Personal Finance Advice To Ignore In 2021
I am sure that many of you are as eager as I am to leave 2020 behind. As we move into 2021, here are three “money takes” that I think we should also leave behind.
- You shouldn’t spend money on coffee.
- Focus on passive income.
- Picking stocks is okay if you put in the work.
In this article, I review why it’s best we move these often recycled pieces of advice and move them to the trash (where they belong,) and I offer up some more rational alternatives.
Enjoy your latte
Confession; when I was a newbie personal finance writer, I was one of the many people who wrote about what a giant waste of money going to a coffee shop is.
I would plug some numbers about the cost of coffee into a compound interest calculator and write about all the money people are losing by buying coffee instead of investing that money.
There are two reasons I wrote these articles.
- I was a crappy writer when I first started out.
I was basically repackaging what I read in large, mainstream media platforms and passing it off as some brilliant revelation, which it was not. When I stopped following content mills and started listening to thoughtful, smart voices in the personal finance space, my writing evolved, and I moved past this type of writing.
2. At that time, I was suffering from financial anxiety.
I used to get stressed out every time I had to part with a single dollar because I had a deep-seated fear that I would not be able to make enough money one day.
I looked at money the way Gollum looked at the ring, trying desperately to hold onto “the precious.”
The cause of this financial anxiety stemmed from a very toxic family/financial relationship that sprung up in the aftermath of the financial crisis in 2008–2009 (a story for another day.)
The further I got away from that toxic situation and the better my financial position became, the more I began to loosen my vice-grip on my wallet. I am not saying I spend frivolously, but I can go to the coffee shop with my wife on the weekend without feeling stressed out.
Here is a simple way my wife and I can indulge ourselves with the occasional overpriced latte without feeling stressed or guilty; we include it in our budget.
We set aside a certain amount of money every month into what we call an “us fund.” The us fund is designed for my wife and I to enjoy some luxuries like a $5 latte without it worrying about what it will do to our budget.
So, go ahead and enjoy your fancy coffee; just make sure you include it in your budget.
The myth of “passive” income
In the past few years, one of the biggest buzzwords that has taken hold in personal finance and digital marketing is “passive income.’
The internet is jam-packed with internet marketers that want to sell you on the idea that if you simply listen to them (and buy their “program”), you too can kick back and start generating income with minimal effort.
Here’s the thing; the idea of passive income is a load of crap.
When someone talks about passive income, what they are usually talking about is actually “Scalable income.”
I have a straightforward definition of scalable income.
You are not guaranteed to make a cent, but their is no limit on how much money you can make
Salable income, and what most people call passive income, is simply pursuing a business. Selling products online, affiliate marketing, or starting a podcast are all business pursuits.
They can provide you with “scalable” income, but they are the furthest thing from passive. Yes, a Podcast episode can continue generating revenue long after it has been released but lose sight of two things.
- All of the work it took to create the Podcast episode.
- All of the ongoing work you need to do in order to maintain and scale a successful podcast.
You can replace the word “podcast” with any other form of what most people refer to as passive income, and the two points are just as true.
You’re not going to make a lot of money doing anything without tons of hard work and luck. If someone tries to tell you any different, run away because they are probably trying to sell you something.
Creating scalable income through a business or side hustle that you enjoy can be a great thing but go in with your eyes open, knowing it will take a lot of work.
Picking stocks is a losing game
One of the most bizarre financial stories of 2020 was the rise of the Robinhood day traders.
Don’t get me wrong; I think it is a great thing that more people are interested in investing in the stock market. But, buying and selling individual stocks is not investing; it’s speculating.
The internet is full of success stories of how people got rich investing in the new hot stock of the day. This has led many people to believe that if they just “try hard enough,” they can get rich trading stocks too.
The reality is that there is a mountain of research and evidence that point out that it is next to impossible to outperform the average return of the stock market in the long run.
It can be done in the short run, but the most likely cause of short-term success is not skill but luck.
If you think stock trading is easy, fun, or harmless, I encourage you to read this 2018 paper by Hendrik Bessembinder from Arizona State University entitled “Do Stocks Outperform Treasury Bills?”. Here is a summary of the paper.
- Bessembinder studied the lifetime performance of individual stocks in the U.S, dating back to 1926.
- 60% of all stocks he studied had a lifetime return less than a 30-day U.S Treasury Bill (T-Bills).
- That means that you would have had better returns if you had invested in T-Bills (which are risk-free) than if you had invested in the majority of U.S stocks since 1926.
- 4% of U.S stocks accounted for 100% of the gains in the U.S stock market since 1926.
Bessembinder concluded that “The results help to explain why poorly-diversified active strategies most often underperform market averages.”
Let me put these research results in the clearest terms possible; If you want to invest in the stock market, don’t buy individual stocks because you will probably lose money.
If you’re going to invest in the stock market, have the humility to realize you’re not Warren Buffet and you can’t beat the market. So, don’t even try.
Instead, invest in a handful of low-cost index funds and call it a day. Doing so will save you time and money.
What other common pieces of financial advice do you think we should leave behind in 2021? Let me know in the comments.
If you are new to investing or have never invested your money before, I invite you to take my free e-mail course called “investing 101.”
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions