Bad Financial Advice Our Parents Gave Us

Parents mean well, but that doesn't mean their financial advice is golden. 

I'm going to share a well-guarded secret: Parenting is trial and error. As much as our parents love us, and as much as we love our own mischief-makers, parenting is nothing more than a big experiment. Sometimes we get it right and sometimes we're so far off base we wonder why anyone ever put us in the game.

(Seriously, has anyone else ever driven home from the hospital with a newborn and wondered what the staff was thinking, allowing you to leave with a live human?)

There's nothing like having kids of your own (or borrowing someone else's) to help you forgive your parents for the mistakes they made with you. Like the rest of us, they were figuring it out on the fly. Sometimes the advice was brilliant, and for that we're grateful. On occasion, though, our parents were just plain wrong.

The following are examples of some truly awful parental advice:

What they said: "Claim zero deductions on your W-4."

If your parents taught you to believe that having extra money withheld from each paycheck was like a "forced savings account" that would be returned to you at tax time, I'm sure they meant well. They were certainly in good company. Nearly 96 million Americans received a tax refund last tax season alone. 

For illustrative purposes, let's just talk about federal taxes. Let's say you get a federal tax refund of $1,500 each year. That means that you're overpaying your taxes by $125 per month. If you claimed enough deductions to receive that $125 on your paycheck instead each month you could easily slip it into an IRA. Let's say you earn 8.0% on this small investment. Provided you make the same $125 deposit into the IRA each month, you would have $8,800 after five years. At the 10-year mark, you would have $21,730, and at 20 years it would be $68,643.

What we wish they'd said instead: "Hey, want to know an easy way to invest in your future? Don't let the government keep your money for free each month. Instead, find a sensible investment and slowly build wealth. If you're not sure how much you should have withheld from each paycheck, the IRS provides this nifty calculator to help you figure it out."

What they said: "Buying a house is a great investment."

There may be pockets of the country that allow you to buy a house, hold it for a short time, and sell at a profit -- but they don't represent the reality in most of the United States. I get the allure, truly. I once interviewed a guy who advised his clients to borrow from their families, cash out their 401(k)s, buy a house, and pay everything back once they hit it big by selling at a profit. It's not only a dangerous idea, but it's not realistic for most Americans.

Unlike rental property, there's no positive cash flow coming from your home. Instead, you pay a mortgage, property tax, insurance, utilities, and maintenance. And there's always maintenance. If you're not fixing something that's broken, you're trying to prevent things from breaking. One rule of thumb is to count on spending 1% to 4% of your home's value every year on maintenance (depending on the condition of your house). If you have a $250,000 house, 1% is $2,500, or $208 per month. And 4% is $10,000 per year.

What we wish they'd said instead: "If you're going to buy a house, think of it as a roof over your head. If you end up selling it for big bucks, good for you! If you don't, you still have a home in which to build memories. And if you decide you don't want to buy, that's okay, too. There are plenty of ways you can invest that money."

What they said: "When the stock market is rocky, all you need is gold." 

In all honesty, I can't recall if my father offered this advice or I picked it up watching an old Civil War movie. Still, this little ditty has staying power. 

For investors, the attraction of gold is that its value moves inversely to the stock market. When stocks are low, gold prices are higher, primarily because investors are buying it to hedge against stock losses. When stocks begin to rise again, those investors sell their gold and move back into the historically-more-dependable stock market, and this sell-off causes gold prices to fall.

What we wish they'd said instead: "Don't depend on gold as your sole investment vehicle. If you want to buy gold, make it part of your overall portfolio. You know how you have a mix of stocks and bonds because stocks tend to go up when bonds are down and vice versa? Historically, the value of gold does not track with stocks and it doesn't track with bonds. By adding a small amount of gold to your portfolio, you increase diversification and add another measure of safety." 

Often, the advice parents offer was accurate at one time. For example, the parents who graduated from college into a world that rewarded any bachelor's degree might tell their daughter that it's fine to study philosophy. After all, any degree will do. And parents who bought a house at just the right time, in just the right spot of the country, might tell their kids that their house was the smartest investment they ever made. 

Forgive me if it seems harsh, but it may be time to pull out the Russian proverb Ronald Reagan liked to use: "trust, but verify." As a parent, I promise you that we mean well, but if our advice feels a little wonky, it just may be.