For some people, getting free financial advice is like getting a free t-shirt. It doesn’t matter what it looks like or who’s offering it. Even if it doesn’t fit, you’re not going to refuse it.
That sentiment may be why 34 percent of Americans go to their family or friends first for money management advice. But getting free financial advice isn’t entirely the same as getting a free t-shirt. If you aren’t careful, one wrong suggestion could end up costing you in the long run.
3 questions to ask when getting free financial advice
Before going to your family for free financial advice, make sure you consider their experience, understanding, and biases about a topic.
Here are three questions you should habitually ask before taking any free financial advice to heart.
1. Have they been through this before?
If your family is like mine, they have a strong opinion about everything. We’re not afraid to share what we think.
If this is the case for you, try to avoid asking a family member’s opinion unless you know what their experiences have been. This wariness is especially important for complex financial decisions.
For example, if you’re buying a home or choosing a mutual fund investment without the correct information, you can experience problems down the road. Someone who has been through the same process can share the lessons they learned along the way.
They can also alert you to pitfalls and share mistakes they made so you can avoid them. As the second youngest child in my family with four older siblings, I’ve had the opportunity to learn from the experiences of my brothers and sisters.
Recently, my wife and I were in the process of buying a home. As the contract was underway, we declined the home warranty plan our real estate agent offered.
A few days later, my wife was talking to my brother and learned that he’d used his home warranty each year since his family moved into their home. The decision has saved them thousands of dollars in appliance repairs.
Since the house we were buying was old and already had an issue with one of its major appliances, we took the advice, went back, and added the warranty.
That’s not to say a home warranty is the best decision in every situation; there are pros and cons to consider. But in our case, my brother’s experience helped us make the right decision for us.
2. Do they know what they’re talking about?
Some financial decisions look simple on the surface but can become complicated the deeper you dig. For example, the general concept of investing is simple: you commit money to something with the expectation of receiving income or profit in return.
Your best investment option, however, depends on your experience, risk tolerance, time horizon, and other preferences. The result of those factors may vary wildly from that of your family members. When it comes to investing, you’ll want to be wary of any free financial advice that doesn’t begin with questions about these factors.
A sibling may recommend investing in penny stocks because you can earn big returns quickly. In reality, penny stocks are highly volatile, and you can also lose big. Therefore, penny stocks are not a good investing idea for beginners.
3. Are they biased?
As the term suggests, personal finance is a personal affair. What works well for you may not work for someone else, but it can be hard to look past your bias when it comes to things that have been helpful to you.
A sister may highly recommend a car insurance company because “they have great rates.” It’s possible, however, that based on your driving record and insurance needs, another insurer may offer you cheaper rates. In this case, it would be better for you to shop around and compare.
Your siblings or parents may also have different priorities and goals than you. What’s more, they may be willing to spend money in categories where you prefer to be frugal. Keep this in mind, especially if you notice them try to change your priorities.
Asking your parents for money management advice can be a double-edged sword. They want you to be happy and successful, but those emotions may drive them to recommend something that may not be in your best interest after all.
Keep this in mind when you hear their opinion on something finance-related (especially when it’s unsolicited).
Other ways to get free financial advice
If you’re not sure which direction to take when managing money, asking your family for free financial advice can be a great way to help you get on the right path.
In some instances, however, it can do more harm than good. As you seek financial advice, take the time to do some research on your own to vet the advice you get from your family.
Chances are well-researched, unbiased (and free) financial advice to help you make the right decision is just an internet search away.
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