"I just invested in this amazing scheme and I've made R3 000 overnight!" Ever heard that before?
Many of us have had conversations where financial advice - solicited or unsolicited - is lovingly dished out by our nearest and dearest. Unfortunately, all too often the advice is opinion rather than well researched information - and at times it can lead to financial decision-making that can have negative long-term consequences.
Lee Hancox, CFP®, Head: Channel and Segment Marketing at Sanlam, says: "Issues can arise when we go along with advice from loved ones who aren't professionals. It's easy to do, as these are often people we trust and the guidance is usually well intentioned. But it's not always well-informed. That's why it's best to always run it by your financial planner before you decide to act on it, noting the old dictum that "if something sounds too good to be true, it probably is".
Here, Hancox outlines some of the most common "bad advice" we receive at different ages and life stages.
In your 20s:
The "worst" advice:
- "You have time to save when you're older. Have fun with your money, while you can!"
- "You're young and healthy, you don't need insurance or medical aid."
Why this isn't the best idea:
It can start fostering bad money habits - like spending more than you earn - and doesn't encourage discipline. It doesn't get you into the swing of budgeting or let you start capitalising on the power of compound interest.
The younger you start to save for big, important things like your retirement, the better. Even if you're just saving small amounts each month, compound interest and time work wonders. In fact, you will never be able to catch up on lost savings without investing significantly more than you would have, had you started saving earlier.
Another point to consider is that in your 20s, your greatest asset is your ability to earn an income: you have 40 or more "earning" years ahead of you. Hence the need for income protection. It's fine to have some fun, but you can use your 20s to set a solid financial foundation for the rest of your life.
In your 30s:
The "worst" advice:
- "Take your pension and plan a trip! You're moving to a better job, you're earning more and will make it up in no time."
- "Why would you need a will? You're only 32!"
- "Stay away from risk when it comes to your investments! Slow and steady is best."
Why these aren't the best ideas:
The impact of not preserving (withdrawing your pension when you change jobs) is huge. You will have to start from scratch. You'll have to make compromises to make the amount up - and even then, you might never do so.
Your 30s are often also the time when you start accruing responsibilities and dependents. You might buy a car, a house, have kids, marry… As your life changes, you need to take "adulting" to the next level and draft a will and get your estate planning in order.
And because you're still young, you'll be doing your investment potential an injustice if you're too conservatively invested. If you're 30 and planning to retire at 65, you have a 35-year investment horizon ahead of you. Which means you can usually recover from market volatility. Of course, it's best to iron out a proper risk profile with a financial planner based on your individual circumstances.
In your 40s:
The "worst" advice:
- "I just bought the new Jag. It's beautiful. You should get one too."
- "Have you heard about Bitcoin? I invested Rxx and made twice that overnight! Get involved…"
Why it isn't the best idea:
"Lifestyle creep" is common in your 40s. You're normally reaching your peak earning potential and there’s a lot of social pressure to "keep up with the Jones's". Don't be tempted. Avoid short-term debt whenever possible and try to stick to the good old mantra of "spending less than you earn". At the same time, make provision for the important things, like your kids' education and an emergency fund for any unforeseen circumstances.
Also avoid overnight, "get rich quick" schemes. Of course, some investment vehicles are completely legitimate, but others probably sound too good to be true - because they are exactly that. Some - like the world of cryptocurrencies - also require careful research and understanding before investing. Again, a financial planner is the best person to advise.
In your 50s:
The "worst" advice:
- "You've been putting away money, right? Then you're definitely on track."
- "I have this amazing family business investment opportunity for you…"
Why it isn't the best idea:
You probably won’t know your retirement savings are on track until you check in with your planner and adjust your plan if necessary. Start thinking very carefully about what happens after you retire. Is there a risk you might outlive your savings? Will you carry on working through a part-time side hustle? According to the Sanlam Benchmark Survey, just 8% of South Africans can substitute 75% of their final income post-retirement. You want to be one of these people.
As your endowment matures, you might be tempted to invest in your child's - or another family member's - big business idea, and it might be a good plan to do so. But it also might not be. Think it through carefully and discuss with your financial planner before making any decisions.
In your 60s:
The "worst" advice:
- "This is what we've been saving for! Let's go on a cruise."
- "You should get into the property game…"
Why it isn't the best idea:
Often, after retiring, people get tempted to withdraw big amounts - like 16% monthly - of their retirement income for holidays and other "discretionary" (non-essential) things. Avoid this by chatting to your financial planner and understanding "longevity risk".
Investing in an asset like property can be a great way to secure an ongoing income. But the property market can also be quite risky. Do proper research before you go down this road.
* For more information, view the Financial Planning film here or visit the Conversations with Yourself page.
Lee Hancox CFP® Head: Channel and Segment marketing at Sanlam, shares tips on how to spot "bad" financial advice from family and friends:
- If it looks too good to be true, it probably is. If the returns are vastly better than what anyone else in the market is getting, there's often something "fishy".
- If you've never heard it mentioned before, you'll need to investigate.
- If it’s a "friend of a friend (of a friend)" who saw great returns, be wary.
- If the scheme offers something that's not guaranteed or seems risky, be wary.
- If your friend or family member is not in the financial industry, then run any advice they give you past your financial planner before you act on it!