Over the years, I’ve had a lot of people tell me what I should and shouldn’t be doing with my money. Sometimes, the advice was unhelpful – or just plain wrong. It brings to mind a quote often attributed to Mark Twain.
“It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”
With that in mind, here are five commonly shared finance tips that you might be better off ignoring.
1. Stock tips and dodgy investment ‘advice’
When your uncle tells you about the mining exploration company that’s about to strike gold, or your friend at the pub tells you about a new crypto coin, it’s not a good idea to drop everything and invest. In the stock market, inside information is illegal. And while your uncle or friend might tell a great story about their investment, their information – if it’s true – is likely widely known.
“If the tip is based on market information, the price probably reflects that,” says Rob Benton, a financial counsellor who works with the National Debt Helpline.
“If the tip is based on information not known by the market, you could be breaking the law.”
You could also be taking a huge amount of risk. And while a risky investment might be an acceptable part of your uncle’s diversified portfolio, it doesn’t mean it’s going to be right for you. Another important point is that very few investors can pick winners consistently. It’s why many experts suggest avoiding picking stock and sticking to low-cost exchange-traded funds (ETFs) that track the broader market.
2. You need to give up your daily coffee (or smashed avocado)
When it comes to budgeting and savings, people tend to focus on things like coffees and smashed avocado. While cutting the cafe out of your life will save you some money, financial adviser Richard Gough suggests focusing on the bigger picture.
If you have a mortgage, for example, negotiating a better rate or refinancing to another bank could save you multiples what you would get by cutting out coffee. Similarly, if you’re trying to save money and you rent, moving to a cheaper property will likely make a bigger difference. At the end of the day, it’s about what works for you.
3. You need to pay off your student debt quickly
The best example of a “good debt” is HELP debt for students (formerly known as HECS). While mortgages, credit cards and other debts incur interest, HELP debt doesn’t. Instead, it only rises in line with the cost of living. On top of that, you don’t need to make any repayments until you’re earning above $46,620. If you have other debts that attract high interest rates, like credit cards, personal loans or car loans, you’re better off focusing on them rather than your student debt.
And even if you’ve paid off your other debts, you might be better off investing your money elsewhere.
The long-term return of the Australian stock market, for example, is about 10 per cent per year, which is much higher than the 1.8 per cent indexation rate applied to HELP debt last year. There is a caveat. If you are planning on buying a home, having HELP debt will affect how much you can borrow. In some cases, it might make sense to pay off the HELP debt earlier for that reason.
4. ‘Rent money is dead money’
It’s no secret that Australians love property. And if you’re renting, it can lead to raised eyebrows and unsolicited lectures about how you’re wasting money. Property has historically been a good investment in Australia, and there’s nothing to suggest that will change soon. But buying a home to live in isn’t the only option to build wealth.
“You don’t have to follow the old path. You can rent and you can still build wealth outside of owning your own home, whether in shares or buying investment property,” Mr Gough says.
And in some cases you may end up better off.
When “big four” accounting firm EY studied renting versus buying, they found something interesting: people who continued to rent while borrowing money to invest in the share market often ended up better off than if they bought. And while the strategy is not for everyone, it shows that the issue isn’t black and white. To quote the EY report: “Rent is no more ‘dead money’ than paying interest on a mortgage.”
5. ‘If you can’t afford it, there’s always credit’
While researching this story, I heard all sorts of horror stories about credit cards and loans. Some people were encouraged by their bank to take out personal loans for holidays, others were encouraged to take out credit cards for the “points”. But if something unexpected happens, like a job loss, these debts can quickly add up.
“Often, I’ll look at how long it’ll take to clear [a debt] by paying the minimum amount, and it’s crazy,” Mr Benton says.
“They can go for 20, 30, 40 years, and you can end up paying three or four times the initial amount.”
And if you’re attracted by points or rewards on a credit card, keep in mind you’re likely already paying for the perks.
“The card company pays to participate in rewards programs, and have to pay for it through an annual fee or higher interest rate,” Mr Benton explains.
“You can get a plain vanilla card that has no annual fees and a lower interest rate, and buy the “reward” and still end up paying less.”
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Disclaimer: This article contains general information only. You should consider obtaining independent professional advice in relation to your particular circumstances.