Guestpost by Kimberly Tan
We all aspire for financial security. We hope for that day when we can sleep soundly at night, knowing that we can cater to all our needs, even during unforeseen circumstances. For example, these past two years or so, we have been confronted with the immense importance of financial health. The pandemic has tested us in many ways, specifically our finances.
If employed, you’ve probably experienced labor uncertainty, such as being requested to render reduced work hours. If you were managing a business you built from scratch, you likely had to contend with the many challenges brought about by COVID-19. Now that the most difficult days are over, it’s high time we set our priorities straight.
The first order of business is gauging how to best approach our finances. Here, it’s crucial to listen only to credible sources. It’s in our best interest to avoid pieces of advice that could further harm us. Here are some of them.
- Aim big, aim high
There’s nothing wrong with being ambitious. It’s only natural that you want to make the most of the life you have or want to have. As they say, aspire for the stars no matter how challenging that can be.
In terms of your finances, such advice could prove detrimental in the long run. That’s because you’re plotting an unrealistic goal that could do more harm than good. You’re setting yourself up for failure.
Consider this scenario. You have a modest business that’s been doing well. Now, you feel like you’re ready to expand. However, you don’t necessarily have the data to support your plans. All you have is an instinctive drive to grow.
So, you’re probably looking into business loan opportunities to fund your next big plan. If that plan is not rooted in realistic objectives backed by credible quantitative and qualitative data showing the exact status of your business, you might end up accruing loans you can’t pay back. That’s the quickest recipe for financial ruin.
When plotting financial plans, it’s crucial to stay SMART.
- Specific – What’s the end goal? Can you discuss it in exact and concise terms? An example of a specific goal is to increase quarterly revenue by 10%.
- Measurable – Is there a way to quantify the plan’s progress?
- Achievable – Is your objective practical enough?
- Relevant – Is the plan rooted in reasons that make sense?
- Time-based – When do you plan to see results?
You can also use SMART objectives on a smaller scale, such as with your savings goals.
[Jonathan: Excellent tip Kim and this applies to your job as well, do not hesitate to challenge your work objectives and your manager 😉]
- Build credit history via unpaid balances
There’s a lot to be said about having a good credit score. For starters, it will be easy for you to apply for loans. Whether submitting an auto or a home loan, you can rely on your excellent credit rating to increase your chances of getting a loan approved.
However, one financial advice related to credit score makes no sense. That is to keep unpaid balances on your statement of account. The idea is that your credit history becomes more dynamic with those unsettled debts. But it does not take a financial expert to figure out that unsettled credit card debts do nothing for your financial goal. On the contrary, unpaid debts reflect negatively on your credit rating.
Keep in mind that unpaid credit card debt accrues interest every month. Thanks to the compound interest, those monthly interest grows more each month, and your outstanding debt remains unpaid. In time, you’ll realize those interests have exceeded the value of what you owe.
As you can see, these scenarios directly oppose the advice that to build a credit history, you must keep borrowing and keep outstanding debts unpaid. That advice can be traced back to businesses that make plenty of money from interest payments on unpaid loans or debts.
If you want to improve your credit score, pay what you owe your credit card or loan provider every month. It will also help if you keep credit utilization low.
- Your home is an investment
There’s nothing blatantly erroneous about this financial advice per se. However, it can be detrimental to a person’s financial strategy.
Ideally, the goal is to keep your financial portfolio diverse. Now, the problem with looking at real estate as an investment is that some people end up satisfied with the property they purchased, losing interest in expanding their portfolio of assets.
Remember that assets should earn you money. For example, if you invest in a business, your spending should give you ROI. The same goes for stocks and bonds you bought. You want them to perform well in the market, so they can regularly funnel passive income into your account. While those amounts may vary, at least you know your money’s not stagnant.
Unfortunately, you cannot say the same for the house where you live. Yes, its value may appreciate, but unless you rent it out or sell it for profit in the next couple of years, you can’t look at it as an investment or an asset. It’s just something you bought and now use, like a car or a piece of precious jewelry you wear as you wish.
Consider your home as a small aspect of a broad investment strategy. With this mindset, you’ll better gauge which assets will earn you money, not in the future but now. Meanwhile, you may purchase and sell fixer-uppers if you wish to profit from real estate.
[Jonathan: Totally agree and I have written about it as well: 5 Reasons why your home is not an investment]
- Investing solely in big companies
The upside of investing in big companies is that you can rest assured you’re betting on established business ventures. The likelihood of losing your money is slim, if not entirely absent.
However, this investment strategy is contrary to what legit financial experts recommend to their clients needing wealth management. That advice is about diversifying financial portfolios, which we already touched on earlier.
Portfolio diversification circles back to this adage: do not put all of your eggs in one basket. That way, should one basket collapse, you don’t lose everything.
The rule applies to investing in stocks and bonds, too. If you already have money invested in products from established companies, by all means, keep them.
However, it’s in your best interest to pursue up-and-coming brands. The last thing you want to happen is missing out on a project that has the potential to be the next big thing of the future.
It’s best to invest early. If the company you get behind becomes big, you will have hit the jackpot.
Also, remember that stocks and bonds respond to the fluctuations of the world market. That’s true, no matter how big or small their host companies happen to be. That means that a market crash won’t save you from financial losses just because you bought from a recognized brand with decades of history.
We are bombarded with messages day in and day out. The internet has given us access to a range of information, claiming to have what it takes to improve our lives.
That holds water even when it comes to financial talk. There’s no shortage of social media pages run by influencers claiming to be experts in the subject. And it’s easy to get swayed by them. That’s why it’s important to be as discerning as possible. After all, one financial advice that’s supposed to help you out could do the opposite. Case in point: the ones cited above.
When managing finances, you cannot just rely on random sources you find online. Note that a piece of advice that has worked for someone else might not necessarily work for you. It’s best to ascertain where you’re at money-wise. From there, determine a wealth-management approach that suits you.
About the Author
Kimberly Tan is a financial advisor who loves to freelance writing about personal finance. She is very passionate about helping people in managing their finances and see them succeed in it. Reading books while drinking tea is her favorite thing to do in her free time.
I would like to thank Kim for her insights on the harmful advice we often hear on internet and social media. The financial topics mentioned in the article really need digging and see how they fit in your overall financial situation indeed.
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