Sometimes the worst ‘vice’ is advice – even if it’s well intended. This is especially true when financial topics arise. Unfortunately, no one can tell you how to manage your finances – that’s up to you. Here are few pieces of really bad financial advice you should avoid, no matter how your current financial situation appears.
- Drain Savings/Retirement Accounts to Pay off Debt – Rather than using all the money you’ve saved for emergencies, a home, or for your retirement to pay down debt, keep that money where it is and find other ways to pay down what you owe. This piece of advice doesn’t take into account your age, income earnings potential, amount of debt, and life’s little emergencies that come out of nowhere. Even if you have many years left to earn an income, medical issues, divorce, or other problems may occur that require you to spend some of your savings.
- Cancel Unused Credit Cards – This can negatively affect your credit rating as lenders and creditors want to see how you use existing credit. Rather than close these accounts completely, pay off what you owe and don’t charge anything new. A ‘zero’ balance will actually help you maintain a positive credit rating. This is one of the reasons why it is wise to think twice before applying for an online credit card. Banks like Clydesdale Bank have long interest free promotional offers, some don’t. What they all do have in common is a credit profile check: if they see you closing down a lot of accounts, your score could be temporarily reduced. If you have debt, consolidate with a balance transfer and put the unused cards on ice, which some people literally do.
- Open Credit Card Accounts to Increase Your Credit Score – This may help increase scores slightly, but the number of accounts you open and use will not bump your score up that much. If you regularly max out these cards or fail to make regular monthly payments, your score will go down. Unless you’re very careful and responsible with credit, stick to one or two cards at the most. Again, avoid having too many online credit cards.
- You only need to save 10% for retirement – You may need much more than that when you retire. The 10% rule doesn’t take into account personal health issues, current income, future income, immediate and future family expenses, and much, much more. While it’s wise to save at least 10% of your income for retirement, if possible, try to increase this as your income goes up. Play it right, and you could even retire young!
- Risky investments are the only ones that truly pay off – If an investment opportunity seems too good to be true, don’t risk your future on it. Conservative or moderately risky investments typically pay off – they just take longer to do so. When it comes to investing, understand completely what you’re investing in, the risks involved, and how much you stand to gain/loss.
- Pay off debt first, start saving later on – This advice is debatable depending on the amount of debt you have and your current financial situation. If you have a small amount of debt that you can pay off in six months, then it may be worth foregoing a savings buffer until after the debt is paid. But if you have additional expenses such as a mortgage, children, or health issues that prevent you from working as much as you’d like, having money in savings when emergencies strike may actually keep you from falling further into debt.
Instead of paying off all debt at once, contact creditors and lenders to see if other payment arrangements can be made. Take the remainder, and put it into savings after paying your monthly expenses.
Well-meaning advice from friends, family, and financial advisors may seem beneficial at first, but unfortunately, when you really think about it, some of this advice may not work for your lifestyle.