12/5/2011 5:06 PM ET|
6 tales: Worst money advice ever
When it comes to bad financial guidance, these stories from average Americans are hard to top. But they offer valuable lessons on what not to do, financial planners say.
What's the worst financial advice you've ever received?
MainStreet posed this question to a group of average Americans and received a variety of colorful responses -- from investment mistakes to real-estate blunders.
To find out what can be learned from each person's story, we picked the brains of financial planners from around the country. Interestingly, while the advisers agreed that some advice was indeed unwise, in other cases they argued that the advice could be sound in certain situations.
"A lot of financial advice is not 'one size fits all,'" says certified financial planner Helen Huntley of Holifield Huntley Financial Advisers in St. Petersburg, Fla. "Advice that's good for one person may not be at all good for another who is in different circumstances."
You should also keep in mind that while seeking professional financial advice is often the way to go, you should be wary of an adviser who is too pushy.
"When a client feels pressure from anybody to make a financial decision -- especially those taking their money -- run for the exit," says certified financial planner Phyllis Carlton of Carlton Advisors in West Linn, Ore. "A true financial professional will be able to answer any and all questions in terms the client understands. If they don't, either they do not understand the risks themselves or they don't have their client's best interests in mind."
Read on to hear the stories of six Americans, plus comments from the pros.
Name: Janet Zinn
Hometown: New York
"About 10 years ago an old accountant advised we cash in a substantial 401k plan to pay off credit card debt, instead of instituting a plan to pay it off over time and learn how to spend and save at the same time."
What the experts say:
In general, touching your retirement plan before you reach retirement age is a no-no.
"When folks are under 59½ years of age, there is a 10% penalty (for cashing in your 401k) in addition to the current income taxes owed on whatever amount was cashed in," says certified financial planner Debra L. Morrison of Trovena in Roseland, N.J.
Morrison says a better idea is to consider taking out a loan on 401k money following "a rigid, monthly repayment schedule, which requires the participant to pay off the loan, thereby maintaining the retirement funds for their original intended use."
Of course, there are exceptions. "The advice may have been appropriate if, say, the credit card was charging 29% interest and the consumer was in the 15% bracket with a 10% penalty," says financial adviser Fred Amrein of Amrein Financial in Wynnewood, Pa. In this instance, "your cost of the 401k redemption is 25%, saving you 4%."
Always do your homework, and run the numbers before making any decisions to touch your retirement fund, Amrein adds.
VIDEO ON MSN MONEY
A financial mistake many people make is keeping your mortgage for the tax write off. It doesn't make sense to pay $100 in interest to get $25 back in taxes.
Worst advice I'd ever gotten: I'd been a stay at home mother for two years and bills were starting to add up. My husband made just over any federal guideline limit for any sort of financial assistance, so we were on our own. Things were getting tight, so we sought out professional advice.
His recommendation? That we were SOL and that I shouldn't even consider working because I would pay more in child care and taxes than I would get in a paycheck.
One year later I'm glad to say I completely ignored his advice and found a way for my schedule to work with my husband's so that we can minimize the time my son spends in daycare. The extra income has been enough to help us keep our heads above water with our current bills, as well as help us getting caught up on our debt.
These are not examples of bad investment advice. These are examples of investment advice gone wrong. There is a difference. All investment bears risk . Most of the examples of bad investment delineated here are better examples of poorly executed advice. Or sour grapes over "the money I could have made if only I hadn't done what I did". Or self-praise over an alleged successful start-up.
All of us have perfect 20/20 regarding choices we should have made. Few of us are willing to accept that our own practices undermine our chances for success.
Believe me, there are many much more compelling examples of bad financial advice than these. Perhaps you could have been introduced to Bernie Madoff.
Worst financial advice I ever got? Get an adjustable rate mortgage. This was about a year before the housing market collapsed and ARM's were all the rage; everyone from my parents to my mortgage broker to my best friend tried to sell me on the idea and my response was "I'd have to be an idiot!" It took me a while but I managed to get a fixed rate at 6.5%, which I then re-wrote at 5.1% a year later while all of my friends were trying to figure out how to deal with their mortgage adjusting up instead of down. Now I know what my mortgage payments will be for the next 20 years, unless I do something to change it, they have no idea from quarter to quarter or however they are set up.
The best financial advice I can give is to prepare for your future. I do not care how you do it, but I have heard many people say they are just going to work until they die; don't assume you will be able to. My Grandmother-in-law had a massive stroke and was disabled, in a home ank in need of constant medical care for 7 years, she didn't even remember her children or grandchildren and had no idea when her husband and son died. My M-I-L was left to cover her expenses on a waitresses salary, but thankfully my Grandfather-in-law had a job with a pension and good retirement benefits that provided 75% of the medical care. My M-I-L got out of waitressing and found a job that has some benefits and she purchased a disability insurance plan; I started paying for a life and disability plan for her as well seeing as how my husband and I are the only family she has left, so if something happens to her it is up to us to care for her. I also have a job with a pension and great benefits that I keep after retirement and that my husband can keep in the even that something happens to me, so we are covered for life. Think about that before you leave your children with the burden of paying for your advanced care and if you don't need it, great, but at least your grandkids college fund won't have to cover your old age.
On page 5 about investing $5000 in a mutual fund, the advice from the "experts" that MSN found seems a bit wrong. Diversifying asset classes and yearly rebalancing is great general advice, but for the scenario described for someone who has only $5000 in a brokerage account with no plan to add more, attempting to follow that advice will waste way too much on fees. Getting professional advice is probably not worthwhile because for what the advisor is paid, you'll easily use a significant portion of the $5000 getting the advice. Whether they take that as a fee or if they get a kickback for recommending an inferior fund doesn't make much difference. They WILL get paid. If the person is going to use the $5000 as a start and continue adding to the investment, they should do research and educate themselves over the years. If all a person ever intends to invest is $5000, it probably isn't worth the time to learn about investments, and there's no one who will give them good enough advice when dealing with that small amount. If they get advice from a friend or relative like this person did, there's no way (other than time consuming research) to find out if they know what they're talking about. I could give some advice, with what to do with $5000, but you can't trust that either. The takeaway is that there is no magic that will turn your $5000 into a small fortune by waiting some number of years. Either save the money for a specific goal, use and enjoy the money, or try to make your fortune by gambling it away. You can do your gambling at a casino or at Wall Street. If you buy an investment product without adequate research, it is pure gambling, and the odds at the casino may be better. There is no way to know when you have done enough research, so don't start investing with money that you absolutely can't afford to loose. As you do more research, the odds may improve to the point where you're more likely to do better than you would sticking it under your mattress.
I have lost over 20 grand taking "advisor's" advice. They often push products their company sells. The stock market is the east's version of Las Vegas. Advisors input is like racetrack tout sheets. My personal acvice: . Buy stocks in companies you know and who have been around a long time. (except for GM !!!) If I had stuck with Exxon (used to be Esso) I would now be in clover. Go with a low commssion outfit like Fidelity. I used to pay 1 to 2% at an upscale brokerage ouitfit. That's around 100 or $200 for a 10k trade. Fidelity: $8....Also, have a Roth IRA. I'm retired and have to pay tax on my regular IRA with drawals. I haven't done the numbers to see what the comparative tax benefits are, but it hurts to now pay taxes on that money. If people followed what investments I have made and done the opposite, they would now be wealthy.........
The company I work for has a 4% match in their 4O1K, every time someone tells Me not to put money in it that I will just lose it, I tell them one thing is guaranteed, I will have more than You.
CPAs are not the organization to blame. We are legally forbidden from giving financial advice such as "buy this bond, sell this stock" unless we are also certified financial planners. And, we are not omniscient. If a client does not tell us about all of their financial data, then we cannot properly advise them on how to go about getting out of debt or point them in the proper direction for financial planning advice. More often than not, the fault for financial failing lies with the client not giving us the data that we need to help them.
What we usually do is provide the correct tax consequences of a decision (such as cashing in a 401(k)) or help figure out what the cash flow is going to be like once certain payment plans are put into place. Helping a client decide how to pay off their bills in the most economical manner is actually a big plus for our industry.
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