Taking Financial Advice from Friends? Here’s What You Need to Consider

Recently, I facilitated a financial literacy game, and one of the participants, a fresh graduate from a local university, gave me a lot to think about when it comes to financial advice. She played the game with a good sense of financial responsibility, focusing on clearing liabilities like credit card debt. This strategy helped her improve her net worth during the game, even though she admitted she had little experience with investing in real life.

When we spoke after the game, she shared that most of what she knew about investing came from friends. They advised her to invest a fixed amount into the S&P 500 every month, assuring her that it was the best way to build wealth. While this advice sounded reasonable and practical, it made me wonder whether following advice from friends is always the right move.

The Double-Edged Sword of Financial Advice from Friends

Talking about money with friends feels natural and comfortable. It is easy to trust them because they are in similar life stages and have shared experiences. Many young adults rely on peer advice when it comes to financial decisions, often finding it easier to follow what their friends are doing rather than seeking professional guidance. Friends can provide relatable insights, motivation, and encouragement to take action, making financial planning seem less daunting.

However, relying solely on peer advice has its pitfalls. While their intentions are often good, their knowledge may be limited, leading to one-size-fits-all solutions that may not align with individual financial goals. What works for them may not necessarily work for someone else, especially when factors like personal risk tolerance, financial obligations, and long-term goals are taken into account. For instance, the S&P 500 may be a solid long-term investment, but it comes with volatility that may not suit everyone’s financial situation or emotional comfort level. Friends may also overlook critical financial considerations such as diversification, liquidity needs, and risk management.

It is easy to get caught up in the excitement of following popular investment trends, especially when friends confidently advocate for them. However, financial decisions should not be based solely on what worked for someone else. Taking a step back and evaluating whether the advice makes sense for one’s unique financial situation is crucial.

Understanding the Risks of One-Size-Fits-All Advice

Advice like investing in the S&P 500 every month sounds simple and effective, but the reality is that investment strategies should be tailored to an individual’s specific needs and goals. Blindly following generalized advice can lead to unintended consequences, especially if the risks are not fully understood. The U.S. market, for example, has experienced significant fluctuations over the years, and while it has historically trended upwards, relying entirely on it without diversification may expose an investor to unnecessary risk.

Financial planning involves much more than just choosing an investment. It requires a deep understanding of how different factors, such as market conditions, personal financial obligations, and future goals, come into play. Following a strategy simply because a friend recommended it might not take into account the bigger picture, potentially leading to regrets down the road.

Finding the Right Sources for Financial Advice

While friends can provide a good starting point, it is important to seek guidance from credible and experienced sources to make informed financial decisions. Financial advisors can offer personalized strategies that align with specific goals, risk appetites, and time horizons. They can help individuals understand their options beyond the basic advice received from peers and provide deeper insights into financial planning.

Financial coaches can also play an important role by helping individuals develop better money management habits and long-term strategies without being tied to selling financial products. Their focus is on educating and empowering individuals to take control of their finances with confidence.

Self-education is another valuable tool in making well-informed financial decisions. Reading books, attending workshops, and following credible financial content can provide valuable knowledge and perspective. The key is to verify sources and ensure the information aligns with personal financial goals.

Taking financial advice from multiple sources, including professionals, family members, and trusted mentors, can help create a well-rounded understanding of financial planning. Relying solely on friends may not provide the comprehensive view needed to make the best financial decisions.

Evaluating Financial Advice Before Taking Action

Before acting on financial advice, it is important to take a step back and assess whether it truly aligns with personal goals and circumstances. Evaluating the long-term impact of the advice and considering whether it fits within a broader financial plan can help avoid costly mistakes.

One of the first things to consider is whether the advice aligns with individual financial goals. Just because a friend has found success with a particular investment does not mean it will work for everyone. It is essential to understand the risks involved and whether they are acceptable based on personal comfort levels.

Doing thorough research before making a decision is another important step. Instead of relying solely on what friends say, looking into various perspectives and consulting credible sources can provide a clearer picture. Exploring alternative investment options and strategies that align with personal risk tolerance and long-term objectives can also lead to better outcomes.

Seeking a second opinion from a financial professional or a trusted mentor can provide additional insights and reassurance before taking action. Making financial decisions should be a thoughtful and well-informed process rather than a response to peer influence.

Be Cautious, Be Curious

Friends can be a great source of motivation and inspiration when it comes to finances, but it is important to approach their advice with caution and curiosity. Asking questions, doing research, and seeking professional guidance can help create a well-informed and balanced financial plan.

The young graduate I met during the financial literacy game is on the right track. She is proactive, willing to learn, and open to new ideas. However, like many others, she could benefit from a more comprehensive approach to financial planning that takes into account her unique circumstances and goals.

Financial success is not about blindly following advice from friends but about making thoughtful and informed decisions that align with personal values and long-term objectives. Taking the time to educate oneself and explore different perspectives is key to achieving financial stability and peace of mind.

What About You?

Have you ever followed financial advice from friends that turned out to be great or not so great? What did you learn from the experience?

Let’s discuss in the comments below.