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Don't Be Fooled by These 3 Pieces of Terrible Financial Advice – The Motley Fool

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All of these could lead you astray.


Key points

  • There’s a lot of bad financial advice out there.
  • Knowing which pieces to avoid could spare you a world of financial pain.

There’s nothing wrong with seeking out financial advice, whether it pertains to saving, investing, or estate planning. But there’s a host of bad financial advice out there, and it’s important to steer clear of tips that could set you down a misguided path. Here are three pieces of terrible advice worth ignoring.

1. Save $10,000 for emergencies and you’re all set

It’s important to have money in your savings account to manage unplanned expenses. And you might hear that if you reach a certain threshold, like $10,000, you’re all set.

But actually, the amount of money you need for your emergency fund should hinge on what your monthly expenses look like. It shouldn’t be based on an arbitrary figure.

Your emergency fund should have enough cash to cover three to six months of essential bills. Now if you only spend $2,000 a month, a $10,000 emergency fund may be perfectly adequate. But if you spend $6,000 a month, it’s not enough. So rather than rely on a random figure, take the time to calculate what your emergency savings should look like.

2. Avoid credit cards at all costs

Some people will insist that the only thing credit cards will do is lead you into debt. But if you manage yours strategically, you could end up not only avoiding debt, but benefitting in other ways.

In fact, credit cards could be your ticket to boosting your credit score — provided you pay your bills in full and on time every month. And if you’re able to maximize your credit card rewards, the cash back you accrue could help you pad your savings and stay out of debt.

3. Buy a home in cash if you can

When you take out a mortgage, you automatically end up spending more than your home’s purchase price, because you’re charged interest on that loan. And so you might hear that it’s better to avoid a mortgage and buy a home outright in cash.

But there’s a risk in doing so. Even if you have enough cash to pay for a home in its entirety, you should know that homes are a fairly illiquid asset. That means it’s not very easy to turn a home into cash should that need arise.

When you own stocks, for example, you can sell them whenever you want and get cash for them right away. Granted, you might sell those stocks at a loss, but you can still do so quickly.

Selling a home, on the other hand, could take months. You need to find a buyer and, in many cases, wait on that buyer’s mortgage to close before getting that money in your hands. And so buying a home in cash is a move you might end up regretting.

Also, while not paying mortgage interest could result in savings, if you don’t tie up your money in a home, you’ll have the option to invest it. And the return you generate on your investments might exceed the amount of money you save by not paying mortgage interest.

It’s a good thing to take control of your finances by seeking out advice — but be careful about the sources you use. If anyone tries to sell you on these bad ideas, do yourself a favor and run the other way.

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