3 Ways Personal Financial Advisors Mislead You

3 min read · 8 years ago


Money Secrets

Why is all money advice the same? Why do so-called “experts” keep giving us confusing advice that never seems to work?

For example, my favorite chestnut — “Keep a budget!” — almost never works. Yet do we question the advice? No. We blame ourselves, instead of realizing that budgets almost never work. (If you want a better way to manage your money, try automating it.)

Your financial life would be tough enough if all you had to sort out was the confusing advice, but when you peek behind the veil, you’ll discover several money secrets that the money pros won’t tell you.

Secret #1: Cutting back on lattes almost never works

How many of us have heard this advice? “If you stop spending money on lattes, in 30 years, you could have $90,000 saved!” It sounds logical — but it doesn’t work. If it did, we all would have cut back and we’d dutifully be stuffing our bank accounts with $3 every day. Here’s why saving money on lattes is futile:

1. We love our morning coffee. It’s not just the caffeine, it’s the ritual of treating ourselves.

2. Saving $3/day is not really that much — especially when we acknowledge that we would probably spend that money elsewhere, not invest it (like the “experts” assume we would).

3. We’re cognitive misers. Each minor decision we make reduces the likelihood of making more important decisions later in the day. Do we really want to use our limited willpower on a $4 purchase? If we force ourselves to say NO to a latte in the morning, what will we helplessly say YES to in the afternoon?

It’s surprising to hear that this conventional latte advice doesn’t work. But ask yourself: Has it worked for you? Most of us “try harder” to cut back on lattes…only to yo-yo back to buying them a couple weeks later. Instead of worrying rather focus our limited willpower on bigger areas, like negotiating our salaries, investing, and even improving our credit scores.

Secret #2: As an individual investor, you’re probably being ripped off

I spent years studying investing to learn the ins-and-outs of how Wall Street rips individual investors off. Here are some of the ways they trick ordinary Americans into spending tens of thousands of dollars more than they need to:

1. High fees. How much are you paying for the funds in your 401(k)? Hint: Anything more than 0.50% is too much. Anything more than 0.75% is outrageous. These numbers seem small, but over your entire career, they’re worth tens of thousands of dollars — money that could be in your pocket, not the big banks’ bottom lines.

2. Commission-based financial advisors who get fat fees from recommending inappropriate funds. If you use a financial advisor, make sure he or she is a fee-only advisor, someone you pay an hourly fee to. You don’t want an advisor who recommends funds, then pockets a commission. Of course, most people can skip having a financial advisor by reading 2-3 good books and setting up automatic investing.

3. Unnecessary accounts. Do you really need life insurance as a single person? Probably not. Yet many of the “advisors” you meet are really salespeople, selling you unnecessary products and services that you don’t need.

Where should you invest instead? For most people, low-cost target-date funds will get you started investing without hefty fees. These funds are diversified and automatically become more conservative as you get older, and their low fees mean you’ll keep your money in your pocket — not Wall Street’s.

Secret #3: Getting a tax refund is a good thing!

When tax time comes around, how many of us have neighbors who wag their finger at us and say, “If you’re getting a tax refund, it means you gave the government free money!” That sounds logical. But it also misses the point. The average tax refund is about $3,000. Can you guess how much interest you’re actually losing? About $1.25 per month. In fact, if you had that money, you almost certainly would have spent it all. Interestingly, when Americans get their tax refund, they tend to save it or pay off debt. So next time your friend angrily points out that you gave money to the government, just smile. They may be technically correct, but you can be right — or you can be rich.

Here’s a bonus fourth money secret: You don’t have to pay credit card late fees.

Credit card companies pay a lot of money to land every customer, so the last thing they want to do is lose you over a $15 late fee. Follow this link and register to get a word-for-word script you can use on the phone with them to battle late fees and even get your APR lowered: How to Hack Your Credit Cards.

Ramit Sethi is the author of the New York Times bestseller, I Will Teach You To Be Rich. Get his free techniques and word-for-word scripts at http://www.iwillteachyoutoberich.com.