I recently listened to a “finfluencer” describe the power of buying assets, not stuff. For those in the crowd who were born before MySpace and maybe never used AOL Instant Messenger, let me first explain the term. Unbiased.com defines finfluencers as “influencers who offer advice and information on various financial topics.” Financial influencers—finfluencers—have become more popular on social media over the last few years. While some influencers offer useful financial tips, there are many finfluencers who may do more harm than good.
From the CFA institute: Young investors are turning to financial influencers, or “finfluencers,” on social media platforms, such as YouTube, TikTok, and Instagram, for information and advice about investments. Some financial firms are hiring finfluencers to engage with young investors (those aged 18–25). Finfluencer content can be informative, engaging, and relatable and can help improve financial education and inclusion. However, with low barriers to entry come increased exposure to potential bad actors and questionable advice.
The financial industry is highly regulated to protect consumers from misleading advertising and advice. As such, many major financial outlets steer clear of providing advice of any sort on social media. This leaves a widening gap for others to fill, many of whom may not be qualified to provide any financial advice.
I would argue that unclear or incomplete advice can be just as harmful as “questionable advice.” This particular finfluencer I recently listened to happened to be an example of a good message delivered in a less than accurate way. The man in the video described playing a game of golf with you. Before the game begins, he asks you if you’d like to play for $0.10 a hole, winner takes. You think, “Sure! Ten cents is low stakes.”
Then he offers, “How about we double it every hole? The first hole is $0.10, second $0.20, third $0.40, and so on. You in?” So, you do a little head math and carry it out to maybe hole 7 and get to $6.40. Still doesn’t seem too bad. The finfluencer is moving fast; they have to be fast if they want to keep someone’s attention for 30 seconds. Since you’re reading this, you probably took the math out a little further, but maybe not as far as hole 18. Since I was listening to this example, I was shocked when the finfluencer said, “Guess what? Hole 18 will cost you $13,000!” I didn’t believe it. I actually had to do the math. I was convinced he was wrong. Sure enough, hole 18 is $13,000, $13,107.20 to be exact.
The lesson this finfluencer professed to be demonstrating was the value of buying assets—things that appreciate in value over time—over liabilities or things that depreciate over time. I’m still not sure I follow his connection between the golf wager and this lesson but, to me, it is a clear example to explain the power of compounding. However, for some of his less experienced followers, the lesson may appear to be an endorsement of making wagers. A snippet of advice that easily became unclear or incomplete.
It left me wishing the finfluencer had simply demonstrated the handy Rule of 72. This rule can apply to anything that grows at a compounded rate (interest earning interest). The rule states that if you want to calculate how long it will take for a value to double, like your investment account, divide 72 by the assumed interest rate. The result is the number of years it takes to double. For example, if you have $10,000 that will earn 8% per year, how many years will it take to grow to $20,000? 72 divided by 8 equals 9. It will take nine years for your $10,000 to double to $20,000 at 8% interest without adding any additional funds.
Perhaps a better example of the power of compound interest was provided by a second finfluencer describing a millionaire couple: A couple at age 35 decides they can “only” afford to save and invest the maximum allowable amount into one Roth 401(k) each year ($23,000/year in 2024). After ten years, assuming an 8% annualized return, their 401(k) is worth $347,000. In another ten years, their money triples to $1.1 million. By age 65, it will multiply another 2.5 times to $2.7 million. It’s a simple strategy: save $1,900 per month and accumulate millions. Even better, if your employer makes matching contributions, you can contribute less than $1,900 per month from your paycheck and still reach the annual savings goal. This not only demonstrates the power of compounding, but also the impact of consistent, early, regular savings on your ability to reach your long-term financial goals.
This is advice we stand behind and tell our own clients and their children as they build their financial acumen. Saving and compound interest is more powerful than constantly hunting for that investment that will double in value in a short period or investing in that “hot stock” touted by a finfluencer. Of course, if you can find an investment that doubles in value every year for 18 years with no risk of declining—see the golf wager above—we’ll all be buying. But the basics of investing tell us that the higher the reward (interest or growth) the higher the risk. Read: the higher the likelihood that the investment will NOT double every year for 18 years. Steer clear of those who provide advice as if they have a crystal ball to the future or tout any guaranteed returns.
An Additional Word on Finfluencers
As with any advice, no matter the source, consumers still need to do their research. Approach any new voice with a healthy sense of skepticism. Understand the motivation. Is the producer compensated for giving this advice? Use a broad set of sources to gain information. If a claim is only found on one or a few outlets and seems too good to be true, it probably is. Check the person’s credentials. Do they have a legitimate professional certification (CFP®, CFA, CPA), educational background or other relevant experience and qualifications? Many people appear successful but, remember, their success may not be from investing. You may know better than to take advice from Kim Kardashian promoting a cryptocurrency security, but can you spot endorsed advice from a lesser-known source?
With that said, personal finance influencers can be a good source for increasing your financial knowledge without feeling like you have to spend a lot of time or money taking courses or reading books. With a critical eye, you can beef up your financial acumen, but remember, money tips are not a substitute for a professional financial advisor who can give you personalized, holistic advice specific to your entire financial picture.
We encourage you to learn, get inspired, and be exposed to new information, then check it against your personal situation as well as with a professional. Be sure it is a good decision for you, not just for thousands or millions of followers you don’t know.
This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.
Why Not Just Own Large Caps?
May 2, 2024Bragg Financial Welcomes Sheena Lopez
June 1, 2024I recently listened to a “finfluencer” describe the power of buying assets, not stuff. For those in the crowd who were born before MySpace and maybe never used AOL Instant Messenger, let me first explain the term. Unbiased.com defines finfluencers as “influencers who offer advice and information on various financial topics.” Financial influencers—finfluencers—have become more popular on social media over the last few years. While some influencers offer useful financial tips, there are many finfluencers who may do more harm than good.
From the CFA institute: Young investors are turning to financial influencers, or “finfluencers,” on social media platforms, such as YouTube, TikTok, and Instagram, for information and advice about investments. Some financial firms are hiring finfluencers to engage with young investors (those aged 18–25). Finfluencer content can be informative, engaging, and relatable and can help improve financial education and inclusion. However, with low barriers to entry come increased exposure to potential bad actors and questionable advice.
The financial industry is highly regulated to protect consumers from misleading advertising and advice. As such, many major financial outlets steer clear of providing advice of any sort on social media. This leaves a widening gap for others to fill, many of whom may not be qualified to provide any financial advice.
I would argue that unclear or incomplete advice can be just as harmful as “questionable advice.” This particular finfluencer I recently listened to happened to be an example of a good message delivered in a less than accurate way. The man in the video described playing a game of golf with you. Before the game begins, he asks you if you’d like to play for $0.10 a hole, winner takes. You think, “Sure! Ten cents is low stakes.”
Then he offers, “How about we double it every hole? The first hole is $0.10, second $0.20, third $0.40, and so on. You in?” So, you do a little head math and carry it out to maybe hole 7 and get to $6.40. Still doesn’t seem too bad. The finfluencer is moving fast; they have to be fast if they want to keep someone’s attention for 30 seconds. Since you’re reading this, you probably took the math out a little further, but maybe not as far as hole 18. Since I was listening to this example, I was shocked when the finfluencer said, “Guess what? Hole 18 will cost you $13,000!” I didn’t believe it. I actually had to do the math. I was convinced he was wrong. Sure enough, hole 18 is $13,000, $13,107.20 to be exact.
The lesson this finfluencer professed to be demonstrating was the value of buying assets—things that appreciate in value over time—over liabilities or things that depreciate over time. I’m still not sure I follow his connection between the golf wager and this lesson but, to me, it is a clear example to explain the power of compounding. However, for some of his less experienced followers, the lesson may appear to be an endorsement of making wagers. A snippet of advice that easily became unclear or incomplete.
It left me wishing the finfluencer had simply demonstrated the handy Rule of 72. This rule can apply to anything that grows at a compounded rate (interest earning interest). The rule states that if you want to calculate how long it will take for a value to double, like your investment account, divide 72 by the assumed interest rate. The result is the number of years it takes to double. For example, if you have $10,000 that will earn 8% per year, how many years will it take to grow to $20,000? 72 divided by 8 equals 9. It will take nine years for your $10,000 to double to $20,000 at 8% interest without adding any additional funds.
Perhaps a better example of the power of compound interest was provided by a second finfluencer describing a millionaire couple: A couple at age 35 decides they can “only” afford to save and invest the maximum allowable amount into one Roth 401(k) each year ($23,000/year in 2024). After ten years, assuming an 8% annualized return, their 401(k) is worth $347,000. In another ten years, their money triples to $1.1 million. By age 65, it will multiply another 2.5 times to $2.7 million. It’s a simple strategy: save $1,900 per month and accumulate millions. Even better, if your employer makes matching contributions, you can contribute less than $1,900 per month from your paycheck and still reach the annual savings goal. This not only demonstrates the power of compounding, but also the impact of consistent, early, regular savings on your ability to reach your long-term financial goals.
This is advice we stand behind and tell our own clients and their children as they build their financial acumen. Saving and compound interest is more powerful than constantly hunting for that investment that will double in value in a short period or investing in that “hot stock” touted by a finfluencer. Of course, if you can find an investment that doubles in value every year for 18 years with no risk of declining—see the golf wager above—we’ll all be buying. But the basics of investing tell us that the higher the reward (interest or growth) the higher the risk. Read: the higher the likelihood that the investment will NOT double every year for 18 years. Steer clear of those who provide advice as if they have a crystal ball to the future or tout any guaranteed returns.
An Additional Word on Finfluencers
As with any advice, no matter the source, consumers still need to do their research. Approach any new voice with a healthy sense of skepticism. Understand the motivation. Is the producer compensated for giving this advice? Use a broad set of sources to gain information. If a claim is only found on one or a few outlets and seems too good to be true, it probably is. Check the person’s credentials. Do they have a legitimate professional certification (CFP®, CFA, CPA), educational background or other relevant experience and qualifications? Many people appear successful but, remember, their success may not be from investing. You may know better than to take advice from Kim Kardashian promoting a cryptocurrency security, but can you spot endorsed advice from a lesser-known source?
With that said, personal finance influencers can be a good source for increasing your financial knowledge without feeling like you have to spend a lot of time or money taking courses or reading books. With a critical eye, you can beef up your financial acumen, but remember, money tips are not a substitute for a professional financial advisor who can give you personalized, holistic advice specific to your entire financial picture.
We encourage you to learn, get inspired, and be exposed to new information, then check it against your personal situation as well as with a professional. Be sure it is a good decision for you, not just for thousands or millions of followers you don’t know.
This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.
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