There is a lot of money advice out there, and it feels like there’s even more of it targeted to women these days. That is a great, great thing...usually. Some of it can be well-meaning, but sadly misguided. Here’s what’s itching at me:
1) There’s a lot of discussion about emergency funds, that three-to-six months of take-home pay that should be stashed away in the event of an…um…emergency. No problem there.
But I’ve recently heard—more than once—that we women should establish an emergency fund even if we have credit card debt outstanding. No, no, no, no, no. Sure, there are some kinds of low-interest-rate debt that may make sense to leave outstanding (think mortgages or some kinds of student loans), but not credit card debt. Never ever.
Think about the cost of this advice. Say you have $5,000 of credit card debt at an 18% interest rate. Ugh. Say you happen upon $5,000 of money. If you take some of the advice out there, and split the use of that $5,000 (half to establish an emergency fund, half to pay down credit card debt), you still have $2,500 of credit card debt and $2,500 of money sitting in cash.
The $2,500 of credit card debt at an 18% interest rate costs you $450 a year. The emergency fund earns almost nothing in interest. So you’re out $450.
Let’s rewind and do this differently. Again, you start with $5,000 in credit card debt and you earn, find, or stumble upon $5,000. This time you pay down that whole $5,000 in credit card debt; because of that, you have no emergency fund. Cost to you in interest payments? Nothing, nada goose egg.
Hold on, you say. What if I have an emergency? I don’t have an emergency fund.
Well, if that happens, then and only then take on some credit card debt and use it for that emergency, and then pay it right back down when the dust settles.
2) You don’t need to invest your money now. You should invest later, when you’re earning a higher salary.
Again, no no no no. This feels right intuitively, but it ignores the power of compounding, explained here. Here’s an example of compounding: say you invest $100 today and earn 10% on it in the coming year; that’s $10, which means you then have $110. If you earn that same 10% return the next year, you earn it on the $110. So you earn $11, not $10. Do it again, and the same 10% return earns you $12. And so on and so on. And over time, it adds up to a lot. And well outstrips any benefit of “waiting to invest.”
3) Buy stocks in companies that you know.
This is the advice that the legendary investor, Peter Lynch, gave to individuals and has been popular since. The thinking was: Shopping at your favorite store, and notice that the parking lot is full? All your friends raving over a new product? Well, those are key insights, and so those may be companies whose stock you may want to be invested in.
Ok…but this is only one piece of information you need to determine whether an investment is attractive. For example, the store parking lot may be packed, but other investors may have long ago figured that out and bid up the price of the stock. Or it could be that a competitor has had a technology breakthrough that will render the product you love obsolete.
And, while we’re at it, there are many, many, many professional investors doing enormous amounts of research on that same company; and for them it’s a full-time job. So betting that you know more about an individual stock than they do — and that you see the investing opportunity before they do — is, in my opinion, not a great bet.
Further, if the implication of this advice is that one invests in a few stocks here and a few stocks there, that’s a poor investing strategy. Instead, a strategy that has yielded higher returns, with lower risk, over time has been to invest in a broad-based investment portfolio, diversified across a range of types of investments (stocks vs bonds, for example), industries and geographies.
4) The stock market is expensive, so don’t invest now. (Or: The stock market is cheap, so now is the time to invest.)
No, no, no, no.
Markets that may appear “cheap” can get cheaper. And markets that appear expensive may have been cheap in hindsight (perhaps because the economy was strong, or company performance was strong, or interest rates declined, or any of dozens of other reasons). As a result, very, very few people can “time” the market, and consistently figure out the most profitable time to buy or sell.
That’s why picking the “right time” to invest typically doesn’t work. Instead, investing over time, in a regular and recurring fashion, is what works best. It means that you end up investing sometimes when the market is “on sale,” sometimes when it is expensive and often when it is in between; of course, past performance is not a guarantee of future return, but historically the stock market has returned 9.5% on average annually since 1928.
5) Don’t ask for the raise. Karma and hard work will get you the raise you deserve.
Yes, the CEO of a major company advised this. But isn’t this part of the reason that women continue to under-earn men? I’m not sure about you, but I’ve had very few people throw money at me without my asking — even when I was working hard and doing a great job.
What happens if you do ask for that raise?
Well, Ellevate Network recently asked professional women that question. The answer: 75% of women who asked for a raise last year got it.
Now that’s good karma.
These results were generated using the credit card calculator at bankrate.com. They assume a $5,000 credit card balance with an 18% interest rate and no additional credit card charges.
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