In the last decade, a LOT has changed. Do you want to succeed financially? Here is outdated financial advice that does not hold true today!
Times are changing, and times are changing fast. 10 years ago smartphones just became a thing, now they are a habit that is intertwined with us.
Technology is changing, societal values are shifting, and financial markets are evolving. With this changing world around us, it would only make sense for financial advice to change too.
You probably learned great things from your mentors, parents, and financial books. BUT these things shouldn’t be assumed without thinking about if they still hold true today.
The changing economy and the changing financial systems may be making some of that advice outdated and downright wrong.
Here is some outdated financial advice, specifically 13 statements to rethink.
1. Buying Is Better Than Renting
Well, that largely depends on your situation.
If you’re buying a home, you need to put a lot down. Real estate agent fees, taxes, advisory fees, and more. You will get this back within a few years when you’re paying a lower cost, you’re slowly starting to pay back the mortgage (not just interest), and your home is appreciating.
Whether that is a good decision depends largely on the area you want to buy in. If it’s an expensive area for rent and a cheap area to buy, it may be attractive. If it’s an expensive area to buy but relatively cheaper to rent, it may not be attractive. Plus, if you’re not staying in your house at least a couple of years, buying can be an expensive decision.
Besides all of that, rising home prices are not a guarantee. That’s what we saw in the 2008 financial crisis, where the housing prices plummeted for a couple of years.
Buying can be really expensive. Your roof needs replacement, you have water damage, or your heater broke. These are all large unexpected costs that need to be accounted for. When you’re renting, you just call the homeowner or your leasing company and they sent someone to fix it.
Many people are going into homeownership thinking it is the only right decision. Please think about it first and think about all the factors that determine whether it’s for you or not.
Besides housing, there are also other things that you can rent instead of buy. When I was studying, I rented a bike for 13 EUR per month. They fixed everything and when something wasn’t working they were there within minutes. Perhaps that’s just a Dutch thing with the bikes, but why not do it with other things that can cost a lot? With cars, with bikes, with specific tools, and more.
2. Your House Is An Investment
Your home is a liability, not an asset. This is one of the main things I learned from Rich Dad Poor Dad that blew my mind.
When you having something that is taking money out of your pocket, it is a liability. When you own something that is putting money in your pocket, it is an asset.
So if you own a home it is a liability because it is taking money out of your pocket. If you own a home and rent it out, it is an asset because it puts money into your pocket.
A lot of my friends started to own a home in the last few years. They love spending on their home, renovating it or buying additional things that they like. They are doing this because ‘their home is an investment’ and they are very certain it will add more to the value of the house than it will cost.
For the US real estate market they tested for home renovation projects and they found that zero home renovations had a positive return on invested. This means that for all the renovations and improvements that were done on a home, zero of those resulted in a selling price higher than invested costs.
Unfortunately, there is no data available on this in the Netherlands of Europe that I know of. That would be super interesting to analyze!
Unless you house hack, live with roommates, or fix up and flip houses – your house is not an investment but an expense.
3. Student Loans Are Good Debt
I agree that not all debt is created equal, but generally student loan debts are still a burden.
This also depends largely on your situation, your risk appetite, and your interest rates. While in a lot of countries the student loans have a lower rate compared to other loans, it is still experienced a financial burden to most.
Many people need student loans to get through school, including me, but they are not always paying for themselves.
I have friends who finished their bachelor’s within four years and didn’t rack up too much student debt. I also have friends who switched majors a couple of times, spent 8 years in school, and have $70,000 in student debt. That is a lot when tuition is around $2,000 yearly.
Most people need to take some student loans to get through college. However, student loans can have a high consequence on your financial life for many years to come.
4. First Pay Off Your Student Loans, Then Buy A Home
This rise of the student loan debt is not only having an effect on how much you can actually keep from your first paychecks, but many people would also give the advice to first pay off the student loans before buying a home.
While it can be great to rent an apartment and pay off your student loans first, it should be possible to buy a house while having student loans. The thing is that student loans often influence the amount of mortgage you can take out, at least in the Netherlands.
If you’re considering it, start running the number or get information from independent parties. The result may be very different than you think. Whether you should buy a home with student debt depends largely depends on the market, your finances, and where you plan to be in a couple of years.
With many of the items in this list, it largely depends on your situation and what you want out of life. Buying isn’t better than renting and your house isn’t always an asset, it largely depends on how to treat it.
5. Pay Off Your Mortgage Early
Many people hate debt and want to get rid of it asap. While it isn’t good to rank up too much debt, it can be wise to think about your decision to pay off your mortgage early. Like most financial decisions, it depends largely on your personal preference and current financial situation.
First, consider what percentage of interest you are paying. When you have a 3% interest rate, it is less attractive to pay off your mortgage early. You can get an average of a 7% return on your investment when you’re choosing to invest in the stock market.
When you have an 8% interest rate and you are not comfortable with having a high mortgage, yes it may be a good decision to pay off your mortgage early.
Whether or not you dislike having a high mortgage can depend on your risk tolerance. Some people naturally have a higher risk tolerance than others. How you grew up around debt can have an impact on that as well. When your parents are telling you your whole life that debt is bad, you may feel uncomfortable with debt and want to pay it off asap.
Lastly your age impacts your risk appetite. The general rule is that the older you get, the lower the risk that you should take. If you’re investing in stocks, think about going into bonds. If you’re having a house, think about paying it off early. You simply have less time to correct when something doesn’t go as planned.
Think about your risk appetite and the general market returns (7%) versus your mortgage interest rate. Don’t blindly pay off your mortgage early.
6. The Stock Market Is Risky
Many people I know still are convinced that the stock market is risky. They don’t know anything about the stock market nor have they ever invested. Still, they are convinced that the stock market is risky.
While it may be risky to invest in individual stocks, the general stock market goes up over time. That’s why investing in low-cost index funds is the way to go for me personally.
Generally speaking, the stock market will always go up. Sure there are some stock market drops that will let you believe otherwise, but over time the stock market will still go up.
While index funds prevent huge highs, they also prevent huge losses. Imagine that you have 5 companies and one of them crashes 50%. That means your overall portfolio lowers with 10%. Imagine that you have 3000 companies (in an index fund) and one of them crashes 50%. That means your overall portfolio lowers with 0.2%. That is quite the difference.
When you want to mitigate the risk that people typically associate with the stock market, go for index funds and avoid picking individual stocks. You will be fine.
7. Asset Allocation Is Determined By Age
Something that I have heard many times in the past, is that you should invest your age in percentages in bonds. The rest in stocks. This means that when you’re 30, you invest 30% in bonds and 70% in stocks.
While this may have worked in an era where people still got actual interest on their bank accounts, bonds nowadays are simply a less profitable investment. You may still want to get more towards bonds as you get older, though the rule of 100 is not going to cut it for you.
Determine what is your risk attitude and determine based on that what you want to do with your portfolio. Rebalance your portfolio regularly and adjust your plan when needed.
8. Keep An Emergency Fund Of 12 Months Expenses
Let’s start here: every single person should have an emergency fund. When you don’t have it, you are busy building it. It is extremely important to have cash available when something unexpected happens in your life.
I personally think that having 3-6 months of expenses in your emergency fund is sufficient. If you’re having a stable income and little unexpected expenses from month to month, 3 months should be enough. If you’re having an irregular income and regular unexpected expenses, 6 months should cover it.
When your emergency fund is too low, you may need to take on extra debt when unexpected expenses present themselves. That’s not what you want.
When your emergency fund is too high, you may miss out on the investment returns on the market plus the inflation that makes your money decrease in value. That’s not what you want either.
While it is a pity if you miss out on some investment returns when the market rises, it is better to have a little bit too much in your emergency fund rather than having too little. It is better to have $2,000 that you’re not using, compared to $2,000 that you need to get in debt for.
Think about where you are on the spectrum of risk and determine how high your ideal emergency fund would be. Create a monthly money routine and check where you’re at financially.
9. Don’t Talk About Money
For many people, talking about money is still taboo. It is extremely important to break that taboo and talk openly with people about money.
It’s about talking about your salary, how you budget your money, how you file your taxes, or how you work towards financial independence for example.
If you get over the money taboo and start to talk about money with your friends, you will notice there are many things you can learn from them. It is great to learn from your own mistakes, but it would be much better to learn from their mistakes and prevent to make that mistake in the first place.
Besides that, it is great to talk about the struggles you have around money. This way you won’t feel alone and people who have gone through the same thing will help you to overcome them.
You don’t need to force your friends or family to talk about money. Just share what you have learned or ask their advice on things you think they have experience with.
Talking about money makes life so much easier and interesting. I love talking about money and I do it all the time with the people around me!
10. Find A Job You Like And Never Change It
When I started working on my last job, I remember coworkers that worked there for over 25 years. Several of them actually. Some moved around within the company, some didn’t.
Last month I revisited them to lunch with them (yes, I took my own lunch and ate it in the canteen). They told me that the entire department would be let go in three months, and all the people who worked there 20+ years can go as well.
This taught me that relying on one employer and one career is not always the way to go. You can find a job you like, sure, but there can be a moment when they don’t need your services anymore.
Make sure that you always have reliable work experience that you can switch jobs whenever you want to.
11. Retire At 67+
Retirement is something that is ever-changing at the moment. In the Netherlands, they have adopted a law a couple of years ago, where people can only retire from 67. Every year that goes by, the retirement age goes up with one month. For me personally, I need to work until 72 years and 3 months.
Hell no, ain’t nobody got time for that.
Can you imagine people going to work when they are age 72? I don’t think that this will be appropriate for the majority of people. We’re already having issues hiring people who are 55+, let alone people who are 65+.
The majority of people doesn’t experience their job as their passion, why would you want to work for 40+ years before you can retire?
Luckily any single one of you can retire early. Financial independence and retire early (FIRE) is a movement that states that you can retire when you have 25x your yearly expenses saved. This assumes a safe withdrawal rate of 4%.
When you are taking early retirement seriously and you adjust your behavior, it certainly is possible. I personally do the following: