With a wealth of bad financial advice out there, it pays to know how to separate the rocks from the diamonds. Four independent financial advisors discuss the worst money advice they've heard and share what you should do instead.
When it comes to your finances, knowing which advice to follow and which to ignore can mean the difference between building serious wealth and demolishing your entire life's savings. While it's not always that dramatic, there's no denying the damage that taking bad money advice can do to your long-term financial planning. So, here's what to do instead:
Shaun de Klerk, a financial advisor at Fairbairn Consult, has picked up a constant theme around bad financial advice. "One of the popular marketing strategies of some of the country's leading financial services providers is centred around 'investing smart' for your wedding, kitchen renovations or other costly events or projects through a tax-free savings account," says de Klerk.
"The reality is that a tax-free savings plan has specific benefits incentivising long-term savings, so it should never be used for an immediate, single-payment event. That just defeats the purpose. The benefit comes from attaining growth over a long period of time."
A tax-free savings plan should therefore form part of a longer-term savings plan. "The fact that growth in this account is not taxed, essentially makes it the ideal post-retirement income supplement in conjunction with a retirement annuity, which also brings significant tax benefits. The growth on a tax-free savings account occurs over an extended period, enabling you to live off the growth without paying tax."
Candice Kagan, a financial planner at Brofin, says that many people are confused about the best way to handle their pension savings when they move to a new company. "Clients are often advised to transfer their pension or provident monies to their next company's pension scheme to avoid withdrawal tax when they change places of employment," she says. "Yet this will effectively lock up their money until retirement age."
She suggests investing the monies in a preservation fund instead. "The transfer is done tax-free, plus preservation funds allow a once-off withdrawal before retirement age (subject to tax). This creates more flexibility in the client's portfolio and allows the client to control where these monies are invested."
Miguel Araujo, an independent financial advisor and wealth manager with The Jurgens Group, warns of the dangers of switching investments based purely on the past performance of a specific fund. This should not be seen as an indication of future returns, especially not in the short term.
"We have found that many investors tend to fall into this trap," he says. "Chasing the performance of last year's best fund ends very badly for them and hampers their efforts to achieve their goals."
"Investments move in cycles," he adds, "and the winners of today might not be the winners of tomorrow. It is more important to look at the consistency of a fund over the longer term."
Independent financial advisor Michele Benatar says that people are sometime encouraged to make investments before paying off debt, which is ill-advised. This, however, doesn't apply to bonds or retirement annuities, she says, because clients must put money away towards those kinds of investments.
"You do have to spread your risk, but very often the cost of debt is a lot higher than the return you may get on an investment," she warns. "While it's important to invest, the client should be encouraged to kill off debts that have the highest interest – such as high-interest loans – before thinking of any investing."
Fairbairn Consult's De Klerk agrees. "Understanding the impact of interest payable versus interest earned could possibly result in the most beneficial financial mindset shift imaginable," he says.
This article is for informational purposes only and should not be construed as financial, legal or medical advice.