The Bad Financial Advice Your Parents Gave You That's Actually Costing You Money
Most people can still hear a parent's voice when making a financial decision. Maybe it's reminding you to save, avoid debt or spend less than you earn. Many of those lessons remain timeless, but some of their advice no longer fits today's economy.
"It's important to recognize that our parents made financial decisions based on the information and circumstances available to them at the time,” said Beth Stenz, a certified financial planner (CFP) at Edward Jones. “They were often influenced by the generations before them, many of whom lived through the Great Depression, wars or periods of significant economic uncertainty."
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Pay Off Your Mortgage as Fast as Possible
For previous generations, paying off a home early was often a wise financial move. But today's homeowners may be better off balancing mortgage payments with investing.
“Now we have a generation sitting on sub-3% mortgages, convinced they're being responsible by paying them down early,” said Steven Rogé, a CFP, chief investment officer and CEO of R.W. Rogé & Company, Inc. They could, instead, build net worth faster in a balanced portfolio suited to their risk tolerance.
Stenz has seen the negative impact of this in clients "who were aggressively paying down a low-interest mortgage while underfunding their investment accounts.”
She helped them shift their strategies to balance debt management with investing.
Chasing Income Instead of Growth
Many parents pass on the belief that income-producing investments are ideal, but not necessarily.
Rogé said he often returns to a piece of financial advice a client shared from parents who had amassed “a small fortune over their lifetimes.” The parents “assumed they'd done well because they always put their money into Treasury bonds, like it was a little secret no one else knew." However, their real source of wealth was actually “their ferocious savings rate."
He also discouraged seeing real estate investments as any better than investing in the stock market. These kinds of beliefs lead to “income illusion,” he said, explaining, "by focusing on total return, the combination of capital appreciation and income, dramatically improves long-term results compared with chasing cash yield."
Lack of Financial Discipline
Mark Clark, a financial advisor and founder at Prestige Advisors, suggested that the most common financial trait people inherit from their parents isn't a piece of advice at all.
“It's a lack of financial discipline," he said. "So few of us were ever formally taught how money works."
Habits get demonstrated rather than taught and we carry them forward.
And Now the Good: Timeless Money Lessons
Still, you don’t have to discard all your parents’ advice. Clark finds that young people following genuinely good advice from their parents are usually following “the timeless stuff,” such as “live within your means, be accountable for your expenses, pay yourself first and save rather than adding new debt or buying something you can't afford," he said.
“Buy high-quality investments and hold them for the long term," Stenz said. "This doesn't mean set and forget, but time in the market is often more important than timing the market."
And How To Grow: Overcome the Communication Gap
Previous generations often treated money as a private topic. Today’s families can build stronger financial futures by having more open conversations about budgeting, investing, debt and long-term planning, according to Stenz.
She said that younger generations need to learn “basic financial skills such as budgeting, saving, investing and responsible borrowing.”
The best financial advice is “personal, thoughtful and tailored to your unique situation,” she said.
Today's Economy Requires New Skills
According to Dr. Erika Rasure, chief financial wellness advisor at Beyond Finance, recent research suggests Americans still value some of what their parents taught them.
A recent Beyond Finance survey of 2,001 U.S. adults found that mothers remain Americans' biggest financial influence, with 31% saying their mom most shaped how they manage money today, compared with 17% who named their father.
For many Americans, “mom was the first financial coach,” Rasure said. The companion Father's Day survey found that fathers were most associated with teaching the value of hard work, financial independence, investing and planning for the future.
Still, many survey participants said they wished they'd learned more about investing, credit scores, debt management and retirement planning growing up, Dr. Rasure said.
Perhaps one of the most encouraging findings, however, is that 33% of respondents want to teach the next generation to talk openly about money.
“That signals real progress,” she said.
“The most respectful thing you can do is improve on what your parents did,” Clark said. Living below your means, saving consistently and working hard will likely never go out of style.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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