Analysis

3 Ways Taking Financial Advice From TikTok Can Leave Your Life a Mess

Would it surprise you to learn that more than half of TikTok users say they turn to the social media platform for financial advice? A study by Personal Capital found that these TikTok users not only look to TikTok contributors for advice, but only 4 in 10 of them fact-check the financial advice they’re given. Given the lack of financial education taught in schools, taking the word of a random online personality could be a recipe for financial disaster. Here are three reasons why.

1. Anyone can post to TikTok

Any of us could refer to ourselves as an arborist (tree specialist), but that doesn’t mean we know anything about trees. The same is true of many “financial experts.” Just because someone claims to have inside knowledge doesn’t mean they can offer anything meaningful to your personal finances.

Accepting advice from someone without knowing about their training, experience, and philosophy on money management is like allowing a 12-year-old kid to drive your car because they swore they know how. Unless you know someone personally or can verify what makes them an expert, you risk allowing bad advice to become reality.

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Anyone can say anything online, as we’ve all witnessed. Why trust your financial future to someone you’re not sure you can trust? If you’re looking for a trusted financial advisor, ask friends and family who they would recommend.

2. Bad intel can become your reality

According to a report by the University of California-San Diego, the average American consumes somewhere around 34 gigabytes of data and information every day of the week. That’s equivalent to 100,000 words heard or read. While we forget the vast majority of what we hear, a message repeated often enough eventually begins to feel like the truth.

Let’s say a TikTok personality tells you that retirement accounts are a waste of money. The contributor is a great speaker and has scrounged enough data together to seem legit. Instead of contributing to a retirement account, they tell you that investing in precious metal coins will make you wealthy long before you hit retirement age. You watch the video a few times, then notice that the same person has also posted on other social media outlets. Soon, you’ve heard or read the contributor’s message a dozen times.

Here’s why you’re likely to remember the message:

  1. You feel good about what the TikToker is saying. According to research from the University of California-Davis, Center for Neuroscience, our brains prioritize rewarding memories over others, even replaying those memories when we are at rest. And getting rich sooner rather than later certainly feels like a reward.
  2. According to Professor Charan Ranganath, lead author of the study, “The brain prioritizes memories that are going to be useful for future decisions.” What could be more useful than the “sure fire” way a TikTok contributor promises will make you wealthy?
  3. Repetition is key when it comes to remembering new material. The more often you turn to this particular TikToker and hear their spiel about buying coins, the more the thought sticks in your mind.

3. Everyone is selling something

Data shows that TikTok influencers earn an average income of nearly $122,000 annually, with some earning millions of dollars. In order to receive a steady stream of income, TikTokers must gather followers, and the best way to do that is to say something outrageous, tell people what they want to hear, make beautiful promises, or all of the above.

It’s about gaining followers and earning revenue. After all, they have budgets based on income targets they want to meet and if they can get you on the hook, they’re that much closer.

One of the most outrageous pieces of financial advice has mushroomed on TikTok, with an entire squad of TikTok influencers telling people to stop contributing to their 401(k)s. Here’s a sample of their argument:

  • Management fees are too high: That may be true in some cases, but you have to decide whether you would do a better job investing your money than a professional money manager with a fiduciary responsibility to look out for you.
  • You can’t get the money penalty free until you’re 59 1/2: Um, yes. 401(k)s are designed to grow as much as possible prior to retirement. If you’re taking money out early, you’re disrupting that growth.
  • You don’t know how much you’ll have to pay in taxes: The majority of people have less money in their checking accounts after they retire. A 401(k) may actually end up saving you money at tax time, particularly if you’re in a lower tax bracket.

This crew of influencers say people should purchase a life insurance policy and borrow against it in old age, instead of investing for their retirement. Some recommend that borrowers not repay the money. Instead, they should die with the debt.

And the really stinky part? Many of these influencers are associated with life insurance companies that give them a piece of the revenue if you cancel your retirement plan and buy a life insurance policy.

Most of us learned not to engage with strangers when we were kids. The same applies to us as adults. No matter how well you feel like you “know” someone you’ve only seen online, be suspicious of their intentions. If they’re saying ridiculous or outrageous things to gain followers, they’re trying to sell you something, or they get a kickback if you take their advice, be wary.

Better yet, surf over to a legitimate financial site and learn more about how legitimate brokerages work.

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