3075: One Terrible Piece of Financial Advice You Should Never Ever Listen To by Paula Pant of Afford Anything

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[00:00:30] This is Optimal Finance Daily. One Terrible Piece of Financial Advice You Should Never Ever Listen To by Paula Pant of AffordAnything.com. Launch into any money-related conversation and you'll inevitably hear the following bad financial advice. But it worked for me. Those insidious five little words have been used to justify all types of terrible ideas. From buying lottery tickets,

[00:00:59] to over-leveraging your investments, to over-leveraging your investments, to investing every last dime into Apple stock. Let's try this one on for size. Common Sense. Even if you find an awesome investment, spread your risk by picking a few other investments as well. Rental properties are awesome. But even if you could make 20% cap rates, you should still keep a solid chunk of money in stock market index funds. Retort.

[00:01:27] But I put 150% of my savings in gold in the year 2007 and it totally worked for me. Put every dime in gold, nothing else. Why bother diversifying when you can get the best returns in this arena? Common Sense. Hold on. You invested 150% of your savings? Retort. Yeah, I can take a cash advance from my credit card at 14.9%

[00:01:52] and invest it for 170% and invest it for 170% gold returns. It'd be stupid not to. Common Sense. Uh, don't you think that's a bit risky? Retort. Hey, scaredy cat. If you're so terrified of risk, why don't you sew your money into a mattress and leave real investing for us tough guys? Uh-huh. Right. Tip. When your opponent has to justify their saving strategy with ad-Hanneman attacks, they're grasping for straws.

[00:02:22] All right. That was an easy example. Afford-Anything readers are an intelligent group. I don't need to explain this example. You can see why it's an insane argument. But let's look at a subtler example of the it-worked-for-me phenomenon. Let's check out an example in which the counter is Uncommon Sense. But I sold my home for $20,000 more than I paid. Uncommon Sense. Don't tie up a huge chunk of your net worth in your home.

[00:02:51] Your home is not an income-producing asset. It won't stick cash in your pocket each month. Your money should make money. So live in a cheap home while you deploy your cash into rental properties, stock index funds, or other income-producing investments. Reinvest. Lather. Rinse. Repeat. Better yet, buy a small apartment building, like a duplex, triplex, fourplex, as your first home.

[00:03:18] Live in one unit and rent out the others. If your neighborhood doesn't have multi-units, live with roommates until you either have a baby or your mortgage is paid off. Retort. But I sold my home for $20,000 more than I paid for it. So my house is an investment. It worked for me. This is precisely the type of argument you'll hear from someone who hasn't crunched the numbers. The people who say it often conflate gross gains with net gains.

[00:03:45] The average person doesn't make very strong net gains on their home value after adjusting for insurance, taxes, loan interest, repairs, maintenance, realtor commissions, and closing costs. If they're lucky, most of their net gains can be explained as inflation plus 2%. Most people would be better off living in tight quarters and putting the excess money into stocks. Are there exceptions? Sure. Just ask the people who bought houses in Southern California in the 1970s.

[00:04:15] But this is the tail end of the bell curve. People have also made millions winning the lottery. Furthermore, most people who happened to buy in 1970s Southern California shot themselves in the foot by trading up continually until the market burst. Many people thought they were different, that they were the exception to the rule. But then they became scared that they'd be priced out in 5 years. So they bought a big home, then lost all their gains.

[00:04:41] The best antidote to getting priced out in 5 years isn't to pay an overinflated price today. It's to create more wealth. Build your net worth at a rate that's faster than housing growth. It's not that tough. Let's try another example. College is good. Grad school is better. Uncommon sense. You're not a zombie. So don't blindly repeat the mantra that college is good and graduate school is better. Do the friggin' math.

[00:05:09] If you want to be a neurologist, awesome. Take out a six-figure student loan to go to medical school. Because you'll have a rare high-demand skill that will command you a $225,000 plus income. But if you want to be a social worker earning $30,000 a year with a master's degree, think twice before burying yourself with the debt. Retort. But I did it and it wasn't so bad. My student loan payments are only $180 a month. That's nothing.

[00:05:38] That's less than my car payment. And I think the government will forgive my loan in 20 years anyway. Plus, I got this job that pays $42,000 a year. And there's a chance I could get enough in bonuses to make as much as $50,000. There's no way I could have gotten that without my master's degree. Ouch. This is one of the most common, it worked for me, arguments that I hear. And what's befuddling is that the underlying message is that it really didn't work.

[00:06:06] $180 per month for 20 years is $43,200. That's a decent chunk of cash, but it's not horrifying. People have lost more by buying a house at the wrong price. What's worse is the missed opportunity. $180 invested monthly over 20 years is $106,730. That's a horrifying amount. But that's still not the worst part.

[00:06:33] The real sad news comes from other missed opportunities. Want to start your own business after a few years? Good luck. The rest of us can move into grandma's basement, mow lawns on the weekends to pay for groceries, and spend the rest of our week building our own graphic design enterprise. Your extra $180 monthly loan payment means you'll need to mow many more lawns. That's true of a mortgage too. Yes, but you can sell a house. That's not the only hang-up.

[00:07:02] You'll be far less inclined to change careers if you decide your current path isn't fulfilling. What would you do? Go back for a second master's degree? In a different field, racking up even more debt? You'll have a rougher time quitting your job to travel the globe. You'll lose the flexibility to change jobs and take risks. You'll probably delay buying your first rental property or maxing out your Roth IRA by a few years. It worked for me isn't always the best path.

[00:07:31] At best, it's an isolated data point. At worst, it's just bad advice. You just listened to the post titled, One Terrible Piece of Financial Advice You Should Never Ever Listen To, by Paula Pant of AffordAnything.com. And now, a word from our sponsors at Betterment. When investing your money starts to feel like a second job, Betterment steps in with a little work-life balance.

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[00:09:50] Message and data rates may apply. You can reply STOP to opt out at any time. I like how Paula combated bad financial advice with just good life advice. What I got out of this article is that you need to foster a sense of self-direction. Personal finance is so personal, and what works for someone might not work for me. But it might give me a clue, and when I read and listen enough,

[00:10:17] I gather enough clues from enough different people to solve my own financial riddle. Whenever I read financial advice, I read it as, this is what worked for me, not, this is what worked for me, so it will definitely work for you too. I think it's important that we expose ourselves to many different perspectives about money. It's one of the things I love about hosting this podcast. I'm getting exposed to so many different viewpoints on money, and many of them contradict each other.

[00:10:46] There are so many ways to build wealth, and there's no one guaranteed way to get rich for everyone. In reality, everyone has a unique set of skills, preferences, and circumstances. So if you ask someone else how you can build wealth, they're going to be challenged to give you a good answer. Only you can determine the strategy that's going to work best for you, because only you see your full picture and all the nuances of your situation. And that will do it for today.

[00:11:16] Have a great day. Thank you for listening. And I'll be back here reading to you tomorrow, where your optimal life awaits.