The high price of bad financial advice: ‘Be very, very careful where you get your information’

It’s getting harder than ever to avoid financial advice. Between articles on the cost of living crisis, the explosion of personal wealth influencers on Tik Tok and patronising uncles at a family do, it feels like everyone has an opinion on what we should be doing with our money.

Some often repeated “golden rules” of personal finance like spending within your means and putting a bit aside in case of emergencies seem to stand up under the weight of time and changing economic conditions. However other “tried-and-tested” nuggets on “how to be good with money” are often only as good as the unique set of circumstances of the people who did the trying and testing.

For example, growing up in my Australian working-class neighbourhood, older men drummed into younger generations that buying a new car -instead of a “cheap second-hand runaround” and putting the rest towards a first home – was signing yourself up for financial ruin.

This would have been good advice to people who bought homes in the 1980s when eye-watering interest rates kept house prices lower and house deposits weren’t far off the price of a brand new mid-range car. Going into debt to buy a car instead of a house would have seemed financially irresponsible.

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The old adage that a car loses 11-30 per cent of its value when it is driven off the lot doesn’t hold water in the post-Covid used car market where, in Ireland, prices have jumped 77 per cent

However, as cars began to feature more complex electronic components, they became harder to fix yourself. The cheap banger you bought to save money might end up costing you more in the long run in terms of missing work due to breakdowns, and mechanics’ and towing bills. Especially if you factor in the economic shift away from a manufacturing to a service-based industry, which means the young person behind the wheel is less likely to be a mechanic or work in the car plant and is more likely to work in sales than the older generation peddling this advice.

For today’s twentysomethings, getting a loan during a period of what have been historically low rates to buy a reliable car might be the better financial choice. Even the adage that a car loses 11-30 per cent of its value when it is driven off the lot doesn’t hold water in the post-Covid used car market where, in Ireland, prices have jumped 77 per cent, according to the latest Done Deal research.

So “don’t buy a new car until you buy your first house” might have been good advice in a bygone age but not so much now, when house prices have vastly outstripped wage growth. There’s a good chance you’ll be stuck repairing that cheap old banger for years longer than older generations did given it now takes a reported three to 10 years in Ireland to save for a house deposit.

Gender bias

Problematic advice isn’t just an outcome of generation gaps – it’s also gendered. Traditionally financial advice aimed at women was about reducing spending and managing the household budget instead of making more money through things such as investing.

It’s nice to know you can save €40 a month by doing manicures at home but, in the long run, unless it’s invested or put in an extremely high yield savings account, it’s not going to set you up for retirement.

Simran Kaur, author of Girls Who Invest, found such gender-skewed advice is not just anecdotal. She cited a 2018 analysis by a UK bank of more than 300 articles that found 70 per cent of male-directed money media talked about investing while 60 per cent of media directed at women was about spending less.

“This encouragement of men to take on more risk and of women to be more mindful and have a scarcity mindset is damaging to what young women expect their relationship with money to look like,” wrote Kaur.

[ Brianna Parkins: Building your own home can save money but is not for the faint-hearted ]

Conventional advice is fine but it tends to rely on people, markets and economies always behaving conventionally, which they don’t.

People who were told “to get their foot on the property ladder” during the Celtic Tiger might have bought overvalued properties in places far from family and amenities, hoping they would trade up when prices rose. Unfortunately some were left with houses they didn’t want to live in stuck in negative equity and now with creeping interest rates making their mortgages harder to afford.

That still hasn’t stopped shaky advice – such as that investing in property is as “safe as houses” because the market will eventually always go up – still being dispensed.

Similarly, pop personal finance advisers have been seen encouraging investors not to worry about dips in the current market because “stocks always recover”.

Influencers

But as Yale professor of finance James Choi told NPR: “It’s not true that stocks will always win over the long run. Bad things can happen ... In Japan, the stock market still hasn’t recovered to the level it was back in 1989.”

Prof Choi, a behavioural economist, released a study last year to see how advice from popular personal finance gurus stacked up with what economists say. In Popular Personal Financial Advice versus the Professors, Choi notes that “millions of people get financial advice from non-economists” citing the success of David Ramsay and books such as Poor Dad, Rich Dad. So he summarised the common recommendations from the top 50 popular money management books and weighed them against benchmark academic advice.

He found key differences between approaches to the stock and housing markets. Personal finance gurus are more likely to support investing in shares that pay dividends, while economists are likely to find them unattractive for a range of reasons, including the high taxes they attract.

Choi found that although “popular financial advice can deviate from normative economic theory because of fallacies”, it was still useful to consumers

They were also divided over mortgage choices, with academics leaning towards going with adjustable rate mortgages (unless interest rates are low) and personal finance books recommending fixed rates.

Overall, Choi found that although “popular financial advice can deviate from normative economic theory because of fallacies”, it was still useful to consumers because it factors in human emotion, individual circumstances and is computable by the public, unlike dense academic modelling.

With that in mind, we pester Irish money experts about what they consider to be the worst personal advice out there and what mistakes they have made in taking tips from others.

Mistakes to avoid

For author and budgeting expert Caz Mooney, it is going too hard, too soon by slashing expenses with big changes. Mooney likens reducing expenditure to a diet with small changes usually leading to a more sustainable difference long term.

“When I was starting, people said you need to cut everything out,” she says, in terms of slimming down things such as the weekly food shop. “We cut back too much and found we were spending more on takeaway because we had less in cupboards, so it’s important to be realistic.”

She has found reducing such things just a little to be more helpful. This is more effective, she says, than recommending a fixed number for what an average family should spend on weekly groceries, “because everyone has a different way of eating”.

When it comes to hunting down deals on anything from insurance to a laptop, she cautions that going for the cheapest to maximise savings can be counterproductive.

“Sometimes the cheapest option isn’t always the best option,” she says. The cheapest insurance may not include the full range of coverage you need or leave you vulnerable to eye watering excess. The cheapest computer may not have the specs required to use it long term for work and may require costly upgrades to memory and graphics cards, costing you more in the long run.

‘It’s about working out the best value. Budgeting is about taking control rather than going completely frugal ... you still have to get the things you need.”

Paul Merriman, the face behind AskPaul.com, says taking advice from global best-selling finance books without understanding how the US banking system differs from the Irish one can lead to expensive mistakes.

“The biggest one I’ve seen, and I’ve been saying this for 20 years, is you don’t need to build up a credit score in Ireland,” he says. “It’s easy to get personal finance content all over the world on your phone and, in the US, people are rewarded for having a good credit score. It’s popular to advise people at 18 to get a credit card to start building a score.”

But, in Ireland, that could be doing more harm than good, because consumers don’t need to “build” credit by taking small loans and paying them off.

“That doesn’t count in Ireland. The only thing that counts is a bad credit record,” says Merriman, meaning if you continually miss credit card payments or don’t repay debt to a financial institution, that will be what shows up. If a consumer thinks a credit card will lead to irresponsible spending and missed payments, it’s just better to not risk it.

Merriman says getting a credit card at 18 at the urging of a colleague is the worst money advice he has acted on.

“I couldn’t buy concert tickets on a Pass [debit] card so I ended up with a card with a 5k limit but didn’t have a clue how to manage it. I was just making the minimum repayments.”

Merrman uses the example of a young couple being told to hold off buying a house at the start of Covid by a well-meaning uncle who thinks the market will crash, advice that could have cost them “the guts of €50,000″

Another piece of traditional thinking Merriman often comes across, especially with older clients, is that repaying a loan over time while maintaining some savings is a better option than paying it off in one go.

“For example, a lady paying down a credit union loan will say her brain will make her pay her loan down but she might not save that €200 a month so she’s afraid to the clear the loan with savings.

“People want access to their savings but the bank is giving low interest on that savings account and charging 6 per cent on the loan – it’s financial madness.”

Merriman says it is down to misinformation and a lack of financial education in communities around things such as how compound interest works and will end up costing people more in loans.

He also uses the example of a young couple being told to hold off buying a house at the start of Covid by a well-meaning uncle who thinks the market will crash.

The jump in house prices and interest rate rises could have cost that couple “the guts of €50,000″, says Merrman, if they had followed that advice and bought at the end of 2022.

“I call people like this barstool advisers – the stuff people give to kids and grandkids,” he said. “You can listen to the advice but be very, very careful where you get your information.”