This Money Advice Is 100% Wrong
BY SALLIE KRAWCHECK
The latte conversation is back. Yes, even during a pandemic. When I looked yesterday, I saw nearly 200K comments on Matt Bellassai’s Starbucks tweet from a couple of weeks ago: When we shared it on our Instagram, the community lit up. (My favorite response was by @msyoungprofessional, who perfectly skewered this advice by commenting: “I saved billions by making coffee at home and also by being a billionaire before I started making coffee at home. It’s so easy!”) ICYMI: “Skip the latte” is bad financial advice. The basic idea is this: “You’re throwing money down the drain by buying coffee in the store.” “If you invest that latte money in the stock market instead, you can become a millionaire.” I’ve heard it a million times — in good years and in bad. Here’s better advice: Are you kidding? When we’re on the other side of this pandemic, I’m dancing to the coffee shop every morning on my way to work, to treat myself to some delicious, warm, milky, frothy latte. I’ll do so knowing that I’ve done the math. In order to become a latte millionaire, I would have to earn stock market returns that is literally multiples of what the typical individual investor has earned over the past 20 years. I firmly believe that whenever you can, you should treat yourself to the little things that make you happy, without guilt. At the same time, you can get the big things — including the math on financial decisions — right. There’s been a lot of bad math out there lately … and not all of it’s about coffee. Betting on individual stocks during the pandemic (or anytime) is bad advice. A survey of just a few recent headlines:
“Bargain hunting for stocks in a bear market? Here are some tips before you invest,” from CNBC.
“12 Stocks That Are Beating the Market During the Coronavirus Crisis — and Can Keep on Growing After” from Barrons.
“Here Are 20 Stocks To Buy In The ‘Coronavirus Economy,’ According To Market Experts” from Forbes. (And 20 more. And 29 more. Geez.)
The gist of each of them is that the economic downturn is a fantastic (even “once-in-a-lifetime”) opportunity for you to “time the market” — aka guess when individual stocks might go up or down in price and buy or sell them accordingly. Here’s better advice: Stick with investing regularly and for the long term. The problem is that “timing the market” approach is a loser. Of course, you can make some occasional great trades (and give yourself some great Zoom cocktail party chatter), but trading in and out of the market just doesn't consistently work. It doesn’t work for regular people with investments. And it doesn’t even work for professional investors who get paid to do it: in fact, less than 1% of professional mutual fund managers who used the strategy were successful. Even Warren Buffett — literally the greatest investor of our time — says nobody can time the market; he doesn't even try. Instead, we typically recommend investing for the long term, regularly, a little at a time, regardless of whether the stock market is up or down. It’s called dollar-cost averaging. Here’s some math on that: If you had stayed invested in the stock market for the past 20 years and not touched it, your money would have tripled. But if you had traded in and out and had missed out on just the ten best stock market days over that period — that’s right, just ten days — your returns would have been just half of that. “Build up an emergency fund before paying off your credit card” is bad advice. This one hurts a little. I have long been a Suze Orman fan. I love what she has built. I love that she pulled herself up by her bootstraps to do it. I love that she managed to do it in an industry that has had few successful women. I LOVE that she tells people to “stand in their truth” of their own financial circumstances. (I might have used different words, but the underlying concept of rejecting the shame around money and living within your means is a great one.) But when I read the advice she gave in a recent New York Times article … the math just doesn’t work out. Reversing her previous advice, Suze is now telling people to build an emergency fund even if that means leaving your credit card debt outstanding and paying just the minimum that’s due. Better advice: Pay off your credit card debt first — and then build your emergency fund. At Ellevest, we’re all for an emergency fund: that three to six months’ worth of your take-home pay — or more — in a FDIC-insured bank account or (NCUA-insured credit union account), there in case of emergency. But you should build that only after you’ve paid off your high-interest rate debt, like credit cards. That’s because the balances that you carry on credit cards are expensive. Really expensive. Credit card interest rates average 16% right now. Meanwhile, that emergency fund will earn you just about 0%. How much can that cost you? Let’s do a little math experiment: Say you have a credit card balance of $6,200 (the national average) and an extra $200 per month. You can use that $200 to pay down the credit card, or you could use it to build an emergency fund, while just paying the minimum due on the credit card.* After six months, keeping that credit card debt outstanding (while building the emergency fund) would have cost you $483 in interest. Oof. That’s almost $500 down the drain. Now, assume you have an actual emergency six months in, which costs you $1,000. By now, you have a little more than that saved in your emergency fund, so you pay for the emergency out of the emergency fund. Call that Scenario A. If you don’t — well, you run the credit card back up. Call that Scenario B. Here’s the thing: By the end of one year, Scenario A will have cost you $101 more than Scenario B. That’s because the interest on your credit card balance compounds — meaning you have to pay interest on your interest. The longer you take to pay your balance off, the more it will cost you overall. And here’s the other thing: It could take you quite a while to build up three-plus months’ worth of take-home pay. If just six months of paying only the minimums on your credit cards while you prioritize your emergency fund costs you $483 in interest, imagine how much extra you’d pay if you just kept paying the minimums indefinitely. (Hey, you may say, but what if I have an emergency and at the exact time I do, the bank cancels my credit card?? Well, the chances of those two things happening simultaneously are vanishingly small. And so you are paying for a very expensive “insurance policy” for a highly unlikely event. Lightning strike stuff.) In each of these cases, building the emergency fund before you pay off your credit card balance simply means that you’re just taking your hard-earned money and sending it over to the credit card company. That said, we get that feeling like you don’t have anything stashed away to pay bills might feel uncomfortable. That’s why this emergency fund advice feels “right.” So if you’re really not able to sleep at night, or you feel your job is in imminent danger, how about a “mini” emergency fund? Think in terms of maybe $1,000 to handle immediate bills that can’t go on a credit card, though, not eight months’ of living expenses. (The average American spends about $5,000 a month in expenses.) “Bitcoin is skyrocketing — don’t miss this opportunity!” is bad advice. Since the pandemic began, I’ve seen advice to “load up” on Bitcoin as a hedge against inflation, people calling it “digital gold” that’s gone way up as the rest of the economy tumbled, and other people calling it “ready for a crash.” A couple of weeks ago, Bitcoin went through a process called halvening** that spawned some excitement on Twitter and least one “spiritual reflection.” OK. (Even Suze commented on it and that “many people think that it probably will” go up. Not OK.) Ellevest’s Bitcoin advice: No. Just no. Unlike stocks and bonds and other investments at Ellevest, Bitcoin has no fundamental underpinning. It’s not like a “real currency” that is tied to a country’s underlying real economy. It goes up or down based on pure sentiment. The only advice “experts” should be giving is that you’re only allowed to buy Bitcoin with the money you would have gambled on that trip to Vegas that’s now indefinitely postponed — assuming you have all your credit card debts paid off, your emergency fund built up, and you’re investing wisely for the future, that is. The bottom line is this: As everyone — especially women — loses financial ground during this pandemic, it’s really important that we all have reliable, achievable, and mathematically grounded financial advice. We’ve got you covered there. PS: We’re still answering your money questions, too — see here for all the (mathematically grounded) answers we’ve shared so far.