Social media is full of influencers dolling out tips on how to build your wealth and manage your money better. A lot of these tips are practical and helpful, like using a budgeting app to organize your monthly expenses or building an emergency fund. But some of these tips are not so helpful. In actuality, if you followed them, you could do yourself a lot of harm.
What are some bad financial tips you should ignore?
Jump on Investing Trends
Plenty of financial influencers will encourage average people to jump on new investments like cryptocurrencies and NFTs in order to get rich quickly. These investments promise high rewards in comparison to more traditional options, like certificates of deposit (CDs) and treasury bills.
You should be wary of any novel investment that promises high rewards because it will usually come with even higher risks. If you haven’t reached a point of financial security where you can handle a major investment loss, do not jump on the bandwagon for the latest trend.
Following this bad advice is also a good way to get scammed. You might fall for a rug pull scam, which is what happened with the Squid Game cryptocurrencyseveral years ago. Or you might fall for a pump and dump scam, where an investor encourages others to buy into an investment to quickly inflate its worth and then sells their own shares for a significant profit.
UseCrytpo for Emergencies
Speaking of trendy investments, you might see a piece of advice telling you to invest in cryptocurrency to have a foolproof emergency fund. The reasoning for this advice is that all banks could collapse and leave deposits impossible to access, and cryptocurrency will remain a safe stash of funds that you can turn to in that crisis. This event is very unlikely to happen. If anything, your cryptocurrency is far less likely to be reliable in emergencies than the deposits sitting in a savings account.
Keep your emergency fund in an FDIC-insured bank account. The FDIC will insure up to $250,000 of your deposits. So, if your bank ever collapses, you should be able to recoup your emergency savings quickly.
Empty Your 401(k)Early
Some influencers suggest that you liquidate your entire 401(k) retirement plan early so that you can have access to everything you saved. This is a terrible idea! First of all, a 401(k) plan can be an excellent safety net that you can rely on in your retirement years. You don’t want to empty that. And second, making early 401(k) withdrawals will come with penalties. The withdrawals will also be treated as taxable income.
Even if you need funds for an emergency, like a home repair, you shouldn’t use the money from your 401(k) to pay for it. There are better ways to handle that urgent expense that will not have a major impact on your retirement years. If you don’t have enough money on hand to cover an expense, you could try to apply for a loan online. An online loan can be a quick solution when you need to borrow cash for an urgent expense but you don’t have enough savings available. After using the funds to resolve the problem, you can follow a straightforward repayment plan.
Use Your HELOC to Buy a Rental Property
Many influencers will recommend real estate as the best type of investment. This is potentially because real estate can be used to garner passive income (through renting), and in turn, build up wealth. One way that homeowners are told they can purchase a rental property is with a HELOC (home equity line of credit).
It’s not a wise decision to use a HELOC to buy a rental property. First, a HELOC is a secured loan. It uses your house as collateral. So, if you default on your HELOC, you could potentially lose that house. This is a huge risk that you don’t want to take in an attempt to grow your wealth.
Plus, owning a rental property is not exactly going to be an easy task to take on. You will be choosing to become a landlord, or at the very least, a vacation rental owner, which will come with a series of responsibilities and liabilities. One example of rental properties backfiring as investments is the COVID-19 pandemic. Many Airbnb hosts had to bear the financial burden of their rental properties all on their own.
If you’re scrolling through your social media feed and you see any of these financial tips, keep scrolling. You and your wallet will be better off when you ignore them.
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