Have you ever gotten a bad piece of financial advice? You’re not alone. We’ve all had a “helpful” friend or relative that’s given us a pointer in the wrong direction. The good news about bad advice is that we can still learn from it - we can learn what not to do.
It’s time for Part 3 of our series about “The Worst Financial Advice You’ve Ever Received.” With each article in the series, we’ll share the bad advice you can get, the surprising and sometimes funny examples others have run into, and ultimately what you should focus on instead.
Bad Advice: “Borrow As Much As You Can”
Credit cards, auto loans, mortgages, and student loans - debt is all around us. While debt can be a useful tool when used for the right reasons, it can send you in a financial spiral if you’re not careful.
While in college, my sister-in-law’s friend took out student loans even though her parents were paying for her college education in full. She looked at the loans as “free money” to use for spring break vacations and eating out during the school year.
Mike from Miked Up Blog was advised to buy a house that he could grow into, with a high mortgage payment. The theory was that tight payments early on would be worth it as his income grew. This was the situation many homebuyers got themselves into before the 2000’s housing market bubble burst. With low equity, those homeowners ended up owing more on their mortgage than their house was worth.
A car-salesman gave Aaron from Personal Finance for Beginners an expensive financial lesson in the cost of debt by extending his loan to six years in order to keep his monthly payment “within the target range”. Never mind the fact that the payment was equal to his entire monthly income!
Misty from Simple Organized Lifestyle was advised to open up credit cards to build her credit score right after high school. The thinking was that a good credit score would help her get loans in the future. It worked - but not as intended. Unable to resist the allure of spending on credit, Misty ended up needing a loan from the bank to pay off her credit card debt.
A co-worker told Laura from Savvy Family Finance to optimize her tax deductions by getting the biggest mortgage she was qualified for. Unfortunately, that deduction is just a discount on the cost of the mortgage; it costs more than not taking on the extra debt!
Good Advice: “Use Debt Sparingly and Carefully”
Used properly, debt can be a useful tool to help you achieve your goals, but the downsides of debt make it a tool that should be used sparingly.
For mortgages, Steve from Think Save Retire has some great advice. He was told to buy as big of a house as he could afford. In his words, more appropriate advice would be: “Remember that you’re heating and cooling any place you buy, so make sure it’s the right size for you.”
Taking on extra debt for a bigger house means you’ll have more to heat, cool, clean, insure, and pay taxes on. In addition, you’ll own a smaller percentage of your home, putting you in a worse position if house values drop.
For student debt, take on just what you need and consider paying the debt off while still in school. Student jobs may not pay a ton, but every bit you put toward the principal on your loan means less interest paid in total.
Auto loans are worth avoiding altogether. Use public transportation, ride-share with friends, and/or save up to buy an inexpensive car outright.
Credit card debt should be avoided at all costs. This kind of debt typically has a really high interest rate (debt consolidation might be something to consider.) If using a credit card for cash back or reward points, make sure you pay off the credit card in-full each month to avoid having those pricey interest charges.
Finally, for any type of debt, consider how much it’s going to cost in total - not in terms of monthly payments. Longer loans at a lower payment give more time for the cost of interest to build, costing you more money in the end.
Avoid debt where you can and if it’s absolutely necessary, use it carefully!