5 Big Lessons Popular Personal Finance Advice Gets Wrong

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Every day, you’re inundated with information. From social media to texts, phone calls, emails, and news alerts—it’s incredible how much information we process regularly. So when it comes to handling your finances, it’s natural to think that the information you hear repeatedly is the best advice to follow. 

Right? Well, not quite.

Here are five pieces of popular personal finance advice we can almost guarantee you’ve heard before and why you shouldn’t necessarily take it. 

Lesson #1: “Skipping Your Daily Latte Will Make You a Millionaire” 

This popular personal finance “lesson” seems to be a favorite for Baby Boomers who see younger people enjoying their little “luxuries,” whether it’s a daily trip to Starbucks or a plate of avocado toast. And frankly, aside from bad advice, it’s condescending.

Sweating the small stuff isn’t always the correct answer, especially if you’re making meaningful purchases that bring you joy. Let’s put it in perspective: spending $5 on a latte five days a week would equate to about $1,300 a year. Not enough for a down payment on a house or a new car.  

Instead, focus on reducing your most significant expenses, such as housing and transportation. If you’re determined to purchase a new home or reach another significant financial milestone, it will take more considerable lifestyle changes than skipping coffee to meet your goals. Consider getting a roommate to split housing costs or purchase a used car with cash  instead of financing a  brand new one.

Pinching pennies with your discretionary spending isn’t sustainable and can harm your overall well-being and sense of fulfillment. If something makes you happy and you can afford it without blowing the budget, go for it. 

Client Story

We had a client saving up for a down payment on a home. After trying to cut out the “small stuff” for a while, she moved in with her family and virtually eliminated her housing costs. This allowed her to save for her first home and pay her debt more aggressively. She found that this life change made a much more significant impact on her ability to reach her savings goal than trying to cut back on her discretionary spending.

Lesson #2: “Owning a Home is Always Better than Renting” 

Homeownership is often looked at with rose-colored glasses. We’re told time and time again that success means a white picket fence and a (large) mortgage. But we urge you to challenge the notion of homeownership and recognize that it is, in fact, not always the superior choice.

The big hangup people have with renting is that you’re giving money to a landlord, essentially helping somebody else pay their mortgage and build equity in their home. But before writing it off completely, consider the benefits of renting (and there are many!). 

When you don’t own a piece of property, you’re not the one responsible when something goes wrong. A pipe bursts, the ceiling leaks, and the tub drain clogs up—not your problem! And house repairs can get expensive, so being able to pass the buck when things go awry is a big advantage.

I tell my clients, when you’re renting your rent payment is the most you’ll spend on housing costs, but when you own a home, your mortgage is the least amount you’ll spend on housing cost.

When you rent you aren’t responsible for paying property taxes and don’t have to worry about general maintenance costs such as servicing the HVAC system, repaving the driveway, cleaning the gutters, etc. Unexpected repairs can come up and these can be costly. 

Renting also provides flexibility and mobility, which is vital if there’s a chance you or your partner would have to relocate for work or family suddenly. It is much easier and more affordable to leave a rented space (especially if you’re on a monthly lease) than to sell your house. You don’t have to worry about market conditions or interest rates.

Purchasing a home can be a rewarding experience, but it’s worth considering all options before tying your money up in such a significant asset.

Client Story

We work with a client who has enough savings to purchase a home but chooses to live in a low-rent apartment with roommates. This decision allows her to save even more money for a larger down payment. As a result, she’s considering buying a duplex that will allow her to earn rental income from the other half, essentially living rent free while her tenant helps her build equity and grow her net worth.

Lesson #3: “Avoid Debt” 

If you’re human, there’s an excellent chance you’ll have to take on debt at some point. Rather than try for the impossible (avoiding all forms of debt ever), focus instead on distinguishing between good debt and bad debt.

Taking on good debt means using a strategic borrowing strategy to help pursue wealth-building opportunities, such as home buying or higher education. Bad debt, on the other hand, is typically high-interest debt that doesn’t serve your more significant goals or long-term needs. Bad debt includes credit card debt and personal loans.

No matter what type of debt you accrue, you still owe it to your financial well-being to weigh your options and manage it responsibly. For example, the timing of taking on a loan can make a huge difference in how it plays into your greater financial picture.

Consider how varied interest rates have been over the past few years.

In 2020 or 2021, you took advantage of a 3% mortgage rate and bought a home or refinanced your previous mortgage to reduce monthly payments. But in 2023, interest rates are significantly higher, so buyers are more cautious about taking on new debt (especially auto loans or home equity lines of credit).

Lesson #4: “Everyone Needs Life Insurance” 

There are many types of life insurance policies but two common ones are: term and whole.

Term life insurance is active for a set amount of time (think 10, 20, 30-year periods). Once the term has expired, the coverage ends.

Whole life insurance is an insurance policy that lasts your lifetime and has no expiration date. Some whole-life policies accrue a cash balance and act as an investment vehicle.

Insurance brokers sometimes push whole life insurance policies heavily because of their large commissions and kickbacks. Because of the incentive to sell, people are saddled with expensive monthly premiums for a policy that doesn’t fit their lifestyle or needs.

When you’re in your 20s, for example, you may not have dependents or significant assets that require such robust coverage. Instead, you’re better off investing the money you would pay on premiums in a Roth IRA (as an example).

When used strategically, however, term life insurance can offer cost-effective coverage for your family. Use term policies to help protect your family’s financial well-being during high-cost years. For example, in your 30s and 40s, you may have a large mortgage and a spouse or children who depend on your income. A term life policy can offer critical financial protection and cover costs like childcare, college, retirement, or mortgage payments.

Client Story

It’s common for a client to come to us with a whole life insurance policy. In many instances, it’s one of their most significant monthly expenses. We help them cash out their policy and redirect the cash value as well as those monthly premium payments toward paying down debt or other financial goals. We help them find much more affordable term life insurance policies that protect them when needed.

Lesson #5: “Saving More Money is Always the Solution” 

It’s great to be a savvy saver, but there are limitations to putting too much focus on your savings strategy. Stuffing dollar bills under the mattress, or letting money sit in a checking account accruing virtually no interest, isn’t making your money work for you.

Start small by opening a high yield savings account. Even earning 4% on your money can be a huge improvement! If you move $10,000 from your checking earning nothing in interest to your savings earning 4%, you’d have made over $400 throughout the year!

The next step to building wealth is investing your money. Opening a brokerage account and setting up a recurring deposit into low cost index ETFs or mutual funds will have a large impact on your ability to grow your net worth long term. Allowing your money to grow and hopefully, outpace inflation (which has seen record highs in recent years). Otherwise, all that cash starts to erode from the effects of inflation, and your purchasing power decreases over time.

As Ryan Holiday said in his blog post: 24 Things I Wish I Had Done Sooner, “As far as saving and investing money goes, there are so many different automatic transfers I should have set up earlier. I don’t know what my block was, but I stuck with doing things by hand for too long. Meanwhile, every account I have and did eventually set up scheduled transfers for–for my retirement, for my kids’ college, rainy day fund etc.–constantly surprises me with how large the balances have been. Set it and forget it…the sooner you do it, the more you’ll have. You won’t regret compound interest.”

And when we say investing, we’re not only talking about the markets. One of the best investments you can make is in yourself, whether pursuing a new passion, expanding your skillset, negotiating a higher salary at your new job, learning a new language, or anything else that interests you. Find new ways to make yourself more valuable and explore income-generating opportunities, such as starting a business or side hustle. 

Moving from a saver to an investor provides you the flexibility and opportunity to reach significant financial milestones and exponentially grow your retirement savings.

Debunking Bad Financial Advice 

Plenty of people in life and online like to share personal finance advice. But we encourage you to listen and evaluate the information carefully. Personal finance balances enjoying your hard-earned wealth today and being mindful of your future goals.

There’s no one-size-fits-all financial advice that will help you become a millionaire overnight, and you should run far, far away from anyone who promises otherwise. Feel free to reach out if you ever want to chat about some of the personal finance myths we shared above. 

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