Money / Financial Planning
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TikTok isn’t just about viral dance videos. It has quickly become a popular resource for personal finance advice, but unfortunately, it’s not all good. While there are some legitimate money experts on the app, there are plenty of financial tips floating around on TikTok that are either misleading or just plain wrong.
GOBankingRates asked personal finance experts to debunk some of the worst money advice on TikTok, so if you see any of this on their #fyp, keep scrolling.
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Starting an S Corporation Can Help You Avoid Paying Taxes
In a popular TikTok video, a woman claims that “if you start an S corp and own 100%, you can buy everything you own under that S corp and you don’t pay taxes on anything you buy because it’s considered a corporation. expenses.” The video also claims that she can hire her children to work for you for $12,000 per year tax-free and “give this expense away to her household.”
Why this is wrong: “The S corporation is only ‘allowed’ to purchase things that are considered ordinary and necessary expenses for their own business,” said Bill Smith, national director of tax technical services for the CBIZ MHM National Tax Office. “So, for example, if you bought a lawn mower that you use to mow your lawn, that would be treated as a taxable distribution to you. There are legions of cases discussing the use of a business as a personal checkbook, and they are not limited to S corporations.”
As for the statement that you can “hire” your children to work for you for $12,000 per year tax-free, this probably refers to the annual gift tax exclusion, which wouldn’t even apply here.
“The S corporation 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 legitimately working and compensation is reasonable, there would be no income taxes, but there would be property taxes. job. The S corporation would not be able to deduct the $12,000 from the salary if the children did not work or if the compensation was not reasonable. It appears to combine the standard deduction and the annual gift tax exclusion. There is no aspect to this that involves ‘giving away to your family home’. What he seems to be saying is that his children can work tax-free, but what he is implying is that they don’t have to do anything to get their $12,550 in 2021. That’s wrong.”
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Anyone can teach themselves 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 found success doing it. But this is not an investment strategy that experts recommend.
Why this is wrong: “To be consistently successful in day trading, you need to have considerable capital, time and emotional stamina, attributes most people don’t possess,” said Will Rhind, founder and CEO of GraniteShares, an ETF issuer. based in New York City with more than $1.5 billion. in assets under management. “Although first-time day traders may initially have beginner’s luck, they are likely to suffer losses over time. They could lose their entire investment, or worse, go into debt if leverage were applied. It is essential to never speculate with more money than you can afford to lose.”
Rhind recommends focusing on building long-term wealth 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, offer transparent, low-cost, and tax-efficient exposure to a basket of securities that trade on an exchange like a stock. There are thousands of ETFs available that address a variety of investment objectives, such as capital growth, wealth preservation, income generation, and inflation hedging.”
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You can turn $56K into $1 million in 11 years thanks to compound interest
In a TikTok video, a woman asks @curtisray for financial advice, claiming that 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 her entire salary into a compound interest account. He “does the math” and finds that her $56,000 investment will turn into $1 million in 11 years, tax-free.
Why this is wrong: Andrew Meadows, senior vice president of Ubiquity Retirement + Savings, points out that living on a single income is easier said than done.
“Who, earning $56,000 a year, can go a year without getting paid?” he said. “Although this example shows a two-income household, the point here is what you are willing to give up. Also, you will have to wait 11 years to get that ‘million’. Sounds easy: sacrifice a year’s salary (if that’s possible) and you become a millionaire in 11 years. While it’s true that it’s tax-free, your contributions are taxed before they come in, but you’re not taxed on interest, you’re not hitting a million if you’re considering the 2% interest and account fees. I also don’t see the fee calculations; there are always fees that people overlook and that can erode their savings.”
Ray’s advice may not be “wrong,” but few financial matters are as simple as he makes them seem.
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“Finance is a nuanced business and getting rich quick is often only for the lucky few,” Meadows said. “Beware of all the things that are left out of this council. If you listen critically, you will find that you don’t have the information: How much is the interest? Through whom is this? Is that institution insured? What are the rates? While some things may be true, just chaining numbers together using loose logic won’t make any quick money. I’ve always been told, ‘If it sounds so easy, why isn’t everyone else doing it?’ And while this might be a good investment for some, one size does not fit all.”
Don’t put a down payment on a house if you’re not required to
In another TikTok video, Ray 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 an account with compound interest.
Why this is wrong: Alex Klingelhoeffer, CFA, CFP, at Essential Wealth Advisors, said this isn’t necessarily “wrong” advice, but it may not be the best advice for everyone.
“This advice comes from a good place,” he said. “If you can borrow at a low rate like you can with a mortgage (3-4%) and invest in the markets at 7-9%, you generally should. In fact, most people have a mortgage and they also have investments. What this advice ignores is the behavioral side of investing. Most people are going to lag the markets by a significant amount, watch the market drop, sell, and be disappointed in the experience. In fact, I’ve seen this happen countless times to people who come into my office in their 40s and have made the exact same mistakes in their 20s.”
In addition, a home is a safer investment than the market.
“The problem with this system is that it’s antifragile,” Klingelhoeffer said. “If you lose your job, experience a poor health outcome, or any other issue, your investments could decline at the same time you need cash. Is that money available in a HELOC? No, because if you only have a 3% down payment, you don’t have any substantial equity. Again, this is coming from a good place, and on a spreadsheet, I can make anyone a billionaire with enough leverage. In the real world, the changes will kill this strategy.”
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Buy soon in newer 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 before are extremely wealthy.
Why this is wrong: “Yes, assets can and do increase astronomically. It is famous that two pizzas were once sold for 10,000 bitcoins that would now be worth $350 million,” Klingelhoeffer said.
However, the rise of bitcoin does not prove that all cryptocurrencies on the market will experience the same increase in value.
“The primary use of cryptocurrencies is as a dumber item, meaning you buy it to sell to someone else,” Klingelhoeffer said. “There are many currencies today and 99% of them will lose their value in less than three years. Why? There is a finite supply of people willing to put a large portion of their net worth into crypto and those who do will want some liquidity. Until there is a coin with demonstrable real-world utility better than traditional banking in terms of functionality, power consumption, and most importantly, legality, crypto is just a space to speculate and see if it can win. I don’t envy 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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