don't listen to the experts

I wish I had known then what I know now. I remember starting out as a recent college grad and doing everything the ‘experts’ were telling me to do. It went something like this;

Expert Advice

“Save 10% of your income for retirement”

“Your student loans are good debt”

It was later in life that I found the massive flaws in this advice. First, by saving 10% of income, we’re setting ourselves up to be servants to our employers for a solid 40 years. If that sounds like fun to you, then by all means, listen to the experts. Second, and perhaps the worst advice I’ve ever heard is that student loans are good debt. Allow me to explain;

Debt is a crippling, soul crushing way to get less for your hard earned money, requiring you to work for your employer for additional years, if not decades to pay for. Having debt is not a good thing except in very few instances (such as when using as leverage for passive income generating real estate). What the experts SHOULD have said is something like this;

“Debt is really bad and you don’t want it. However college is really expensive, and since you couldn’t pay for it without a loan, you now have a loan to payoff. The good news is that college educated people earn more which will help you pay it off. You want to pay it off as soon as possible, but not before you payoff the REALLY bad debts like high interest credit cards and car loans.”

I get that this is a long explanation and not good for the 30 second spot on the morning talk shows, but to tell people that student loan debt is good without the proper context (that it’s actually just less bad than other debt) is really irresponsible.

Fancypants Slick Money Guy Advice

There’s another kind of bad advice out there. This comes from the people that think they know how to game the system. This is usually your friends or family, in most cases they have no financial background, but think they know everything. It goes something like this;

“Don’t pay off your student loan at 4% when you could be investing in stocks at 9%”

These people are trying to impress you because they’re good at third grade math and once read an article that said stocks have historically increased at 9%. Unfortunately, they don’t understand that personal finance and financial markets have an unpredictable and sometimes irrational human element. There are two reasons not to listen to this advice;

  1. Let’s say your student loan payment at 4% is $300 per month. Guess what happens to most people who take advice from Fancypants and decide not to pay down that student loan right away? Instead of religiously investing $300 per month in stocks, they find a reason not to, like a car repair, new iphone or craft beer. Something about the seriousness of the loan compels us to pay it down consistently.

  2. Paying down debt at 4% is a guaranteed return. That 9% stock return that Fancypants is talking about is an assumption, and it’s not uncommon for markets to decline, sometimes significantly, in value. It should be noted that over time, broad measurements of stock investments have historically risen by about 9%. Stocks are crucial to wealth building, but sometimes trying to be too fancy can get people into trouble.

The takeaway here is to protect yourself against yourself. If you think you can find a better return on something else, you need to automate that investment and do it as consistently as you would if you were paying off a loan. You should also know what returns are guaranteed and which are based on assumptions, and factor that into your decision.

If there’s one thing I’ve noticed over years of studying people who have built wealth, it’s that gaming the system doesn’t work in personal finance. People that consistently invest and payoff their debts so they can invest more and more are the ones that win this game. The people who try to game the system usually lose.

Why all the bad advice?

So why are experts in the media and the people closest to you giving bad advice? There are lots of reasons, but here are the big ones;

They have no training in Finance

The media likes to take professional writers and have them write what about what people should do with their money. I’m sure the articles are well-written, but unfortunately the advice is lacking.

They’re telling you what you want to hear

Imagine if instead of telling people to save 10% of their income, the experts told us to save 40% of our incomes. Doing so would build massive wealth, open up a world of options and buy our freedom. What would we do? The WonderMen and WonderWomen reading this blog would be psyched and would go follow that advice, but unfortunately most people would do nothing. It would seem too difficult and insurmountable, paralyzing the average person from taking any action at all. It’s easier for the media to just tell us to save 10%.

They don’t understand real wealth building

Telling people how to get by financially is very different from wealth building. I mean, if you’re teaching people how to retire at 65, is that really teaching them anything at all?

The purpose of this post is not to in any way disparage the people giving out financial advice. There’s certainly value in teaching people the basics and getting them on the right track. But I think the people reading this blog or other personal finance blogs are looking for more. We talk about building real wealth at 8th Great Wonder so people can make an impactful difference in their lives like paying off a house early, living debt free or retiring early enough to enjoy life. In order to achieve those goals we need to take this seriously, get angry if necessary, and sometimes do what’s difficult. But we know the payoff in terms of both money and happiness will be well worth it.

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