Blog | Personal Finance

Why You Must Always Question Money Advice

Before you invest, take a step back to decipher fact from opinion

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If you post a simple question on social media (for instance: What type of car should I buy?) it’s amazing how many people will come out of the woodwork to share their advice. Some of that advice is based on personal preference, some is based on an advertisement they saw or a friend’s experience, and some is based on their assumption of what you want and how much you can afford. But how much of the advice is based on fact? I’d venture to guess little to none. The same is true for most any topic, including money advice.

In the media, I often hear statements that make me pause and wonder, “Is this advice based on fact or opinion?” Statements like, “Men are better investors than women,” or “Women don’t take risks when it comes to money.” This can be especially confusing when you first set out on your path to achieving financial independence.

If you’ve ever watched a financial TV show, you’ve probably heard the commentator turn to his industry-expert guest and ask something along the lines of, “Do you think the stock market is going to crash? Are we headed toward another financial disaster?” And the guest confidently gives his or her reply — or rather, his or her opinion. It’s an opinion because, unless he or she has a reliable crystal ball, this guest has no idea what’s going to happen. Nobody can state with 100-percent certainty what the stock market will do. It’s all a bunch of opinions based on a variety of factors and historical trends.

The worst money advice

Have you ever noticed how most mainstream personal finance “experts” give the same tired advice interview after interview and article after article? If you pay close attention, they almost always claim the path to a comfortable retirement is through diversification, saving more, and living below your means — which is a far cry from what a Rich Dad personal finance coach will suggest.

Let’s explore each one a bit more closely:

  1. Diversify. They suggest you don’t put all your eggs in one basket, but then really only talk about paper assets (stocks, bonds, and mutual funds). How is that diversification? They should be telling you to invest in commodities real estate so you can benefit from the monthly cash flow or start a business to create your own assets.

  2. Save more. You’ve been told to save for a rainy day, but where exactly will this meager savings get you? Do you know how much money you’d have to save up to spend 20-30 comfortable years in retirement? Let’s face it: The interest you earn on a savings account is so low, it’s practically nonexistent — it certainly won’t help grow your nest egg.

  3. Live below your means. If you’re fine living in a world where you have to delay gratification and live without things that you want, then go for it. But wouldn’t it be more exciting to find ways to grow your income and expand your means versus cutting your expenses?

Begin by knowing your goals

Before you even begin looking for money advice, you have to know what information you’re looking for. This depends on the dream and goal you Aspire to — perhaps it’s to achieve financial freedom. It also depends on your plan to get there.

Your plan is simply what you have to do to attain your dream. It primarily involves the Acquire and Apply elements of the Triple-A Triangle (if you aren’t familiar with this concept, read "How To Get What You Want". Your plan does not need to be complicated. For instance, if you decide you want to be a tennis player, that’s the dream. Your plan will be to buy a tennis racquet, tennis balls, tennis shoes, and a tennis outfit, and to take lessons three times a week. That’s the plan.

You’ll want to add one more piece to your plan: A way to keep score to tell you whether you’re winning or losing. In tennis, the barometer could be the number of times you consistently hit the ball over the net. In your financial plan, the indicator may be the number of consecutive days you learn something new to bring you closer to your dream.

Next, you have to know who you want to accept information from. You must choose what information you want to put into your brain and which teachers you want to learn from. More on how to find the right teachers and advisors shortly.

Finally, you have to know which advice and information are relevant and meaningful to you, and which are not. For example, a certain morning finance TV show may not be relevant to you if it doesn’t align with your goals or values — so decide what is beneficial to your life. Learn to discern what information means to you, and also what it doesn’t mean.

How to get the right money advice? Ask the important questions!

Now, instead of blindly following terrible personal financial advice, you should be questioning everything. Young children question everything around them. They ask “why” a lot. Learn to be like a toddler and question all financial advice that comes your way versus assuming it’s a fact. Ask the questions:

  • Does this make sense for me?

  • What are the pros and cons?

  • Will this get me to my financial goal?

You may not always know the right questions to ask, so just keep asking! Every question you ask is the right question if you’re smarter as a result and if it leads you to make better, more informed decisions about you and your money.

4 questions to help decipher good money advice from bad

So, when personal financial advice comes flying your way, how do you know whom to trust? Start with these five basic questions, which I delve into more deeply in my book, It’s Rising Time:

  1. Does their success translate to what you want to do? It’s easy to assume that if someone is successful, their advice must be worth more. Don’t fall into that trap. Just because they are successful in one aspect of their life does not mean they know anything about other areas. They could be offering advice based on their experiences, which may have been rare or unusual. They may have just gotten lucky. They may know a lot about X but nothing at all about Y (and Y is what you’re asking about, of course).

    So many financial advisors are poor, but they sit behind a desk and say they will help increase the investments and wealth of their clients. Many guidance counselors will tell you to go to school, take out a loan to pay for it and then get a job working for someone else. That’s all they know.

    There are a lot of people you’ll want to avoid when it comes to getting advice. You’ll want to ask a lot of questions before placing anyone on a pedestal, to ensure he or she is an expert in the specific area you’re asking about. Instead, look for people who are actually successful at what you want to do in life and have experience in that particular field.

  2. Do they practice what they preach? We’ve all seen doctors and nurses who smoke, heard tales of lawyers who break the law, and have probably noticed a personal trainer at the gym who wasn’t in the best shape — sure, these professionals are only human, however they are clearly not in alignment with their own brand.

    It’s important to determine if the expert you are seeking advice from (such as a financial advisor or real estate broker) is taking his or her own advice. In other words, are they investing in what they recommend you invest in? Are they practicing the habits and strategies they are advocating? Are they living their message daily? When it comes to brokers, does your real estate broker invest in real estate? Did your stockbroker purchase the same shares of stock she is recommending you to buy?

    If a person does not follow his or her own dvice, that’s a huge red flag you shouldn’t be following it either.

  3. Have you considered the source? Have you ever noticed the commercials on a financial television show? The ads typically feature mutual fund companies, stock brokerage firms, and investment banks. Hmmmm, it’s no wonder that the information from these shows favor mutual funds, stocks, bonds and related financial instruments. If their number-one advertiser is a mutual fund company and their advertising dollars are keeping the media outlet (TV program, newspaper, magazine) afloat, then would they ever speak out against mutual funds?

    Probably not.

    Sometimes it's just downright obvious: “Residential real estate is on the upswing!” stated a survey on the front page of a national newspaper at the end of 2010. The study said that the real estate market had reached its bottom and was now improving. In other words, now is the time to buy a house. The fine print wasn't even that fine. The National Association of Realtors conducted the study!

    Always consider the source — and who’s ultimately benefiting from that money advice — before you believe the information presented to you.

  4. Are they an adviser or a salesperson? Always follow the money of the person selling you the investment. Does the person advising you have an agenda (do they benefit financially either directly or indirectly)? Don’t be shy about asking how they are getting paid, to determine if they are on a commission or in need of meeting a quota to earn heir bonus.

    Do what you can to separate the real advice from the sales pitch.

  5. Do they want the transaction or a relationship? If you're talking with a broker or agent whom you've never met before and the conversations are only about this one deal, this one buy, then chances are she's only in it for the short-term commission from that one transaction. You may never hear from her again.

    If, on the other hand, she's talking about other future potential purchases and asking you lots of questions (instead of doing all the talking), then she is probably more interested in developing a long-term business relationship with you. That's who you want to work with, and most often, that's who will give you money advice that's good for you, not just them.

Once you ask all of these questions, you’ll know whether or not you are talking to a good or bad advisor. And if you still aren’t sure about the personal financial advice you’re receiving, trust your gut. Ask yourself if you really trust this person and what they are saying. Then, make your decision.

As your knowledge and experience grow, you’ll get better at deciphering facts from opinions — and you’ll be that much closer to the financial future you desire. By being careful about the advice you take, you’ll be much closer to reaching your financial dreams without wasting your time, money or effort.

Want money advice from a trusted professional?

It's no secret that Robert and I aren't big fans of financial advisors. We strongly believe in taking control of your own finances. That's why we are selective who we choose to work with. So you can be sure we've vetted the sincerity, professionalism and quality of our financial planning expert, John MacGregor.

Robert has been a long-time friend of John's. We can personally vouch for the hundreds of people he's helped clear their financial past and plan a prosperous future. That's why we're excited to announce the release of John's new book, "The Top 10 Reasons the Rich Go Broke: Powerful Stories that will Transform Your Financial Life...Forever". Grab a copy to learn lessons from those who had it all, lost it all and how you can avoid the same fate.

Original publish date: November 01, 2012

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