TikTok is not just about viral dance videos. It has quickly become a popular resource for personal financial advice – but unfortunately, everything is not good. Although there are some legitimate money experts on the app, there is a lot of financial advice floating on TikTok that is misleading or simply wrong.
GOBankingRates asked personal finance experts to remove some of the worst money advice on TikTok – so if you see any of this show up on your #fyp, keep scrolling.
Starting an S company can help you avoid paying taxes
In a popular TikTok video, a woman claims that “if you start an S company and you own 100%, you can buy everything you own under that S company and you do not pay tax on something you buy because it is 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 “return this expense to your household.”
Why is this wrong: “The S company is only” allowed “to buy things that are considered common and necessary costs for its own company, says Bill Smith, CEO of CBIZ MHMThe National Tax Office. “So, for example, if it bought a lawnmower that you use to mow your lawn, it would be considered a taxable distribution to you. There are legions of cases discussing using a company as a personal checkbook, and they are not limited to S companies. ”
As for the claim that you can “hire” your children to work for you for $ 12,000 a year tax-free, this is probably with reference to the annual exclusion of gift tax — which would not even apply here.
“The S company 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 certain when the video was published), so provided the child is legitimately working and the compensation is reasonable, there would be no income tax, even if it is still employment taxes. The S company would not be allowed to deduct $ 12,000 in salary if the children did not work or the compensation was unreasonable. She seems to reconcile the standard deduction and the annual exclusion of gift tax. There is no aspect of this that involves ‘going back to your family household’. What she seems to be saying is that your children can work tax free, but what she’s suggesting is that they do not have to do anything to get their $ 12,550 in 2021. That’s wrong. ”
Anyone can teach themselves to shop daily and be successful with it
A lot of TikTok’s personal financial content revolves around day trading and how different users have succeeded with it. But this is not an investment strategy that experts recommend.
Why is this wrong: “To be consistently successful in day trading, you must have significant capital, time, and emotional endurance – qualities that most individuals do not have,” says Will Rhind, founder and CEO of GraniteShares, a New York City-based ETF issuer with over $ 1.5 billion in assets under management. “Although first-time traders may initially have novice luck, it is likely more likely that they will suffer losses over time. They may lose their entire investment, or worse, go into debt if leverage was applied. It is important to never speculate with more money than you can afford to lose. ”
Rhind recommends focusing on building long-term wealth instead of short-term gains.
“You’re probably better off investing your money in a diversified investment vehicle that eliminates the guesswork,” he said. “Exchange-traded funds, for example, offer tax-efficient, cheap and transparent exposures for a basket of securities that trade on a stock exchange just like a stock. There are thousands of ETFs available that solve various investment goals, such as capital growth, wealth preservation, income generation and inflation hedging. ”
Find out: Best expert money advice for millennials
You can make $ 56,000 to $ 1 million in 11 years thanks to compound interest
In a TikTok video, asks a woman @curtisray for financial advice and says that her husband earns $ 80,000 a year and that she earns $ 56,000. Ray recommends that the couple live solely on the husband’s income while the wife spends her entire salary on a compound interest account. He “pushes the numbers” and finds that her $ 56,000 investment will be $ 1 million in 11 years tax-free.
Why is this wrong: Andrew Meadows, senior vice president at Ubiquity Retirement + Savings, notes that it is easier said than done to live on a single income.
“Who can earn $ 56,000 a year, can go a year without getting paid?” he said. “Although this example shows a household with double incomes, the point here is what you are willing to give up. In addition, you have to wait 11 years to get the “millions”. It sounds simple: sacrifice a year’s salary (if at all possible) and you’ll become a millionaire in 11 years. While it is true that it is tax-free — your fees are taxed before you go in, but you are not taxed on interest — you will not really reach a million if you look at 2% interest and account fees. I also do not see the calculations on the fees; There are always fees that people lack that can erode your savings. ”
Ray’s advice may not be “wrong”, but few financial issues are as cut and dry as he makes them seem.
“Finance is a nuanced business and getting rich quick is often just for a select few and lucky few,” Meadows said. “Watch out for all the things that are left out of this advice. If you listen critically, you will find that you do not have the information: How big is the interest? Who is this through? Is that institution insured? What are the fees? Some things may be true, but it’s not just merging numbers with loose logic. I’ve always been told, ‘If it looks that simple, why does not everyone else do it?’ And while this may be a good investment for some, one size fits all. ”
Do not deposit a down payment on a house unless you are required to do so
In another TikTok video, Ray says that it is best to put down the minimum possible down payment and then deposit the rest of the money you had saved for a house in an account with compound interest.
Why is this wrong: Alex Klingelhoeffer, CFA, CFP, at Exencial Wealth Advisors, said that this is not necessarily “wrong” advice, but that it may not be the best advice for every person.
“This advice comes from a good place,” he said. “If you can borrow at a low interest rate that you can with a mortgage-3-4% -and invest in markets at 7-9%, you should usually do so. In fact, most people have a mortgage and also have investments. What this advice ignores is the behavioral side of investing. Most people will track markets with a significant amount, see the market decline, sell and be disappointed with the experience. In fact, I have seen this happen countless times for people who come to my office in their 40s and have made the same mistake in their 20s. ”
In addition, a home is a safer investment than the market.
“The problem with this system is that it is antifragile,” Klingelhoeffer said. “If you lose your job, experience a poor health outcome or other problems, your investments may be down while you need cash. Is that money available in a HELOC? No, because if you only have 3% lower, you have no significant equity. Again, this comes from a good place, and on a spreadsheet, I can turn anyone into a billionaire with enough leverage. In the real world, fluctuations will slow down this strategy. ”
Buying newer cryptocurrencies early makes you rich
TikTok users @superhexwin suggests that you buy new cryptocurrencies – like HEX – as a way to get rich, and notes that people who bought bitcoin and Ethereum early on are now extremely rich.
Why is this wrong: “Yes, assets can and do go up astronomically. Famous, two pizzas were once sold for 10,000 bitcoin, which would now be worth 350 million dollars, says Klingelhoeffer.
However, the rise of bitcoin does not show that every cryptocurrency on the market will see the same increase in value.
“As of 2021, the main use of crypto is a major idiotic article, that is, you buy it to sell to someone else,” Klingelhoeffer said. “There are lots of coins these days and 99% of them will be worthless in less than three years. Why? There is a limited range of people who are willing to put a large part of their net worth into crypto and those who do want some liquidity. Until there is a coin with a demonstrable real tool that is better than traditional banking in terms of functionality, power consumption and, most importantly, legality, crypto is just a space to speculate and see if you can beat a winner. I do not confuse 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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Last updated: September 15, 2021
This article was originally published on GOBankingRates.com: The worst personal advice about TikTok (and why it’s wrong)