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Why This Popular Financial Advice is Terrible for the Average Person

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If you’ve ever left a comment on our blog, you know that we try to respond to each and every one of them. Sometimes a few slip through the cracks, but we really try to answer them all. In our minds, it doesn’t just add to the conversation. If you’ve taken the time to leave a comment, we want you to know that your voice has been heard.

And yes, we are actually the people who read them.

It’s important to us that you get a response from either Holly or myself. It’s also a chance for us to learn more about what you guys want to read and talk about.

But, sometimes we find a few gems that we totally disagree with… and I just can’t let this one go… ha!

Pulling My Hair Out

While reading through the comments section a few weeks back, I stumbled upon some advice we’ve all heard before. We’ve all had this line fed to us at some point, usually by some type of sales person. In my opinion, it’s always a big red flag that I tend to ignore.

Here’s the gist of it: This person believes that paying off debt is the wrong financial move. Instead, they recommend keeping the debt and using any extra money to “invest the rest.”

Ugh.

Honestly, this is the stuff that makes me want to pull my hair out. It’s not that the advice is wrong. Mathematically, it could actually be the right play. But this line of thinking doesn’t take human emotion and habit into account at all. Like, not one iota.

The Problem With Using “Other People’s Money”

It’s hard to deny that the math is typically right. Even just a 3% win could mean a lot of money, right?

“So, why are you getting all worked up about this Greg? That extra 3% isn’t chump change.”

No. No, it’s not.

But here’s the problem: It rarely works out like this.

Using other people’s money doesn’t take into account the fact that we are human. It doesn’t take into account an individual’s budget or cash flow situation. It doesn’t take into account the debt and monthly payments that you already owe.

Instead, this line of thinking simplifies your financial situation into terms that make you more likely to buy. It’s a sales technique commonly shrouded as good financial advice.

7 Reasons to Avoid Using Other People’s Money

Even if the math appears to work out in your favor, human behaviors generally don’t. Here’s why.

#1) Most people don’t actually invest the extra money.

OK, answer honestly now. Have you ever financed a purchase and turned around and invested the extra money? Have you bought a car with a $500 a month payment only to invest that “extra” $500 a month instead? Have you financed an iPhone and immediately stuck that $700 a month in a Roth IRA?

No. Of course you haven’t. Neither have I. Nobody does.

The whole line is bogus.

In theory, using other people’s money and investing the rest is a decent idea. But, in order for it to work, you actually need to take the extra money and invest it.

So, if you claim that you are financing a car or are refusing to pay off your mortgage because you’ll have more money to invest, then I challenge you to actually do it! By all means, stick to your guns and shove it in an investment. If not, you’re just making an excuse to borrow more money to buy things you don’t need and can’t afford.

#2) It desensitizes you to what things actually cost.

If you’ve ever financed a major purchase (and who hasn’t?), you’ve probably noticed that sales people rarely mention the full price of the product. Whether it’s furniture, a car, or even a house, those trying to sell you something want you to focus on one financial number and one alone – the monthly payment.

When considering major purchases, the actual numbers can get overwhelming. Talking in terms of tens of thousands of dollars, or even hundreds of thousands, is enough to make anybody get cold feet. But, if you break it down into bite sized chunks (monthly payments), it seems more manageable.

Here’s how the conversation goes: “Sure, that extra $10,000 that the seller wants is a lot of money (and it means more money in a sales person’s pocket), but it only increases your monthly mortgage payment by $50 a month. You can handle that, right?!?”

Wrong.

By using other people’s money and financing everything we buy, we become desensitized to what things actual cost us. We no longer feel the pain of our purchases. That’s great for sales people, not so great for us. Which leads us to even more problems, such as…

3) You end up buying more than you can afford and saving less.

Hopefully, you know how much all of your monthly payments cost. (If not, you need to get on a budget, STAT! Here’s how to start.) But, do you know how much you’re paying in total for each item, including interest? Probably not.

When we’re desensitized to the true cost, we end up buying more than we can afford or otherwise would have spent. Instead of being happy with the $2,000 couch or the $10,000 car, we end up spending waaaay more than we would have been comfortable spending in cash. In effect, we end up with less to save rather than more.

4) We end up with cash flow problems.

So, you decide to finance a purchase and save the rest. OK. That might be fine on it’s own. But it’s rare even when this is the only thing you finance.

Most proponents of the “use other people’s money” theory argue that they’d rather have the cash to invest. Except, we all know that isn’t what happens. Instead of financing only what we need, most people end up financing everything. We take on a whole financing mindset.

So, instead of using the money we “save” to invest, we use the breathing room to finance the next product. We pick up monthly payment after monthly payment, and then we wonder why can never get ahead. Worse, we end up using more debt just to stay afloat.

The problem isn’t that we need to do a better job of utilizing debt in order to maximize our returns. For the average person, the problem is that we overextend ourselves with so much debt that we don’t have anything left to invest.

Stop trying to “use other people’s money,” and start using your own money more efficiently instead!

5) You’re effectively borrowing money to invest it.

Let me ask you this: Would you feel comfortable taking out a loan to invest in the stock market? No. Of course you wouldn’t. The average person would never do that. But, essentially, that is what “using other people’s money” encourages you to do.

6) It puts you at risk.

Debt sucks. It causes you to work harder and longer for things you don’t need and can’t afford. What’s worse, those payments don’t go away if (and when) something unexpected happens.

No matter what, you need to keep earning income to pay off that debt. And if money is tight enough, one little hiccup could cause huge problems. Lose a job. Take a pay cut. Get sick or injured. When you’re deep in debt, any of these things (and more) could send your financial world into a tailspin.

But when you own actually own the things that are important, you’re in a much stronger financial position if trouble arises. Ask anybody who has owns a paid off house if they wish they’d kept using other people’s money instead. I won’t.

Oh, and if our income ever takes a nosedive, I’ll be able to live on far less than most people because I don’t have any debt.

7) It’s typically self-serving advice.

The next time you hear the advice “use other people’s money,” I hope you’ll tap the breaks. Before making any decisions, I hope you’ll start thinking about what the person across from the table is trying to sell you.

Sure, it’s easier to spot this technique when you’re shopping for something like furniture or cars. But, even well-meaning advisors use this line to increase sales. Heck, they may even believe that they’re helping you make a good decision.

The next time you get fed this line, remember what they really want. What they really mean is, “Go deeper into debt so you can spend more money with me.” Before making any moves, think through it carefully.

Final Thoughts

After years of being debt-free and reaping the rewards, this is basically where I stand: Avoid debt and invest. It’s not a zero-sum game. You can do both.

Pay cash for the things you need, and invest a portion of your leftover savings. That way, you get the best of both worlds – debt freedom and investment returns.

What do you think? Am I off-base? Let me know in the comments below!Use other people's money. It's something you hear all the time, but is it really good advice? Here's why the average person should tune it out.

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17 Comments

  1. The truth is that poor people are more likely to make bad financial decisions, according to a new report from the World Bank. They borrow too much and save too little

  2. I agree with you! I have actually read some of those “financial makeover “. articles in which a family has worked hard to payoff their mortgage only to be advised to cash out their home equity and invest it in the stock market. That seems insane to me!

  3. Yes! I’ve actually gotten that advice more times than I can count. It’s honestly the dumbest financial advice I’ve ever received. I think it’s important to pay off your debts FIRST, then use the extra money to invest. Sure, it’ll be a little harder to “catch up” (which should deter people from getting into a lot of debt in the first place!) but at least you won’t have to worry about borrowing money just to “invest” it.

    1. I know, right? Still, people say this All. The. Time. IMO, it’s such a bad idea for most people because the “extra” money is typically spent rather than invested.

  4. The only time I could think it might be smart to “keep the debt and using any extra money to invest the rest” would be if the interest rate on the debt was zero percent – not one bit more. The only problem with zero percent interest is 99% of the time the “interest” is actually in the price of what you’re buying – for instance, you might be able to get a $20,000 zero-percent interest loan to buy what it really a $18,000 car. So in retrospect, it never makes sense at all unless you find that magical 1% of times that it’s truly no interest – and even then, you have to look and make sure you’re not spending more just because it’s interest-free.

    1. To me, it’s just a terrible mindset to have. Plus, people tend to keep piling on more and more debt instead of saving and investing. Unfortunately, it’s how most people think which is why we have a major debt to savings issue in this country.

  5. We used to have the exact same take. We paid off our mortgage over a 3 year period.

    Then we became introduced to the reality of opportunity costs.

    Now, with a mortgage again, we don’t pay early. In our case, we invest the difference (roughly 60-70% of our income).

    While I agree that we’re often wired to spend money rather than invest it, and behaviorally this is tricky to address, at some point you have to fight that dragon.

    That is to say, once you’ve paid off all the debt and there’s nowhere left to put the money, those behavioral quirks are still there and you’ve got to put the money somewhere. I’ve heard anti-debt advocates say: “I’ll invest then, when I’m debt free.”

    But at some point, and maybe that’s when there’s no more guaranteed-returns-via-debt payment, every one of us has to get to the point where we control those impulses, and put our money where it has the best chance to perform.

    In any case, both approaches are good ones. Paying off low interest debt, while sub-optimal, is still a plenty good approach.

    1. I completely understand opportunity costs, so I get where you’re coming from.

      Again, I think it’s bad advice for most people, not all.

      If you have the discipline to pay off all of your debt, you probably have the discipline to use debt and invest the rest. (I mean “you” in a general sense, not you in particular. I know you personally do! Ha! 🙂 ) Unfortunately, the vast majority of people don’t have that discipline but instead use this advice as a crutch to spend more (IMO).

      For the few who can pull it off, I think the decision comes down to what helps you sleep at night.

  6. I got this advice so much when I was paying off my student loans. I agree that it’s typically self-serving advice. People are just trying to get your money, make you more in debt, and then you’re probably not going to use the “extra” money to invest.

    Plus, there is something really empowering about being able to pay in full with cash. I’m saving up to buy a new to me car in a few years and I look forward to paying cash for it!

  7. I agree with you on this one. I can see how this could possibly work out. However you would have to be incredibly disciplined to pull this off. Perhaps also very smart, very lucky and very good at timing when investing. I think there is probably way too much work involved than most people are willing to put in to it. Myself included!

    1. This approach takes a ton of discipline to come out ahead. Quite frankly, most people just don’t have it in them.

  8. Thanks Sandra! When people take care of the money they already have, they tend to make huge financial progress quickly!

  9. I am not paying off my mortgage faster than the minimum for this very reason. My interest rate is 3.25% and I’ve decided to prioritize getting my full match from my employer in my 401k and maxing out my roth IRA over paying off my mortgage faster. I should come out ahead in the end. Now I may start paying off my mortgage faster down the road as my salary increases (hopefully) and there’s more extra money in the budget.

    My one auto loan is the one I’m on the fence about. Again, it’s at 3.25% and I’ve prioritized getting my full match from my employer in my 401k and maxing out my roth IRA over paying it off faster. The question I ask myself is whether I’m better off saving the extra cash for the next new vehicle we need (probably 1-2 years from now) or paying off this loan faster. I’ve been saving the money for the next vehicle since my assumption is that interest rates will go up and I’d rather stick with the loan I have now than have to get one in a couple years because I have no savings for a new car when I need one. But I question this all the time. I hate having that auto loan.

  10. I started off prepaying my mortgage to get it paid off sooner, than I realized I’m using money taxed at 25% to do so. Instead I’m paying the minimum now, and putting 2000 a month into a 401k to be withdrawn at 15% when I retire in several years. I never see the money as it’s taken out of my paycheck. Then I’ll be paying the mortgage using 15% money, and that 10% difference is real money. I live frugally (no kids) so 2000/month isn’t difficult for me, plus I get a sizable tax break so it doesn’t feel like a full 2000.

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