The worst personal finance advice on TikTok (and why it’s wrong)

5./15 WEST

5./15 WEST

TikTok isn’t just about viral dance videos. It quickly became a popular resource for personal finance advice – but sadly, all is not good. Although there are legit money experts on the app, there is a lot of financial advice circulating on TikTok that is misleading or just plain wrong.

GOBankingRates asked personal finance experts to debunk some of the worst money advice on TikTok – so if you see one of these pop up on your #fyp, keep scrolling.

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To find: Top 10 richest TikTok influencers

Starting an S Corporation Can Help You Avoid Paying Taxes

In a popular TikTok video, a woman claims that “if you start an S corporation and you own 100% of it, you can buy everything you own under that S corporation and you don’t pay taxes on anything you buy because it’s considered a business expense. The video also claims that you can hire your children to work for you for $12,000 a year tax-free and “give that expense back to your household.”

Why it’s wrong: “Corporation S is only ‘allowed’ to buy things that are considered ordinary expenses and necessary for its own business,” said Bill Smith, national director of tax technical services for CBIZ MHMNational Tax Office. “So, for example, if he bought a lawnmower that you use to mow your lawn, that would be treated as a taxable distribution to you. There are legions of cases that deal with using a business as a personal checkbook, and they are not limited to S corporations.”

As for the claim that you can “hire” your children to work for you for $12,000 a year tax-free, that’s likely referring to the annual gift tax exclusion — which isn’t. wouldn’t even apply here.

“Corporation S does not have the annual gift tax exclusion available to individuals (which for 2021 is up to $15,000),” Smith said. “The standard deduction for 2021 is $12,550 (not sure when the video was posted), so assuming the child is working legitimately and the compensation is reasonable, there would be no tax on income, but still taxes on employment Corporation S could not deduct the $12,000 of salary if the children did not work or if the compensation was unreasonable It seems to confuse the standard deduction with the annual exclusion from gift tax. There’s no aspect to it that involves “making a gift to your family home. What it seems to say is that your children can work tax-free, but what she’s implying is that they don’t have to do anything to get their $12,550 in 2021. That’s incorrect.

To see: 10 financial books that will change your life (and your finances)

Anyone can learn how to day trade and be successful at it

Much of TikTok’s personal finance content revolves around day trading and how different users have had success doing it. But this is not an investment strategy that the experts recommend.

Why it’s wrong: “To be consistently successful in day trading, you need to have significant capital, time, and emotional stamina — attributes that most individuals don’t possess,” said Will Rhind, Founder and CEO of GraniteParts, a New York-based ETF issuer with over $1.5 billion in assets under management. “Although novice day traders may initially have beginner’s luck, they are likely to be more susceptible to losses over time. They could lose their entire investment, or even worse, go into debt if the effect of leverage was applied It is essential never to speculate with more money than you can afford to lose.

Rhind recommends focusing on long-term wealth creation rather than short-term gains.

“You’re probably better off putting your money in a diversified investment vehicle that takes the guesswork out,” he said. “Exchange-traded funds, for example, provide tax-efficient, low-cost, and transparent exposure to a basket of securities that trade on exchanges like stocks. There are thousands of ETFs available that meet a variety of investment objectives, such as capital growth, wealth preservation, income generation and inflation hedging.

To explore: 34% of Gen Z learn about personal finance from TikTok and YouTube, survey finds

You can turn $56,000 into $1M in 11 years with compound interest

In a TikTok video, a woman asks @curtisray for financial advice, saying her husband makes $80,000 a year and she makes $56,000. Ray recommends that the couple live solely on the husband’s income while the wife puts all of her earnings into a compound interest account. He “runs the numbers” and sees that his $56,000 investment will grow to $1 million in 11 years – tax-free.

Why it’s wrong: Andrew Meadows, Senior Vice President of Ubiquity Retirement + Savingsnotes that living on one income is easier said than done.

“Who, earning $56,000 a year, can go a year without getting paid?” he said. “Even though this example shows a two-income household, the point here is what you are willing to give up. Moreover, you will have to wait 11 years to get this “million”. Sounds easy: sacrifice a year’s salary (if that’s even possible) and you become a millionaire in 11 years. While it’s true that it’s tax-free – your contributions are taxed before you come in, but you’re not taxed on the interest – you’re not quite hitting a million if you’re looking at interest of 2% and account fees. I also don’t see the calculations on the fees; there are always fees that people miss that can erode your savings.

Ray’s advice may not be “wrong,” but few financial matters are as cut and dried as he suggests.

To learn: How much do TikTokers earn? Here are 5 of the highest paying TikTokers

“Finance is a nuanced business and get-rich-quick is often only reserved for a select and lucky few,” Meadows said. “Beware of all the things that are left out in these tips. If you listen critically, you’ll find you don’t have the information: what’s the point? By whom is it? Is this property insured? What are the fees? While some things may be true, simply stringing numbers together using loose logic won’t bring in quick money. I’ve always been told, ‘If it looks so easy, why doesn’t everyone do it?’ And, while it might be a good investment for some, one size doesn’t fit all.

Don’t put a down payment on a house if you don’t have to

In another TikTok videoRay says it’s best to make the smallest down payment possible, then put the rest of the money you’ve saved for a house into a compound interest account.

Why it’s wrong: Alex Klingelhoeffer, CFA, CFP, at Exencial Wealth Advisorssaid it wasn’t necessarily “bad” advice, but it might not be the best advice for everyone.

“This advice comes from a good place,” he said. “If you can borrow as low as you can with a mortgage – 3-4% – and invest in the markets at 7-9%, you should generally do that. In fact, most people have a mortgage and also have investments. What this advice ignores is the behavioral side of investing. Most people will follow the markets significantly, see the market fall, sell, and be disappointed with the experience. In fact , I’ve seen this happen countless times to people who come to my office in their 40s after making the exact same mistakes in their 20s.

Moreover, a house is a safer investment than the market.

“The problem with this system is that it’s antifragile,” Klingelhoeffer said. “If you lose your job, have poor health or any other problem, your investments could go down at the same time as you need cash. Is this money available in a HELOC? No, because if you only have 3% down payment, you don’t have substantial equity. Again, this comes from a good place, and on a spreadsheet I can make anyone a billionaire with enough leverage. In the real world, swings will knock this strategy down.

Read more: 12 crucial financial tips for every phase of your financial life

Buying early in new cryptocurrencies will make you rich

TikTok user @superhexwin suggests buying new cryptocurrencies – like HEX – as a way to get rich, noting that people who bought Bitcoin and Ethereum early are now extremely wealthy.

Why it’s wrong: “Yes, assets can and do increase astronomically. Famously, two pizzas were once sold for 10,000 bitcoins which would now be worth $350 million,” Klingelhoeffer said.

However, the rise of bitcoin does not demonstrate that every cryptocurrency in the market will experience the same increase in value.

“The main use of crypto is more dumb stuff, which is you buy it to sell to someone else,” Klingelhoeffer said. “There are a lot of coins these days and 99% of them will be worthless in less than three years. Why? There are a limited number of people willing to invest a large portion of their net worth in crypto and those that do will want cash.Until there is a coin with demonstrable real utility better than traditional banking in terms of functionality, power consumption, and most importantly, legality, crypto n “It’s just a space to speculate and see if you can hit a winner. I don’t blame people who go to the casino for the same reason. It’s fun – buy with what you can afford to lose.”

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