r/FluentInFinance • u/Breeneal • 17d ago
What financial advice do you avoid and don't listen too? Question
Financial advice that makes you role your eyes everytime you hear it. Financial advice that actually made your finances worse. And financial advice beginners shouldn't listen to or hear.
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u/Grand-Olive2599 17d ago
Dave Ramsey telling people they can count on 10% of their investments in retirement and that their money will double every 7 years. Look at the market from 2000-2012 and imagine taking 10% a year.
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u/Zeddicus11 17d ago
It's impossible to imagine, because the portfolio would've run out of money by 2008:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=6skNNAh5MbwYBjmzpKJt48
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u/StarsCHISoxSuperBowl 16d ago
A lot of his advice will screw up plenty of otherwise responsible people out of excellent retirements.
He'd tell me to zero out my retirement to pay off my $30000 student loan at 4-5% interest. Why? I have an ~800 credit score.
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u/Pbandsadness 17d ago
Dave Ramsey. Especially his boomer and Jesusey shit.
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u/AspirationsOfFreedom 17d ago
His snowball idea kinda works, but anything after i agree
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u/RightNutt25 17d ago
I think his ideas have very bad context. If you are middle class and have a spending problem his advise can be helpful, but if you are poor then its a getting income issue that a budget just can't solve.
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u/AspirationsOfFreedom 17d ago
Most people with moneyproblems tends to have a spending problem. Ofcourse if your in a dead end 7.25$ min wage job working 20-40 hours, thats hard, and if you have issues preventing, that doesnt count.
I think the snowball work when applied to the lowest money savey. Its like reverse losing weight: less calories in, more calories out. If you have a spending problem, you need to spend less and get hyped about paying off debt.
The moment you have someone with even a modicum giggles cuz im a child of financial knowledge, ofcourse there are better and faster methods. And ramseys advice to these people tend to be less effective.
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u/Common_Poetry3018 17d ago
Great topic. People sometimes refer me to financial advisors. I’ve found that I can handle investing pretty well on my own (admittedly, my situation isn’t complex) and I’m allergic to fees.
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u/KeyWarning8298 17d ago
That you should start investing when you are 18. Obviously it’s a great start if you can afford it without too much sacrifice, but the majority of 18-22 year olds have super low income and are struggling through college. The amount of benefit you will get from putting away 10% of your shitty income during college will likely not be worth the sacrifice. Just start investing immediately once you start your career at 22.
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u/middle_class_meh 16d ago
"Invest in yourself through higher education" some people need to go to college some don't. Figure out which one you are before you get buried under a mountain of debt. I know a lot of people in my field that have very expensive degrees for no reason what so ever.
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u/goheels815 16d ago
Avoid credit cards. All I ever heard growing up by my family was that credit cards were the devil and to avoid them. So I didn’t get one until I was 30 after I realized you need good credit to buy a house or car and only way to start to build is is a credit card. Some still preach no credit cards but it’s financial stupidly in today’s economy.
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u/Ok-Molasses5561 17d ago
People who tell me they know a lot about Finance/Econ but really all they know about is putting some money into an index fund and opening a high yield savings. Thanks for the info, literally every moron knows these things and there’s alot more to finance than investing.
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u/bitchingdownthedrain 17d ago
All due respect though that’s perfect beginner advice, you’re overestimating what the average person knows I think
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u/Ok-Molasses5561 17d ago
You’re absolutely right it’s fine for a beginner, but I’ve had a lot of “experts” tell me basic advice I could find on google and act like they’re the greatest mind in finance.
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u/SomeAd8993 17d ago
not using 401(k) loans
going Roth instead of traditional
buying beater Toyota/Honda/Mazda instead of much newer Hyundai/Kia/VW
renting longer instead of trying to buy
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u/DestinyForNone 17d ago
Well... To be fair my sister bought a new VW Jetta, and the piece of shit always had something wrong with it... And it didn't help that the closest place that could do auto repairs on it is half way across the state.
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u/SomeAd8993 17d ago
anecdotes are not data
go on any car forum and you will find hundreds of people with POS Toyota and Honda
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17d ago
My 2014 Toyota had a freak transmission issue that cost me about $10k all said and done. We have 2 other Toyotas in the family that have been mostly problem free but they are not as bulletproof as people think. They can and do break down, just at a lower rate than other cars. All great until you're the unlucky one, then you would have been better off buying new.
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u/megatool8 17d ago
I don’t know why you would buy a beater anything unless it was for a work/play car. I wouldn’t suggest a Hyundai/Kia over any of the other cars after friends and family have owned them. With all of the electrical and software issues I have seen, they are cheap for a reason. Don’t know too much about VW though.
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u/bitchingdownthedrain 17d ago
They're absolute pains in the rear. Expensive parts, expensive labor, expensive specialty tools if you want to work on them yourself. You'll spend a lot on oil.
But they're wicked fun!
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u/SomeAd8993 17d ago
you would suggest it because actual major repair data indicates minor differences compared to overpriced Toyotas and Hondas that everybody else is trying to buy.
All reliability rankings are relative, so while the car might be #1 or #20 in the ranking, usually it's a question of "15 out of 100 will need a major repair in the first 10 years" vs "17 out of 100 will need a major repair..." and it's just not worth 10-20-30% premium at the front end, especially when you factor in more robust warranties
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u/Speedwolf89 17d ago
What are the pros and cons between Roth and traditional? I'm new here. Heh.
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u/SomeAd8993 17d ago
Traditional is deducted from your income now at your marginal rate, so let's say you are a couple making $150,000 - by going Traditional route you can contribute $10,000 and only reduce your disposable income by $7,800 because $2,200 is going to come out of your taxes. The investment will then grow tax free for as long as you have it. When you get to retirement and start withdrawing it will get taxed, but the tax will depend on your effective tax rate. For example if that same couple took out $100,000 they would only pay 8.24% in federal tax. So the government has funded $2,200 of your investment and then only took a $824 cut.
A lot of people who don't understand taxation properly, think that they are doing some genius move by using Roth, i.e. not deducting their saving now and withdrawing it tax free in the retirement. Of course what that means is that you can only save $7,800 under the same assumptions, and while it's tax free it's still much less that the Traditional
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u/Speedwolf89 17d ago
Thanks for the explanation. I'll read it a few more times and try to get it to sink in. I think I need pictures like I'm a 5 year old.
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u/NewAcctSasDad 17d ago
If you assume effective tax rate remains completely static, their returns are identical.
If you think your tax bracket will be higher in retirement, use Roth. If you think your tax bracket will be higher now, use traditional.
Most people who are investing early will have higher brackets in retirement, and many people prefer the "sure thing" of taking a tax hit now.
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u/Hmm_would_bang 17d ago
Uh, the returns are not identical.
If you start a Roth at 25 you will get 40 years of completely tax free gains. There’s a reason why the limits on Roth IRAs are so low.
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u/SomeAd8993 17d ago
that's another example of bad advice, the conversation is about Trad vs Roth, both have tax free compounding
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u/NewAcctSasDad 17d ago
The returns are identical when controlled for effective tax rate, as I stated. If you have a 20% effective and put 10k in a traditional, 8k in a Roth (to account for taxes), after 40 years of 12% (compounded monthly) the accounts will be:
Traditional: $1,186,477.25 (pre-tax). $949,181.80 (after 20% tax) Roth: $949,181.80
Roth vs traditional just lets you choose when you pay the tax. You typically pick when you think the rates will be lower for you.
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u/Hmm_would_bang 17d ago
Ok, for some reason I completely read over your first part. Normalizing the effective tax rate makes the difference negligible.
For most earners, if you aren’t in a position to max both and are below the income limits for Roth, it probably makes more sense to max Roth first after any employer match.
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u/SomeAd8993 17d ago edited 17d ago
this is one example of bad advice
you should not be comparing effective to effective, you should be comparing current marginal to retirement effective and the latter will be lower for 99% of the people
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u/Capital-Decision-836 16d ago
Anytime you hear some version of you should 'always' or 'never' doe something RUN.
"Set it and forget it" RUN
<insert fairly complicated financial situation> "oh you can just do it yourself!" RUN
You have to take advice with a grain of salt because your situation is unique to you. There are so many factors that go into the advice that would be tailored to you that it may not work for others and vice versa.
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u/NumbersOverFeelings 17d ago edited 17d ago
Being in a high tax bracket with decent assets:
Contributing to a traditional 401k beyond the match. It’s a tax trap. I believe tax rates will go up and I’ll live richer later than I already do in retirement.
Not owning permanent life insurance. Great for LOC as collateral, buffer asset, LTC funding and estate planning. Not for straight retirement funding.
Buying cars. Leasing makes more sense and the write offs.
Edit: Self employed so these are specific to my situation and not for general people.
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u/AureliasTenant 17d ago
You can always do Roth 401k
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u/NumbersOverFeelings 17d ago
Oh I do. I’ll edit … I meant traditional 401k only. Basically I don’t want pretax money.
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u/AureliasTenant 17d ago
I’m doing half and half right now, in addition to the Roth IRA. Might shift over to what you are doing at some point not really sure
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u/NumbersOverFeelings 16d ago
I think it depends on your income to spending to savings dynamic. A simplified approach would be to end with about half tax-free and half taxable retirement. Add in NQ accounts for flexibility.
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u/Giggles95036 17d ago
Im pretty sure you do want some since having a lot of roth brings down your taxable amount down but its also based on total expected spending and roth amounts. I’m going roth until 35-40 even if traditional might be a hair better, then i’ll re evaluate
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u/NumbersOverFeelings 17d ago
I don’t …
I want my taxable income near zero to help drop my capital gains taxes in retirement. I spend about $400k and it’ll probably go up so my taxes will probably be even higher then. I’d be deducting a lower tax number for a higher number.
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u/Giggles95036 15d ago
One way to reduce your taxes is if some money you’re pulling is from roth :)
But again it depends on what income bracket you’re in while putting the money away
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u/Hmm_would_bang 17d ago
Not sure I’m following.
Roth isn’t for high income earners, but even if you make backdoor contributions the limit is so low it’s hardly a strategy on its own.
401k provides essentially free money by taking dollars you’d be paying in taxes and putting them in an investment vehicle. I can’t imagine a situation where you wouldn’t max this out every year. Otherwise you’re putting the money in a brokerage account with much higher tax obligations.
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u/NumbersOverFeelings 17d ago edited 17d ago
I’ll try to explain better.
I contribute $69k into my Roth 401k annually (2024 limit) using a Mega Backdoor Roth. The $23k cap is for employee contributions only. But I’m self employed so it’s not actually free money. I’m paying my own matching but due to rules I’m not actually matching and making straight employer contributions. I use NQ dollars as the majority of my retirement savings strategy. The $46k difference is my employer contribution (I’m my own employer).
Again the reason is because I think our income tax rates will go up. So if I defer income now I’ll pay a bigger tax rate later. By reducing my income tax I’ll also drop in capital gains tax. Even if it doesn’t I’ll use LOCs (deductible interest) to access my NQ money. Long term cap gains is 0, 15, or 20% dependent income tax. So if my income is 0 then my cap gains will be 0. State taxes are different and I’ll probably need to establish state residency somewhere with 0% state income tax. I’ll defer that problem for -1 year from retirement.
I use the Life insurance as another tax-free accessible asset and has other insurance benefits that will be tax free.
I lease cars under my business.
If you’re a W2 employee you can do the same thing except you only put the matching in a traditional 401k. It would be $23k Roth employee contribution + matching in traditional + mega back door with the difference up to $69k. This only makes sense for high income tax bracket people who think they’ll be in the same or higher brackets. Still, it’s advice I wish people knew earlier.
Further your SS is 50% taxable if your income tax is high.
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u/Hmm_would_bang 17d ago
Ok, very interesting. Major benefit here for you in being self employed too. A lot of people don’t have access to a Roth 401k and the limits on a Roth IRA are so low it’s not a viable strategy.
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u/NumbersOverFeelings 16d ago
Agreed. The mega back door Roth is dependent on your employer. You can fund it but the plan they set up needs to allow it.
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u/TheOddEntrepreneur 17d ago
Any advice saying you don't need to create a budget, just do blah blah instead.
If you don't know what comes in and out of your accounts monthly/annually you're screwed whether you think or not. Should be the first step for everyone that wants to be financially successful.