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How Experts Can Mislead You On Money Matters: Seven Examples

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When it comes to making, saving, and managing your money, there are endless experts out there to help you out. And sometimes that expert advice is exactly what you need.

On the other hand, there are times when experts mislead you.

For example, when I was young, “experts” advised me to buy the biggest house I could afford. I bought a small mobile home on a lot instead.

Because it was well-located I was able to rent out bedrooms and pay off the mortgage in less than five years. Then, for years afterward, I worked only a couple days per week thanks to the income from my low-cost home.

The experts told me mobile homes didn’t appreciate much. I paid $19,500 for mine, and sold it for $45,000. Thanks to this fast equity-building I was able to own larger homes later in life, and mostly without debt.

The “experts” who advised me were mostly real estate agents, who would have liked the larger commissions that come with larger home purchases, which brings us to some of the potential problems with expert advice you might receive:

  • It can be biased because the expert benefits financially from the advice given.
  • An expert may be biased by her own past experiences.
  • Rules or guidelines may not be relevant to your financial situation.
  • Financial advice might ignore real world complications.
  • Expert financial advice can be just plain wrong.

Keeping in mind the possible causes of misleading advice, let’s look at some specific examples of when you might want to reject what the experts say.

1. Experts Say: Change Your Oil Every 3,000 Miles

The companies that change your car’s oil are a perfect example of how advice can be biased by the financial advantage the expert receives.

The “expert” advice they offer is to change your oil every 3,000 miles. Do you really need to do it that often?

Cars.com says, “The answer is conclusive: No, you don’t, according to every auto manufacturer we’ve talked to.”

The “three-month or 3,000 mile” rule was invented to sell more oil changes. Most manufacturers recommend changing oil after 7,500 miles or more, with some suggesting an interval of every 10,000 miles.

Cars.com points out that manufacturers would not recommend longer oil-change intervals if there was a danger to the engine, since their cars are under increasingly-long warranty periods, during which they pay for repairs.

Reject the advice of the oil change industry. Follow the guidelines in your owner’s manual. You can save as much as $100 or more annually.

2. Experts Say: Pay Off Your Highest-Interest Debt First

Okay, I’m guilty of offering this “expert” advice. In my recent post on 15 Ways To Quickly Pay Off Credit Card Debt, number 8 suggests always paying off the balance with the highest interest rate first.

This standard advice makes sense theoretically, and it’s how I would do it (although I would never have the debt in the first place). But the real world is complicated by psychology.

In the case of paying off debts, it feels good to have a “victory” as soon as possible, and so many people prefer to pay off a small balance first, even if it isn’t the highest interest rate. And guess what? It works!

A study at the Kellogg School of Management at Northwestern University found that “consumers who pursued the “small victories” strategy were more likely to eliminate their entire debt balance.”

Apparently staying motivated is more important than pursuing the most rational and efficient strategy.

3. Experts Say: Your Home Is An Investment (Or It Isn’t)

There is some disagreement on this one, at least in recent years. It used to be that experts (at least real estate agents and family members) routinely referred to a home as an investment, as though you were shopping for a big return rather than a place to live.

However, financial writer Robert Kiyosaki points out that your house is really a liability rather than a financial asset or investment, and many experts agree with him. After all, your home doesn’t produce income like an investment. It just produces expenses.

I consider both positions to be wrong, at least in their rigidness. They ignore your personal financial situation and other complications.

A home is often a terrible “investment;” especially an expensive house. It produces no income, and whatever is theoretically gained by a rise in value probably never provides a positive return after accounting for the extra expenses paid over the years (versus a smaller home).

On the other hand, Kiyosaki’s position is still wrong for several reasons. First, my own example (above) shows that a home you live in can provide income, and therefore can be a good investment. I took in far more rent than I paid in expenses every year.

Second, you can buy a fixer upper to live in, and sell it later (after repairs) for a profit. My wife and I have done this several times.

Finally, there are not only investments that make money, but also investments meant to save money. If you invest in the right house at the right price you can save money versus renting.

That brings us to another home-related matter where the experts may lead you astray…

4. Experts Say: Buy A Better Home Because It Appreciates In Value More

I’ve been told by more than one “expert” (real estate agents again) that a larger, higher-priced home makes sense because it will appreciate more than a smaller, lower-cost home.

After all, if real estate values rise 20% over five years, a $100,000 home gains just $20,000 in value while a $200,000 house will go up in value by $40,000.

That might sound reasonable, but it ignores all the extra expenses paid over those years, like paying more for interest, insurance, property taxes, repairs, heating, cooling, and so on. It also ignores the fact that the higher-priced home will drop in value more if there is a downturn in the real estate market.

The whole real estate industry tends to encourage people to buy bigger and bigger homes, which, not coincidentally, generates bigger commissions and profits.

I just used a calculator that determines “How Much House Can I Afford?” For kicks I entered minimum wage for my own and my wife’s income, along with a 20% down payment. According to this tool, two minimum wage jobs would qualify us to buy a house for $230,000.

That’s insane. Even when we were making six figures I wouldn’t have considered spending that much for a home.

You might also want to reject the expert advice to buy in a better neighborhood. That’s where homes will appreciate more in theory, but it’s also where they cost more, which, again, probably cancels out any advantage.

It’s also suggested that the value won’t fall as much in those nice neighborhoods if there’s another real estate crash.But if you want that kind of protection, look in less-attractive (but safe) neighborhoods and buy the cheapest house you can find.

My wife and I bought a small house for $65,000 in Colorado at the top of the last boom (summer 2006), and after years of falling values we sold it for $72,000 (spring 2009).

Usually lower-priced homes lose the least (or even gain value while others lose), because people have to live somewhere.

If you want big, go for it. If you want safety, buy as cheap as you can comfortably live in. If you want income, buy a duplex (we did that for a while too). Buying a home is a very personal matter, so be skeptical of any expert who offers any universal rule.

5. Experts Say: Have A Liquid Six-Month Emergency Fund

Many financial experts, including Dave Ramsey, say you should have an emergency fund equal to three to six month’s income. The common advice is also to keep that money liquid, like in a money market or other savings account.

Financial celebrity Suze Orman insists you should have eight to twelve month’s income saved. This emergency fund is primarily meant to cover bills following an unexpected loss of income.

First of all, the experts are wrong to focus on a multiple of your income. If you lose your job your goal isn’t to maintain your lifestyle exactly as it is, but to survive without going broke.

So saving enough based on your expenses is more relevant, and your core expenses are what really matters.

After all, you can quit going to the movies or taking vacations anytime, but you still have to eat, keep the lights on, and make your rent or mortgage payments.

Second, how much you should save is not a set formula. It depends on your situation and personal factors.

For example, if you’re young and working in a high-demand industry, you can probably replace a lost job (and the income from it) within a couple months at most. Having enough saved to cover three month’s expenses is probably enough.

On the other hand, if you’re in your fifties, like myself, and you have few job skills, it might make sense to have enough saved for a year or more of expenses.

Finally, the idea that you must keep this money in liquid forms is out-of-date. Keeping a big stash of money in a local savings account making less than 1% annually is just a shame. Put t into something better (at least a low-penalty CD).

If you have credit cards (and you never max them out), use those for emergencies, including for paying bills after the loss of a job.

Then, after you take the time to move your emergency money out of investments, you can pay off the credit cards before interest charges accrue.

Otherwise you can borrow from family until you can liquify your emergency savings.

6. Experts Say: Avoid Credit Cards

Financial guru Dave Ramsey says there is “no reason is good enough to keep plastic around.” His bias against credit cards is so strong that he even claims, “There’s no such thing as credit card rewards.”

I make hundreds (sometimes thousands) of dollars annually from credit card signup bonuses and cash back. Then there are the opportunities for credit card arbitrage and the many other ways to make money with credit cards. Those are pretty good rewards.

And I don’t pay interest… ever. I’m not alone. One report shows that almost a third of people with credit cards pay them in full every month, and so avoid interest charges.

Yes, it’s true that some people, maybe even most people, will spend more when using credit cards, and will get into trouble with the debt incurred. But this doesn’t apply to everyone.

7. Experts Say: Invest In The Stock Market

Many experts say you need to invest in the stock market to be ready for retirement. Many of those experts collect comissons when their advice is followed.

But the bias toward stocks goes beyond those who make money when you invest. For example, every time the market drops it seems financial reporters feel the need to quote experts on why you should jump right back in and buy stocks…

It might be a great idea to invest in stocks. Or it might keep you awake at night, wondering when (not if) the next big drop in the market will come.

I know a millionaire who never invested in stocks. He bought mobile homes on land, one after another, and rented them out.  Now he’s retired in a big house on a hill, with a manager handling all of his rentals.

But I’m not going to say everyone should invest in real estate. That’s just one example of the many other possibilities besides the usual 401k or IRA invested in the stock market.

Something else might work for you, which brings us to the most important point here…

You Are The Expert On Your Financial Needs

You have to determine what works best for you. That’s what the experts get most wrong. There is no one rule for everyone in any area of personal finance.

You might like the idea of simply following the advice of experts.

But, as you can see from the “home as an investment” argument and others, even the experts disagree much of the time, so, at the very least, you have to choose which ones to believe.

In other words, you’re going to make the decisions one way or another, so give them some thought and don’t let the experts mislead you.

If you have an example of where experts have steered you wrong, tell us your stories below … and keep on frugaling!

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One Response

  1. Anne Aug 13, 2018

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