Worst money advice ever?

by Nick on April 11, 2012


Looking for crappy money advice? You came to the right place! In today’s post we explore a few of the worst pieces of (crap) money advice, brought to you buy MSN Money, along with my two cents (keep the change), now that my little run-in with the girl scouts is behind me and I can focus again without fear of getting my kneecaps busted…

Basically, MainStreet asked “a group of average Americans” what the worst financial advice they’ve received and highlighted a few of the responses. I’ve included three of my favorite dumb ideas from their survey, which I grade on a scale of 1-10 with one being “not that” dumb and 10 being “you should go into politics” stupid.

Although grading these is tough because you don’t have all the information, but I did my best. Plus, the scale is anything but scientific so does it really matter? Anyhow, let’s dig in!

Worst advice:

About 10 years ago an old accountant advised we cash in a substantial 401k plan to pay off credit card debt, instead of instituting a plan to pay it off over time and learn how to spend and save at the same time.

Grade: 9; get your campaign manager on the phone… There are a lot of reasons to pay off debt, but cashing out a 401k is really a bad idea in almost every instance. You end up paying income tax (and in this case a 10% penalty) to pay off unsecured debts and don’t address the real problem by changing their habits. Instead, this brain surgeon advises his client to take the short cut (and the most expensive) route to get out of debt… sad.

Incidentally, at least one “expert” didn’t do much better with his thoughts, IMO.

Of course, there are exceptions. “The advice may have been appropriate if, say, the credit card was charging 29% interest and the consumer was in the 15% bracket with a 10% penalty,” says financial adviser Fred Amrein of Amrein Financial in Wynnewood, Pa. In this instance, “your cost of the 401k redemption is 25%, saving you 4%.”

Really? As my two-year-old would say: You’re so silly Mr. Amrien. All of that for 4% minus the opportunity of your money making money in the market, minus the effect of paying back the loan in after-tax dollars that will be taxed again when you take it out at retirement minus the risk of having to pay it back within a couple of months if you leave your job? You so silly. Just pay off your debts folks. Deal?

Worst advice:

To buy an extra house, get a tenant and let the tenant’s rent pay the mortgage and all the bills. So many people and books say this, but many tenants are horrible. I’ve had great (renters), nightmare (renters) and everything in between.

Grade: 5; destined for mediocrity. It sounds like whoever gave this advice was giving one-size-fits-all advice to someone who (at least in hindsight) was not cut out for real estate investing. If you’re not willing to tolerate stupid excuses for late rent or people who can’t get their priorities straight, real estate investing is not for you. But if you’re willing to invest some time and deal with a few extra morons, it can be a great long-term investment. Sounds like it wasn’t right for this gal.

Worst advice:

During college, I was told to open a credit card and use it to charge all my books and school fees on. The 19% or more interest on a credit card is far more than the subsidized government loan that ended up covering my school costs.

Grade: 7; get your exploratory committee together. I don’t mind the subsidized loan (I took them) but what about a third option: getting a job and just paying for the books and fees? I get it though – most people don’t. And I didn’t (at least not completely – I took out loans but also worked and paid for a bunch of crap). I also wonder who “told” her. My guess is it wasn’t a financial advisor but more likely her dumb uncle Fred. But how about thinking “outside of the proverbial box” and doing a little college planning…

Bottom line:

I’m a pretty optimistic, glass-half-full guy but if this is the type of “advice” out there for “the masses” we may be in some pretty big trouble… Take the 401k redemption, for example. Your debts are gone, but you didn’t change your habits so 2 years later you’re back in debt but your 401k is now a 101k (get it?), so you don’t have enough money to pay off your new debts, even if you cash out the rest of your retirement.

And you’re still spending more than you make so you end up falling behind, getting sued and end up going bankrupt. Then you come out of bankrutpcy with no debt and no retirement because you cashed it in… Seems harsh, but it’s pretty common.

So how do you spot bad advice?

The first sign is your’e reading it here :)

Another thing in common with most of the crappy advice out there is it’s way too complicated for way little upside. (i.e. cashing out a 401k loan by estimating your tax rate plus the penalty and then comparing it to your interest rate to find an arbitrage spread to save 4% of interest when your 401k is in mutual funds that averaged 8% over the last 10 years if you left it in there and just paid off the money…) See how long a sentence that is? Compare it to this: Get on a budget and pay off the credit cards as fast as you can. Pretty simple right?

Another sign is that the plan only works if everything goes right. If you make more money and your tax rate goes up your stupid 401k plan just lost money. If you take on more debt you didn’t solve any problem. If, if, if, if… way too many ifs. If your plan is to spend less than you make and put the rest to pay down the debt, it’s kind of hard to screw up unless you lose your income, in which case you’d be screwed with your other plan anyhow…

So what was the worst financial advice you got? And who gave it to you?

Until next time, put your credit card down and slowly step away from the mall!

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{ 42 comments… read them below or add one }

WorkSaveLive April 11, 2012 at 8:21 am

Basing financial decision on ‘what if’ is always a terrible idea. Cashing out the 401k is commonly done and it doesn’t come as much of a surprise.

The problem there is that if people don’t change their spending habits then they’re going to go right back into debt!

The time value of money (compound interest) is such a powerful thing, I’d never touch my 401k!
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Nick April 11, 2012 at 10:09 am

Yep – that’s the beauty of “stop spending more than you make” advice. It really gets to the point. A budget and a change of attitude is the 20% that gets at least 80% of the positive results for sure.

I’m the same way with my 401k. I struggle with whether to tap it to avoid bankruptcy though. On the one hand, you generally get to keep it. On the other hand, if I have legitimate debts and access to funds to pay them, I’d feel guilty not paying. I tell myself that I could always pay them back when I get back on my feet, even if they’re discharged but that the 401k could do a lot more “good” as insurance for my future than for some pennies on the dollar debt settlement… tough one for me.
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TB at BlueCollarWorkman April 11, 2012 at 11:18 am

I got here from a tweet by WorkSaveLive and man am I glad I clicked on it (thanks WorkSaveLive)! This site is GREAT! And this post is great. I worked with a guy once who decided that it was a good idea to pull from his 401k because he didn’t want to wait until his next paycheck to buy a longboard. ??? When he did that I took a mental note to NEVER take financial advice from him!
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Nick April 11, 2012 at 2:48 pm

Wow! That’s just nuts! I think you made a correct mental note…

Thanks for stopping by.
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Daisy April 11, 2012 at 9:40 am

LOL. I totally agree with getting a job to pay for text books. Tuition is expensive and I know it’s not always feasible to have to pay for that upfront but textbooks? They shouldn’t go on a credit card.
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Nick April 11, 2012 at 10:13 am

Yep – you know better than most people how expensive tuition is, huh?!?! Must feel good to be almost at the end of the tuition game…

I was a bouncer and then bartender through undergrad and grad school. I had a ton of fun and made some good money. But my best gig was work study in the student loan department, which was shared with the financial aid office. I became friends with my financial aid counselor and learned a lot about how the process works, resulting in her doubling my university grant to half tuition… All of that working just a few hours per week (and getting paid for those hours, on top of it.)
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Michelle April 11, 2012 at 9:43 am

Haha what bad advice!

And the worst advice I’ve ever gotten was when someone recently on my blog told me that I need to be more frugal. They said that since I have debt (student loans and a mortgage), that I should eat ramen everyday and I shouldn’t have an entertainment fund or anything.

Wow that would be the worst life ever.

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Nick April 11, 2012 at 10:19 am

Yeah, there’s definitely a balance between getting out of debt and enjoying your younger years. If you’re taking a month-long trans-atlantic cruise you’re probably heading in the wrong direction a bit, but as long as you’re intentional and have a plan to control your money and get out of debt, I won’t yell at you for enjoying a little bit of your money.
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Well Heeled Blog April 11, 2012 at 10:09 am

Worst advice… to stop contributing to retirement because I’m so “young.” Well, it’s 5 years later and I’m not SO young anymore, and I have almost six figures in my 401K and IRAs.
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Nick April 11, 2012 at 10:21 am

Wow! That reminds me of George Costanza’s “do the opposite” episode (anyone know that one?).

Incidentally, isn’t it great seeing all that money waiting for old you? :)
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Kari@Small Budget Big Dreams April 11, 2012 at 10:16 am

I can’t really remember any bad money advice I’ve been given. But I’m sure my dad has given me some at one point or another. Last week he called me proud as a peacock about the 52 inch flatscreen he purchased at Best Buy on a credit card. Ugg, it made me want to throw up. Thankfully my mother and stepfather taught me about frugality and finance.

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Nick April 11, 2012 at 10:27 am

Yeah, some of my good money habits (and motivation) comes from watching close range stupidity… my wife got a call from a friend asking for a short-term loan because someone she knows just refinanced her mortgage (for a house she never should have bought). She was going to be away on a cruise over the first of the month. Because she just refinanced (which resulted in a month where she didn’t have a mortgage payment by the way), she didn’t think she could “take advantage of the grace period” and wouldn’t be able to pay her mortgage on time because she would be away when her government check cleared. So she asked if she could borrow a mortgage payment.

Long story short (too late?), she WAS able to “take advantage of the grace period” so we didn’t have to uncomfortably say no (for my wife… I’d have no problem doing it with an explanation re: why that would sound like: You smoke a pack a day, didn’t have a mortgage payment and are going on a cruise that you can’t afford. How is this my problem? You cut out one of those things and you’re not in this crisis….) Sorry – gets my blood boiling – especially when other people’s stupidity, laziness and sense of entitlement suddenly becomes my problem because I sacrifice, plan and, as a result, have money. (this might turn into a post… many of my long, angry comments do, haha!)
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Kooz April 11, 2012 at 11:05 am

There’s an instant gratification problem–get credit cards to avoid paying cash and subsidize school, cash out a 401K to pay off the cards thereby mortgaging your future… People want to see their problems go away right now–budgeting and planning? Forget it.
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Nick April 11, 2012 at 1:46 pm

Yep – I’ve been practicing delayed gratification for long enough that delaying gratification has become instantaneously gratifying…
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Modest Money April 11, 2012 at 11:48 am

The scary part is that they are giving this advice on well read public sites. Who knows how many people are now going to follow that advice. It’s a shame that there is so much misinformation online. Some people just won’t know who’s advice to follow. Part of the problem is that some advice will hold true for specific people, but for others it just doesn’t make sense at all. Finances are all too personal for there to always be a one-size-fits all approach that is best for everyone. In some cases you really do need to sit down with a financial planner to figure out what is best for your specific situation.
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Nick April 11, 2012 at 1:50 pm

Absolutely – too many people forget to ask themselves if what they’re reading is the right advice – for them. Too much headline following and too little THINKING!

I’m considering going to 3 different pros and writing about each of their advice here… I’d be interested in knowing what the heck each of them “advises.”

I still need to write about my lunch dates with a life insurance saleswoman in more detail… that can certainly be a “worst financial advice” story in and of itself.
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Jordann @ My Alternate Life April 11, 2012 at 11:53 am

The worst financial advice I ever got was to take out the maximum amount of student loans possible because “You gotta live, right?” hmm…yeah but I could also live and have a job. Luckily the provincial government runs a loan forgiveness program, so I didn’t have to atone for that mistake.
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Nick April 11, 2012 at 1:52 pm

Ouch. Yep – you gotta “live” for sure. But you’re right – you can live with a job or live slightly less. We all do stupid things though. I used student loan money to buy a motorcycle… I still have both, but only one of them is alive and kicking

:(
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Michelle April 11, 2012 at 12:36 pm

When I was a teenager, I worked in a restaurant as a waitress and most of my income was in tip form. I was counting my tips one night around closing time and a seasoned waiter approached me and told me not to claim all of my tips. He said that if I claim less, I’ll be taxed on less and that “no one will know.” I couldn’t believe he was telling me to blatantly LIE to the freaking IRS! I never took his stupid advice, and I hope karma bites him and he got audited. Hmm, that’s weird…you only made $10,000 last year, but spent $25,000….sooooo weird!
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Nick April 11, 2012 at 1:53 pm

Wow! Did the guy grow up to be your dentist the pimp? Sounds like they have the same respect for you and your money!
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Michelle April 12, 2012 at 3:02 pm

Ha…might be the same guy. I hope it hurt when I *accidentally* bit him. ;)
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Bryan April 11, 2012 at 12:53 pm

One of the worst bits of advice I received was from Money Magazine in which they suggested that the summer of 2010 would likely be the lowest point of the housing crisis, and thus, the point at which housing prices would be the lowest. My wife and I bought our condo then (though, admittedly, not 100% at Money Magazine’s suggestion), and now, comparable condos in the same complex are priced at 15-20% less than what we paid.

I can’t complain too much, though. At least we were lucky enough not to buy in 2006, when my wife first started thinking about buying a place. The places we looked at are now going for about 40-50% less than they were back then.
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Nick April 11, 2012 at 1:58 pm

Oh, I can’t stand those “buy now” articles! I’ve been guilty of buying into a few of those bold statements back in the day. (Like when my “financial guy” told me it was “time to buy” that tech stock that once traded at 240 but was now 60 per share in the spring or summer of 2000. It was from a LARGE brokerage house, too. I put $4,000 into the stock…. You can probably guess what happened next.
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CultOfMoney April 11, 2012 at 5:12 pm

Yeah, I think the worst financial advice I got was from a realitor. My wife and I qualified for a loan way in excess of what we wanted to spend. My realitor when we were touring the house said “if you buy this place for 600k, and put 100k more into it, you’ll have a 700k house!” Well I’d hope so give how math works. Needless to say we didn’t buy that house, and this was also during the period where a warm body could get loans like that, so I’m nothing special… Though we did end up buying a house in 2007. That was primarily my wife’s doing, so I guess I have to say the worst advice came from her. :)
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Nick April 11, 2012 at 9:17 pm

Ha! Your secret’s safe with me. I hope her advice was at least better than the realtor who wanted you to get the biggest house possible…

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BeatingTheIndex April 11, 2012 at 7:10 pm

No surprise really, an average group of people is expected to have tons of these stories to tell. There’s a lack in financial education in school which might explain why these people enter life unprepared to handle credit and debt.
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Nick April 11, 2012 at 9:19 pm

I hear ya. Hopefully an emphasis on school and “at home” education can change the next generation at least. The poor teachers have so much on their plates with so many kids and so little time that I’d like to see parents step up on this one too.

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Thad P @ thadthoughts.com April 11, 2012 at 8:48 pm

I had the chance to buy 2 lots for $900 in 1992. By 2002 each would have been worth $7,000.00. An older friend said the property taxes (on raw land) would be too high.
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Nick April 11, 2012 at 9:23 pm

Ouch. So what did you do with the $900?

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MyMoneyDesign April 11, 2012 at 10:14 pm

I love the occasional “the stock market is going to hell and you’re a fool for putting money in your 401k” articles – sometimes also featured on MSN! Okay smarty pants, if I don’t invest in my 401k or the stock market, what should I be investing in? Those articles never really seem to complete this puzzle.

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Nick April 12, 2012 at 9:48 am

Yeah, most of those don’t point you in the right direction, do they? It’s especially funny because “the stock market,” to me is the simplest and easiest way to get the best long-term returns out there.

Oh, and any time “investing” and “life insurance” appear in the same sentence, you’re in for a show… a terrible show… but a show.
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Financial Advice for Young Professionals April 12, 2012 at 2:19 am

Raiding your 401k is always a bad idea. In certain situations, it can make sense to take a loan from your 401k to pay off high APR debt. But people should really use retirement accounts for retirement!
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Nick April 12, 2012 at 9:50 am

Yeah, I’m a big “don’t steal from Old Nick” guy myself. I’d think most people (math aside) who borrow from 401ks to pay off loans are not solving their problems though, so I’d even avoid that!
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Get Rich Point April 12, 2012 at 3:32 am

The worst financial advice I have received till now is this:

“Don’t buy shares from the stock market. You never know when they will fall. It is better if you keep all your saved money in a fixed deposit.”

I really don’t have the patience to explain why this advice is crap. This was given to me by my room mate during the first year of my engineering job. People now consider me to be a stock market expert. Well! that’s too much but yes I am not that bad.
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Nick April 12, 2012 at 9:51 am

You’re talking to a big “stock market guy” GRP. You don’t have to convince me that the stock market is where it’s at!
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Zack Jones April 12, 2012 at 7:06 am

Worst advice I was ever given: “Pay yourself first.”

Why was it the worst advice — because like a dumbass it took me nearly 20 years to start doing that. I should mention that I was 17 years old at the time I was given that advice. If only I had listened.
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Nick April 12, 2012 at 9:55 am

Ha! Sounds like you gave yourself your worst money advice :) I almost wish there was a mandatory 10% retirement investing in index funds for all workers (only “almost” because I’m a big fan of “free choice,” even if it leads to a bunch of “silliness.”).

I’m sure there would be at least short-term downside to my plan, but imagine if everyone had over a million dollars waiting for them?!?! (that’s assuming 40 years of investing 5,000 per year with a return of only 7%)

OK – maybe I need to tick off a bunch of people and suggest it in a full post… hmmm….
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Paul @ Make Money Make Cents April 13, 2012 at 12:01 am

This isn’t advice I received, but a little story about a friends father-in-law.

He decided to cash out his 401k to buy an investment property. He wasn’t 59.5 and the property was a condo. I about freaked out when I heard this awesome decision. When they told me I bluntly told them that it was one of the dumbest things I have ever heard.

They didn’t like my reaction.
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Nick April 13, 2012 at 6:09 pm

Wow. That’s pretty bad. I’m not surprised about the reaction – a lot of people “can’t handle the truth.” I’ve learned to say something like “pretty bold move – too risky for me but I hope it works out great for you.”
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Poor to Rich a Day at a Time April 13, 2012 at 9:03 am

HA HA loved this post! The worst advice I was ever given was a good friend of mine telling me to just wait another year to divorce my not so great first husband. Her theory being that one more year would be the 10 years I needed to collect on his social security, who cared how unhappy I was in lieu of the money side of it!

I did not listen of course as he was a really really bad husband and 9 years was enough, best move I ever made even if it did make things financially dificult for several years!

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Nick April 13, 2012 at 6:12 pm

Wow. Give up a year of your life for a cut of social security (so like a few hundred bucks a month). That’s just crazy.

I’m really glad you didn’t take that advice and am SURE you’re going to more than make up for the social security by getting out and taking life by the … by the … um… well, you know. By the “stones.” ;)
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MoneySmartGuides April 16, 2012 at 12:45 pm

It pains me to read that bad advice. The worst I was given was in college. Granted it was by the person trying to get me to apply for a credit card. They told me how I could buy everything I needed and not have to bother Mom & Dad for some spending money.
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