4 misleading personal financial advice

Financial advice is everywhere, and some common rules of thumb are so common that we may not stop and question them. So how reliable are these popular financial tips?

According to some experts, the answer is mixed.

“Common advice tends to do what is simple and seems easy to stick to, since people have limited willpower,” says James Choi, Ph. D., professor of finance at Yale University School of Management. “But a lot of the advice is overly simplistic and doesn’t take into account economic research or people’s unique circumstances.”

Here are four outdated, incomplete, or just plain wrong financial myths, plus some research-based advice on what to do instead.

Myth 1: All debt is bad

old adviceDebt – from credit cards or other loans – should be avoided. For example, one The New York Times The bestselling financial guide Targeted at millennials he claims “credit card debt is never good.”

There is some truth to this advice. Using cash — actual dollar bills — makes spending seem more “real” and limits your ability to spend to what you have, in turn. Reducing public spending. High-interest debt can quickly accumulate into large amounts that are difficult to repay.

However, making smart use of debt has benefits, ranging from building your credit score to helping you achieve long-term goals like home ownership or retirement.

Best advice: Use religion wisely. Some debt is good.

Good debt creates value over time. For example, education has historically increased income potential in the short and long term Education debt Reasonable investment. Mortgages are another type of debt that is financially savvy for many people, given the historical home increases Equity and tax breaksand sometimes monthly costs are cheaper than rent.

Temporary debt, in the form of credit activity, can help, too Build your credit score, a number calculated by lenders that affects the interest rate you get on future loans. Large debts and missed payments lower your credit score. However, the high score requires that you have credit experience. This doesn’t mean you have to hold on to debt – you can Pay it every month before accruing interest on it. But a strong credit score requires a history of successfully paying lenders over a reasonable period of time.

Moreover, sometimes debt is necessary to survive. A job loss, unexpected medical bills, or just a few bad choices can cause even smart people to accumulate high-interest debt. So if you find yourself overwhelmed, don’t worry.

“Many young people run into significant debt at some point,” notes Choi. “But most still manage to be financially healthy over time, especially given that income and the ability to save tend to increase with age.”

Instead of letting guilt or anxiety take over, assess the situation and come up with a plan.

explains Todd Christensen, financial advisor and author Everyday money for people every day. “But when they sit down, assess the situation, and consider their options, it usually works out better than they feared.”

Myth 2: You should save a significant portion of every paycheck

old adviceSave a fixed percentage of your income each month for the rest of your life, regardless of your current circumstances or how your life changes over time. For example, for a file Article comparing popular financial advice to economic researchCheck out Choi’s 47 Popular Books of Financial Advice. It found that 32 emphasized saving immediately and 21 recommended keeping your savings rate—usually 10 to 20% of your total income—constant throughout your life.

There are reasons to start saving consistently as soon as possible. Early and regular savings are taken advantage of Compound interest (Early savings grow more than later savings), and monthly specific investing may also reduce emotional responses to market fluctuations.

Committing to regular savings early on, Christensen points out, makes it a lifelong habit.

“You can’t separate money from psychology,” he says. “If people don’t make an early commitment to saving automatically at the beginning of each month, most of them fall into the habit of spending all their money and never paying attention to saving.”

But often it makes sense to prioritize other needs or financial goals over saving.

Best adviceCreate a budget for spending and saving based on: Personal life circumstances and goals.

First, when you’re younger, you’ll likely have less income than you save when you’re older. So rather than sticking to a set rate, it’s wise to increase your savings rate as your total income increases. “It’s easy to passively view money,” notes Maria Davydenko, PhD, researcher with the Canadian Financial Consumer Agency and author of a recent paper. Compare research results with financial advice from online media. “But it’s best to check in occasionally, look at the big picture, and update your plans in light of your current situation.”

Second, from a purely economic perspective, it is always the best option to pay off all high-interest debt such as credit cards before saving. Choi explains that this is because most investments have a much lower rate of return.

Finally, even if you want to save every month no matter what, a flat rate of saving isn’t always optimal. “I recommend that everyone save some money each month to create a lifelong habit,” Christensen says. “But it may be financially wise to put a larger share of your money into high-interest debt or other pressing concerns, and then increase your savings rates later.”

Myth 3: It is irresponsible to spend on “unnecessary” things.

Old advice: Stop all unnecessary spending until all of your financial goals are met.

Of course, it’s important to prioritize basic needs and obligations like shelter, health care, and bills before splurging on unnecessary matters. This is especially true for anyone who regularly spends on things that don’t align with their goals or increase their well-being – for example, eating junk food every day when a cheap, well-packed lunch is fun, or taking a taxi when public transportation is convenient. Available.

But it’s also important to remember why you value money in the first place. “Money is not an end in itself,” Christensen explains. “It is a tool to enhance your well-being and help you achieve your goals.”

Best advice: Create a financial plan that matches your goals, including some money to enjoy what makes you happy right now!

“It’s not about the coffee,” Davydenko assures. “You will not get rich from small savings here and there, but you will deny yourself some enjoyment.” You may reward yourself Boost motivation to stick to your financial plan The long-term.

Everyone is different, but psychological research shows that certain types of spending are especially likely to boost happiness — including Spending money on experiences and on others. So, don’t feel guilty about enjoying brunch with friends or buying your mom a birthday present.

Depending on your circumstances, splurging more on life’s experiences may make sense for you.

“The chance to live in New York City, for example, or travel or work at a low-paying dream job in your twenties may be worth it,” Choi suggests, “even if it means you won’t be able to save right away.”

This is especially true if your income is likely to increase with age and if you are committed to saving more later.

Myth 4: It is rude to talk about money

old adviceTalking about money is impolite, especially in Western countries like the United States, where people tend to associate their sense of personal value with financial value.

Surveys have found that most people in Western cultures refrain from talking about finances even with close friends and family, believing, for example, that “very personal,” shamefulOr they don’t know enough to speak intelligently.

But honest and informative conversations about money are a great way to support each other and share information.

Best adviceDiscuss finances with family, friends and colleagues.

Open conversations about money allow people to share ideas, support, and feedback about important financial decisions. Parents can impart useful knowledge And habits when they openly discuss money and Involve children in financial decisions. Couples discussing their financial goals Healthier marriages. until Neighbors who talk about finances They are more likely to improve their financial behaviour.

People are probably more comfortable talking about money than you might think. After all, you may discuss financial challenges Improve the relationship between trust and closeness. For life’s most important decisions, we talk to others.

“Talking with others is a way to receive support and advice,” says Davydenko. “People benefit from checking in with others any time they are making a financial decision — in the same way they would if they were making a medical decision or choosing between two job offers.”

There is a lot of financial advice out there, but it is important to know what works best for you. The advice every expert recommends: Consider your short- and long-term goals and values, and make a plan.