June 10, 2019
4 Common Personal Finance Tips That Will Actually Fail You
By Lauren Arnold, Planswell
When you ask someone where they get most of their financial advice, you’ll likely receive answers that mostly include family and friends. Unfortunately, relying on your social circles to provide financial advice leaves lots of room for (accidental) misinformation. That’s why we’ve rounded up four common personal finance tips that will actually fail you in the long run.
1. If you have any debt, paying it off is your only priority
It is essential to understand that debt can fall into one of two separate categories: good debt and bad debt. A few examples of good debt include a mortgage or a student loan (basically, any accounts that hold an incredibly low interest rate and was taken on for some sort of investment purpose).
Bad debt is what you have to be cautious of. Most often, bad debt is synonymous with credit cards, as the debt offers you little to no value and credit cards are notorious for having painfully high interest rates (upwards of 20% per month in some cases). The best use of your money is paying off bad debt before paying off any other type of loans.
While there are some circumstances in which it may make sense to pay off your good debt early, like your mortgage, it’s not always in everyone’s best interest. By extending your mortgage and freeing up cash flow to invest and reap the benefits of compounding interest, you’ll likely be in a better situation to reach your goals – whether that be sending a child to school or retirement.
Bottom line, everyone is different and your mortgage and debt decisions should be driven by your financial plan.
2. If you save 10% of your income throughout your life, you’ll be retirement ready
This one is pretty straight forward to debunk; everyone needs to save a different amount based on their current lifestyle and future goals.
A lot goes into how much you should be saving such as your:
- Marital status
- Pension, if any
- Career growth opportunities
And many other factors. There is no way one single savings rule could blanket all of those different situations. For example, starting to save 10% at the age of 22 as opposed to starting at 32 will leave two different people in very different retirement situations.
The best way to combat this myth is to have a financial plan. By building a financial plan, you will know exactly how much savings are required to maintain your lifestyle in retirement (and where those savings should be).
3. You don’t need insurance when you’re young and single
Early in your career, you may not have much in terms of savings and investments yet, so a financial setback could put you in debt. But these are also your prime growth years to get you to those peak earnings. Insurance can help keep things in balance.
Your early career sets the stage for how the rest of your life will play out – it’s your responsibility to ensure you’re doing everything you can to keep things on track. Critical illness insurance is an inexpensive way to protect yourself and should be something young, single people should consider as a key part of their financial plan.
To really understand and combat where this false financial tip is coming from, is to always understand and ask how someone selling insurance gets paid. Then you can protect yourself against being oversold types of insurance that you don’t need or told you don’t need any when you really do.
4. Invest in something because it’s a “winner”
If you want to be a successful investor, emotions are the enemy. Don’t get overly excited when your investments go up and don’t panic when they go down. Know that you’re in it for the long game. You have to trust that the market has reliably gone up for decades. That means if you’re focused on the long term and keep adding to your portfolio every month, you will be successful.
Knowing that no investment is a sure thing is a key part
When it comes to taking financial advice, you always have to be cautious. Everyone has different goals, lifestyle expectations and situations so there is no hard and fast rule that applies to everyone across the board. That’s why we built Planswell. We believe everyone needs a personalized financial plan that will take into account their specific situation to optimize their investments, insurance and borrowing.