There’s plenty of informal financial advice out there. Like any other area of life, money has its fair share of folk wisdom. Is any of it much use?
Clichés abound in financial advice, but clichés have often become what they are for a reason. Sometimes they are wise observations that have become banal through repetition; at other times they are misguided or simply wrong. The trick is knowing which is which, and in what circumstances. Here are ten to think about.
1. Look after the pennies and the pounds will look after themselves.
This is sound financial advice. Small savings can really add up over time – that £2 latte on your way to work every morning could cost you around £500 by the end of the year. More than that, care about your finances is a habit you can cultivate through practice.
2. Don’t spend what you don’t have
This principle was famously espoused by Wilkins Micawber in Charles Dickens’ David Copperfield: ‘Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.’ Although credit cards and other loans might give you a bit of breathing space, it’s hard to argue with this piece of financial advice in the long term.
3. Buy low, sell high
Hardly financial advice, this principle is simple in theory but very difficult in practice – otherwise everyone would be doing it. A more conservative and easy rule to follow might be ‘Sell when you can, not when you must.’
4. Be fearful when others are greedy, and greedy when others are fearful
Stratospherically successful investor Warren Buffett’s financial advice is good for making you think twice. Sell-offs by panicking investors may mean that stock is cheap, and shares inflated by over-optimism are vulnerable to imminent crash. Somehow, though, no one seems capable of judging the true value of a stock quite like Buffett…
5. Never try to catch a falling knife
Buffett may have a point, but when do you call the bottom of the market? No one’s to know if a plummeting stock has got further to fall until it levels out again. You can take your chances, but that’s all they are: chances. Better financial advice might be to make regular small investments to smooth out the peaks and troughs of the market’s fluctuations.
6. Don’t panic
If you happen to own a ‘falling knife’, you’ll probably be tempted to sell it and cut your losses as soon as possible. Either way, it’s best to take sentiment out of the equation. Make decisions rationally, not emotionally.
7. If it sounds too good to be true, it probably is
Also known as ‘There’s no such thing as a free lunch.’ There’s no arguing with this financial advice. The only people who know otherwise tend to work in boiler-rooms, or for Bernard Madoff’s wealth management firm…
8. You can’t go wrong with bricks and mortar
This seemed to be strong financial advice, right up to the worst financial crisis in living memory. Since 2008 people have been a little more circumspect about buying property.
9. Avoid excessive risk
This should go without saying, but the sticking point is the word ‘excessive’ – exactly how much risk is too much? That can be quite subjective and will depend on various factors, including the timeframe of the investment in question.
10. Money can’t buy you happiness
Woody Allen famously added the qualifier: But it can buy you a better class of misery. He may have had a point, but balance is always good. If you’re spending all of your time making, or worrying about money, then you’re probably not having too much fun. This piece of clichéd financial advice happens to be right on the money: a growing body of research shows that increasing incomes have diminishing returns as far as making us happy goes. What matters more is our relationships with family and friends, and the sense of belonging our jobs give us – not just their pay-cheques.