The Worst Savings Advice Experts Have Ever Heard
Even if you’ve just started to save for a big purchase like a home or for retirement, you’ve probably already run into plenty of bad advice. Everyone, especially your family, seems to have an opinion on where your hard-earned money should go. But not everyone knows what they’re talking about. (Sorry, Nana!) Luckily, five money experts weigh in on the worst savings advice they’ve ever heard. Better still, they’ll tell you how to fix it:
1. Bad advice: “Don’t bother saving if you’re in debt”
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If you have multiple bills to pay every month, saving money can sound impossible. But don’t let anyone tell you you shouldn’t.
“If you psych yourself out before you even get started, you’re setting yourself up to fail,” says Alison Norris, a Certified Financial Planner with SoFi. Instead of letting the daunting task of saving scare you, Norris suggests setting a small, yet concrete, savings goal with a set end date.
“By starting with a specific, achievable financial task, you experience a win, feel in control of your money, and make progress toward achieving your overall goals,” she says.
2. Bad advice: “Just save whatever’s left over from your paycheck”
Todd Christensen, the education manager for Money Fit, a nonprofit credit counseling organization, thinks relying on financial leftovers always makes for savings failure.
“There is never anything left over at the end of the month,” he says. “It’s human nature to spend whatever we leave available in our accounts.”
How can you fix this savings mistake? Christensen suggests setting up a monthly direct deposit transfer that takes a set amount of money from your paycheck and puts it into a savings account that isn’t tied to your checking account. That way, if you need money, you won’t be tempted to dip into your savings.
3. Bad advice: “Put all of your savings into a retirement account”
Even if you have found some of this mythical “extra money,” don’t be tempted to stow it all in one place—like in a retirement fund, says Leslie H. Tayne, a financial debt resolution attorney based in New York. But if you end up with a financial emergency and need these savings in the near future, you won’t be able to take it out of most retirement accounts without a hefty penalty fee.
Instead, Tayne recommends having some emergency funds in a savings account that is liquid and available to you quickly.
“[This] is a financially-savvy move that will allow you freedom and flexibility should you need cash fast,” she says.
But don’t be too eager with your cash savings account, either. While you want some liquid assets on-hand in case of an emergency, having a small fortune sitting in a low-interest savings account and nothing invested isn’t doing much to help you build wealth, says R.J. Weiss, a CFP and founder of the personal finance site The Ways to Wealth. Instead, create a savings strategy with more balance: Keep some of your assets liquid and invest others to best stay prepared for the present and the future.
4. Bad advice: “Put money into savings even if you rack up credit card debt”
It’s usually smart to start saving even if you’re in debt—but not all debt is the same. If you have extensive credit card debt, you may be better off paying down your cards than funneling that cash into savings. The annual percentage rates (APR) on credit cards can run anywhere from 14 to 25 percent—much more than what your average savings account’s yield. This means you’ll save more money in the long run paying down large balances on your credit cards than you would if you put it in a savings account.
But that doesn’t mean you shouldn’t save any cash at all—that’s bad advice, too! Instead, focus on saving up enough to cover expenses like your rent, car, or student loan payments for one to two months in case of an emergency, says Dennis Shirshikov, a financial analyst for FitSmallBusiness.com.
“That rainy day savings will come in handy in case you lose your job or something unexpected comes up,” he says. Additionally, it will prevent you from getting into even more credit card debt if those rainy days come sooner than planned.
Looking for other smart ways to save? Here, six of the best free apps that will help you save money.