A few years ago, I was given the worst financial advice I could have been given – and I took it.
To be clear, the advice I was given wasn’t objectively bad. In fact, for someone else it could have worked very well. But for my goal and where I was emotionally at the time, it was terrible advice. And I paid for it in years worth of credit card debt.
Had I taken a minute to relate the advice back to my specific situation (in other words, my goal and the emotional blocks I was dealing with), then I would have known it wasn’t going to work for me at that time. Instead, I looked at it objectively. Since it made more sense objectively, I went with it.
That was when I learned the importance of asking “why” every time someone gives financial advice. Because, if we don’t do that, we could end up in situations far worse than the ones we started with.
The Importance of Asking “Why” When You Receive Financial Advice
No matter what financial advice you’re being given, how sensible it may seem, or who’s giving you the advice, always ask “why” before you assume that it will work for you.
When I was being given the advice that turned out to be bad for me, I knew that the advice technically made more sense than what I had planned. But I also knew I had emotional blocks to work around – and ignored them in service of doing what technically (mathematically) made the most sense. Here’s what happened:
In my early 20s I had a moderate amount of credit card debt. I wanted to pay it off with a vengeance, but I simply didn’t earn enough money to pay extra on my minimum payments – and at that time I worked so hard to find my first professional job post-college that it didn’t occur to me to look for a second job to help. After working 2-3 jobs the entire time I was in school, I just couldn’t stand the thought of doing it for another year (though in hindsight that seems like a small amount of time – and likely wouldn’t have even taken that long to pay the debt off).
I felt stuck between a rock and a hard place. Ironically, I was working as a personal banker (and was shocked at how little money that position earned). This was before the Great Recession and a time when someone with a good credit score could obtain an unsecured personal loan. I decided I was going to do just that in order to pay off my credit card debt. The loan would cut my interest rate from roughly 22% down to 4%. And, even better, it ensured a fixed payoff date. No matter what, as long as I made those monthly payments (which weren’t much more than the minimum payments on my credit card), then I’d be debt-free in two years. I couldn’t imagine anything better.
That’s when a friend and fellow personal banker told me I was nuts to take out a personal loan. She couldn’t believe I’d pay 4% interest when I could just as easily acquire a balance transfer credit card with 0% interest for 12 months. That way even more of my payments would go straight to the principle balance – obviously the most mathematically sensible thing to do.
“But I don’t want another credit card,” I told her. “I never, EVER, want to have a credit card again. Revolving debt is too easy to lose control of.”
While she understood, she still encouraged me to do the balance transfer – helping me think I’d just as easily be rid of credit cards when I paid that one off. My numbers side took over and I took her advice. And it didn’t work for me.
This is where asking “why” (and a steady stream of follow-up questions) would have benefitted me. Had I done that, I would have realized that the ONLY benefit of taking the balance transfer was a mathematic benefit – but there were other factors at play. The other factors were that I wanted a fixed-term payoff plan so that I could know for certain that the debt would be paid off, that I feared how easy it is to lose control with credit cards and thus didn’t want to have one at all, and the ultimate fact that, while my goal was debt payoff, my higher goal was guaranteed debt payoff.
At that time in history, I wasn’t mature enough for the balance transfer credit card. Not because I used it to make purchases, but because I acquired it without setting up a plan to pay it off before the 12 month mark, when the interest rate would go up to 25%. I simply got the new card, kept making minimum payments or slightly more, and after 12 months fell further into debt when the retroactive interest rate hit my balance. In short, I failed. It was a good idea poorly executed – and I paid for it.
Financial advice very often sounds good on paper, but how it plays out in real life is much more important. And money decisions are always much more than the simple math problems they can be boiled down to.
Never Forget About Your Ultimate Goal
In my situation, I sort of did ask “why” – in that I asked why my friend thought I needed the balance transfer card over a personal loan. But I didn’t ask “why” in relation to my goals.
Any time we’re considering a financial action, we need to reflect it back to our ultimate goal.
In my case, my goal wasn’t just to pay off debt, it was to have a fixed payoff date. I wanted that guarantee that I’d be debt-free and not have an ounce of temptation to use credit cards again. And there was only one way to achieve that goal: to pay off my debt with a loan equipped with a fixed payoff date.
The “why” question needs to be turned on us when we’re trying to discover our ultimate goals. In my case, why did I want to use a loan to pay off debt instead of a balance transfer? Why did I fear credit cards? Why was the fixed payoff date so important to me? It’s through why questions like this that we can discover what actually matters the most to us – and it’s usually not the thing we started with.
Once you dig deep to discover your ultimate goal, use it as a measuring stick for everything someone tells you. Does that advice help you get to your goal? Or does that advice serve another goal? Only say yes to the advice that will actually get you where your ultimate goal is.
Advice Can’t Help if You Don’t Have a Plan
The balance transfer advice failed for me at the time because it didn’t meet my ultimate goal of having a fixed payoff date and no more credit temptation. I knew what I wanted but I ignored it because I thought the numbers were more important than my emotional goals. Clearly, I was wrong.
But that bad advice, several years later and in a much different place in life, became good advice. I’d moved across country a few times, managed to get closer to the career I wanted and increase my pay, and then tried again with a balance transfer. By this time I’d gotten pretty good at budgeting and no longer feared revolving debt. My new goal was just to get rid of my debt as fast as possible – I could hardly stand the thought of it anymore. I was also making enough money to have a small surplus that I could (and did) use to boost my payoff. But my real game changer was this: I made a plan.
Financial advice without a plan is useless. So few financial actions are over and done with as soon as they’re initiated, so creating a follow-up plan is key. For me, that follow-up plan entailed calculating exactly how much I would have to pay each month in order to pay the balance transfer off before the interest was set to increase. I then made that my “minimum payment” and succeeded in paying off the balance transfer card right on schedule.
Advice that served my ultimate goal plus a plan of action ended up being the keys to solving a financial problem that plagued me for years.
So the next time you’re given financial advice (or read it in a blog post such as this one), ask yourself “why.” Why does that advice sound like it makes sense? How might it not make sense? Does that advice serve my ultimate goal – not the goal I have on the surface, but the underlying need that I have? Is it the best way to reach that goal – or could some other variation better meet my needs? Then, when you discover the advice that truly will work for you, create a plan of action.
Advice that makes sense for your specific needs + a plan of action = financial success.
What’s your most pressing financial goal?
Image Credit: Jordan McQueen