?
No, that’s not how it works. In fact, most properties are not owned by the “owners” but rather the bank meaning it does not affect your net worth.
You see, unless you buy a house that you can afford or you buy a house during a bubble (like most people), that investment won’t have a positive effect on your net worth. Most of the time, the effect can be the opposite.
We’re not saying you shouldn’t invest in property, because it’s generally a good investment. Just don’t assume your net worth automatically skyrockets after.
- The 4 percent Retirement Rule
There is a common rule saying that you should use 4 percent of your retirement the first year and then increase that amount based on inflation, and by doing so, you won’t run out of money.
According to several studies, the 4 percent rule only works 50 percent of the time making it a 50/50 gamble. In other words, the odds aren’t really in your favor.
A better solution is to follow the IRS’s guidelines regarding retirement funds. They even have practical tables and systems that you can follow and that will make your retirement last for as long as possible.