There’s a lot of bad financial advice out there. Some of it so championed and ingrained into our culture now that it’s even hard to convince people that the advice is bad. As I continue to learn about personal finance, some advice sticks out to me as much worse than other advice. Some of it is even easy to debunk with the littlest bit of thought or just a couple of minutes of crunching numbers.
Without further ado, here is the worst financial advice I’ve heard.
Your Home is an Asset
Some people don’t just see their home as an asset; they see it as their greatest asset. But here’s the thing—any time you put money into a personal residence, that house isn’t earning you money. It might earn you money when you sell, if it appreciates in value, but a big chunk of whatever you earn off that appreciation, if you get it, is going to be taxed as capital gains.
You really can’t rely on appreciation as a source of income, but even more to the point, if you’re living in the house, you’re not earning anything on it but the equity you’re putting into it.
The only way real estate is an asset is if it’s earning you dollars, which usually comes in the form of cash flow. Think rental properties. In an owned rental property, your tenants are paying the rent, which means they’re paying the mortgage, and they’re putting dollars into your pocket every month if you bought the right property.
Even if you aren’t earning cash flow each month, having a tenant at least pay off the property builds equity with money that isn’t yours. In other words, owning that property is gaining you more net worth because someone else is building your equity—not you. Appreciation is the icing on that cake and rather than the cake in that scenario. In this event, the property is actually earning you money, therefore it is an asset.
If you’re moving money into your house, that’s great—at least the money is still yours while you live in the property, but you can’t count on appreciation to maintain the value of the money you’re sinking into it.
Anything that takes money from your pocket is a liability, not an asset.
Tax Refunds are Bad
I get why, mathematically, people say this. Yes, if you are going to invest the money you would otherwise be overpaying to the government, it’s a great idea to figure out how much you should have withheld and not have a dollar more taken from your check.
I’m a big believer in working with your psychology. Most Americans have a hard time not spending everything they bring home, so I actually use this as one of the tricks that keeps me saving money. Yes, this means the government gets to “borrow” it from me through the course of the tax year, interest free, but it also means I get a big chunk of change at the end of the year that I am actually incapable of touching.
If you are an investor, and you know you would use that money to invest in something that’s going to earn you a return, by all means, make sure you’re only withholding the minimum. But for the average American who has to work with their psychology, this may be the only way many people can afford big ticket items or force themselves to save.
Debt is Always Bad
Yes, much of debt is bad. Credit card debt. Car loans. Student loans, to a large degree, can even be bad if you haven’t invested in an education that will earn you a good chunk of change. More on that in a minute.
But when you’re buying an asset with debt, namely real estate assets, debt is beautiful. Any time you can have someone else pay the debt, such as a rental tenant, your debt is not a liability but an effective tool, because it allows you to buy assets.
I don’t think that going $50k into debt for a risky business venture is a good use of debt. But used correctly, it can absolutely set you on the right financial path.
Conveniences are a Waste of Money
I think this can be true to an extent, but isn’t always as true as some would have you believe.
I think with conveniences, and their cost, you have to weigh out the value you’re getting from the convenience, and you have to be honest about it.
For example, if you pay someone to mow your lawn, are you going to reinvest that time you’re saving into building assets for yourself? Are you starting a side hustle to earn more income? Or are you going to squander it watching TV on the couch?
Let’s say you pay someone $30 to mow your yard. The hour you save on the weekend to build an asset that’ll net you more than $30 is $30 well spent. You also would need to weigh the value similarly against what your time is worth to you to do other things like spend time with family.
Yes, most people can find that hour in the weekend to mow their own yard, and if their schedule isn’t so busy otherwise, the $30 would be an absolute waste. You need to determine if you’re buying laziness or really buying that time back when you pay for conveniences.
Never Use Credit Cards
I actually think this can be excellent advice for most people. You need to understand your own psychology to really know whether this is good or bad financial advice for you.
The majority of people use credit cards irresponsibly. If they didn’t, credit card companies wouldn’t exist. They make money off people who carry balances from one month to the next. And so I think that for many people, this can actually be great advice.
But the truth is, there is a responsible way to use credit cards. That is, using them like a debit card and cashing in the rewards. The key to using credit cards responsibly is to only spend the money you have in your checking account, and then to immediately pay off the card with the money you have. I do this with groceries so I can take advantage of my credit union’s excellent member rewards program.
But if you’re going to rack up debt and carry balances, I think it’s best to cut up your cards and pretend they don’t exist.
Go to College
You might start to think I have an axe to grind with college, and maybe that’s true. I know I’m biased because I myself never finished college, and yet I still managed to succeed in my career. But I don’t think college is for everyone, especially not straight out of high school, most of the time. It’s bad financial advice to tell everybody they should go to college.
I do think that college is an excellent choice for some people, especially when they know exactly what they want to do for the rest of their lives, and especially if that career path will require a college degree for entrance. I’m thinking doctors, lawyers, teachers—you know, the stereotypically learned professions.
But I do think it’s a great disservice to the masses to assume that everybody should go to college. This is particularly true for those people who aren’t sure what they want to do. Or for those wanting to attend for “the experience.” I know there are those who disagree strongly with me, but I wholeheartedly feel that college should be looked on as an investment in your future. People considering college should only take that path if it actually helps to accomplish a long-term goal.
With that in mind, I think it’s 100% fair to say that a degree in philosophy is not as valuable as a degree in marketing. That is, unless you know you want to teach philosophy or have another use in mind for it. But attending college for the joy of it is unnecessary when we have the entire internet at our disposal for pleasure learning.
Alternative Paths to College
There are other paths to consider alongside college, such as:
- The Military (which pays you)
- Trade School (which is cheaper than college)
- Certificate Programs (which cost a tiny fraction of the price and may be sufficient for entry level work)
I actually think it’s often much more beneficial to start working early to gain experience right out of high school (for which you’ll be paid). You can then attend college when you’re more certain of your path. At that point you’ll know the degree will help be a bridge or a stepping stone to meet a requirement for the next step in your career.
The other benefit to doing college this way is that you can then keep your job and do school part time, earn money, and complete your degree in time for promotion.
Do you agree or disagree with my thoughts on financial advice? What are some of the worst pieces of advice you’ve received when it comes to personal finances?