The Worst Financial Products and How to Avoid Them

Today I want to get the discussion going about whether some financial products are inherently bad. In other words, are there financial products that are a poor choice for everyone, at all times, just by their nature?

Financial Products Often Characterized as Bad

  • Retail Credit Cards
  • Adjustable Rate Mortgages
  • Whole Life Insurance
  • Variable Annuities

Can you think of some other financial products that get a bad rap, justified or not?

Many Variations

One overall problem I see with blanketing these products with the “bad” label is that each can come in several different variations. The amount of choices within the personal finance realm is truly dizzying. Did you know that Vanguard (one of the best online stock brokers) sells variable annuities? They wouldn’t sell a bad product, would they?

Everyone is Different

Another problem with labeling all these products bad is that they are used by so many different people. It’s called “personal” finance for a reason. What’s good for you isn’t always best for your 80 year old grandmother, nor your neighbor down the street. Likewise, what’s bad for you might be perfect for another person.

Take the Time to Understand What You’re Getting Into

All this leads me to one take-a-way: since there are so many choices now, and since every one’s situation is different, we should each spend time learning about the financial products we are using. Is there a single financial product, that if well-researched, applied correctly, and used intentionally, will do a person harm? I don’t think so.

Now, I challenge the idea that you have to become an expert on each product. Although it wouldn’t hurt. All you really need to do is pick up a book, blog , or magazine and get a basic understanding. Then, seek out different opinions from various commission-free people in your life. This could be people you know, mainstream financial gurus, Certified Public Accountants, and Certified Financial planners. 

But don’t stop there. Don’t just depend on others. Apply what you learn, the opinions of others, and your own personal b.s. meter, to the decision. If you have doubts and things aren’t agreeing with your personal risk tolerance, then you still have the control to say no.

Where not to get your information: from the person selling it to you!

I definitely get sold from time to time on various products. Life just happens like that. I strive though, to get my information from several sources: other financial bloggers (they usually know the latest and greatest), financial gurus like Liz Weston and Dave Ramsey (their credibility depends on them being right) , and from my friends and family (they know me best and know the local implications). Hopefully after all of that is applied I can weed out the truly bad financial product and make a good decision for me.

Okay, so what do you think? Are certain products just bad, no matter what? Let me hear from you in the comments below…

FYI…Today marks two years since I first started blogging about finance here at PT Money. Thanks for continuing to read and participate.

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Last Edited: February 17, 2012 @ 3:41 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. Congratulations on 2 years! This will almost be my 1 year anniversary of reading what you have to say about money matters.

    I do agree generalizing a particular financial product as “bad” can be close-minded. My opinion is that these generalizations are generally passed on to help simplify the vastness of the financial products available. If one can quickly form an overall opinion as good or bad then they can categorize and move on to something else.

    I did this (looked at negatively) with the stock market before learning what a mutual fund was and seeing funds as crucial for retirement via a Roth IRA. Good point here PT!

  2. I haven’t used those ones, thankfully. But I would add a couple of DANGEROUS products (dangerous in the hands of non-experts):

    -options of all kinds (sorry Derek Foster)
    -futures
    -trading on margin (borrowing to trade)

  3. Happy two years, Babe! I am so proud of what you have accomplished and what you stand for. Keep up the bloggy-blog work!

  4. find a financial advisor says:

    Your post brings up a good point, how do you judge? The stock market has a negative return for the past 10 years, so should stocks be included as a “bad” financial product? Most whole life insurance has beaten stocks for the past 20 years now. The truth is that no one can predict the future, even over very long periods, which is why it is important to diversify among many different buckets – not just stocks and bonds – and dollar cost average. My firm matches investors to financial advisors, and we’ve seen clients gravitate toward lower-risk solutions like bonds and whole life insurance from highly-rated companies.

  5. Dave Charnot says:

    I would agree, it would be wrong to label some products as generally “bad.” But some products are BAD 100% of the time to large groups of the population. And there are times when certain actions should be employed. Here is a small list of generalizations I make when serving my clients.

    Whole Life insurance is bad for anyone that does not have over $1,000,000 of inheritable assets, or for someone that uses it for any reason other than estate planning. It is definitely not a competent option for Income Protection (for better than 80% of our population)… Because it does not allow for income replacement at affordable costs.

    Interest-Only mortgages are really only for real estate investors that have large amounts of liquid cash reserves, not for the “homeowner” with less than 50% downpayment and “no cash”.

    Credit cards are only for people who qualify for low rates and have their cash earning “higher-than-those” rates in other accounts that leverage the bank and/or make more money investing their cash somewhere else altogether(maybe business ownership & expansion).

    The Roth IRA should immediately be employed once a person reaches their maximum matching allowance in their Qualified Plan at work.

    Dollar-Cost-Averaging in mutual funds is the only way to invest in mutual funds, and proper diversification based on intended-withdrawal periods is the key, not their age.

    Stocks & Bonds need to be actively traded based on intelligent information not emotions or rumors. They should not be bought and held without any monitoring…which means, until a person can afford a competent broker, they should not play that game.

    Cycling dividends from money markets & municipals into growth funds is a great way to protect prinicipal & save on taxes while reinvesting those dividends at NAV into growth funds… with a buy low, sell high strategy.

    Paying ourselves the monthly premiums on all insurances into a money market, earning the interest, and paying annual premiums (which are much lower than monthly totals) to the insurance company is a way to create a cash storage for higher deductibles to further lower the rates we pay by intelligently increasing our risk levels with the insurance companies and saving us $$$.

    Unless someone needs the insurance beneftis, a Variable Annuity should not be used by anyone with a low-mid income, unless they win the lottery or recieve a large sum of money they want to save till 59 1/2 and get some long-term tax sheltering.

    Those are just some common generalities that I think should be used in “most” peoples’ lives.