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TikTok private finance tendencies uncovered

If you've spent time on TikTok, you've likely seen financial advice come in many forms, from investing to saving hacks.

While some of the advice is good, some of it is bad and most of it is surprisingly entertaining. We'll help you figure out what's what so you can make sure your money is in the right place.

Should not be used: investment advice

A 2020 study by startup Paxful found that 64% of misleading personal finance videos posted on TikTok mentioned investing in a single company like Tesla, Amazon, or Alphabet. Many TikTokers also advocate day trading, which means that stocks are bought and sold on that day.

While it is possible to make money by stock picking and day trading, it is much easier to lose money. If you manage to sell stocks at a profit, you will have to reserve part for capital gains tax. These are often excluded from the conversation. This can lead to a surprising tax burden for investors.

Many TikTok influencers also advertise various cryptocurrencies as a solid investment. However, since crypto is a relatively new invention, it shouldn't make up the bulk of your investment.

Daniel M. Yerger CFP of MY Wealth Planners said one of the most popular TikTok trends is the pump-and-dump or boiler room scam. Here's how it works. The TikTok influencer will post about a specific stock they've bought and recommend their followers to buy it too. With a large fan base following their advice, the stock price starts rising, proving the influencer was right.

Then the influencer decides to sell his shares and recommends his followers to sell them too. The stock price crashes, again showing that the influencers knew what they were doing.

"The trader looks like a genius, but he only makes self-fulfilling sacrifices as the last to buy or sell end up holding the pocket," said Yerger.

What to do instead: Young people interested in investing might be better off buying an index fund that holds hundreds of companies in a single stock. An index fund is a properly diversified security, so your risk tolerance is low. Index funds have low fees and are perfect as a long-term investment.

Should Use: Use for sparing advice

Like other social media platforms, TikTok is full of frugal living advice and cheap life hacks. Content creators like to focus on topics like meal planning, saving on groceries, and making their own household products. Other topics include cheap recipe ideas, how you can keep your products longer and how you can save electricity bills.

While these extremely frugal tips can be a little silly, TikTok is a great place to find creative ways to save money. However, if you're buying a paint tube press just to squeeze the last bit of toothpaste out of the box, it may be time to put your phone down.

Do not use: insurance advice

Since many agents are paid commission, they only make money selling a policy. There are many insurance brokers out there who use TikTok to sell insurance policies that are not suitable for young people – or really not for anyone.

One of the most popular TikTok insurance videos says that you can outperform the stock market by investing in a life insurance product that ties its returns to the S&P 500. Unfortunately, the video doesn't mention the high fees, cap on returns, and what happens if you miss a payment.

What to do instead: Unless you have someone who depends on your income, like a spouse or child, you don't need to get life insurance. If you need life insurance, stick with term life insurance. The premiums are low, between $ 20 and $ 40 a month, and much cheaper than permanent life insurance.

Should Use: Basic explanations about personal finance

If you're struggling to understand the difference between a 401 (k) and an IRA, or how a high-yield savings account works, TikTok is full of videos breaking down the basics of personal finance.

For example, if you want to learn more about index funds, search for #indexfund and watch a few videos.

How to use social media for personal financial advice

Veterinarian to the experts

Whenever you find a social media personality that you identify with, be sure to double-check their credentials before taking their advice. Are you a Certified Financial Planner (CFP) or a Registered Investment Advisor (RIA)? Visit their website to see where their advice has been published, such as in prominent newspapers, magazines, and other publications.

Check the advice

Before implementing any advice you see on TikTok or Instagram, do a separate search on Google. That way, you can see if reputable websites recommend it too.

For example, if you see a post about refinancing your student loan, read some articles about refinancing from the New York Times, Marketwatch or Kiplinger's. TikTok videos are incredibly short, so it's difficult to explain all of the pros and cons, even if the creator has good intentions.

Be wary of "get rich quick" programs

RLS Wealth's financial advisor Thomas Kopelman said much of the investment advice on TikTok comes from Gen Zers, who for the most part have seen a bull market, they have not been used to going through a recession for several years. This is why there is so often no mention in the investment recommendations that there will be years in which your portfolio will lose money – and that's perfectly fine.

"I also think that most of the younger people think that you make money in the market every year, no matter what – but that's not true either," said Kopelman.

Other advice seems to simplify the process of making money without adding disclaimers. For example, a video showing how you can earn passive income by subletting your apartment on Airbnb doesn't assume that you need your landlord's approval to sublet your apartment or that you are looking for a rental if you can't find an Airbnb tenant.

"Anything that offers guarantees or appears to be a 'get rich quick' strategy should be viewed with great skepticism," said Ryan Moore, financial planner at Jato Wealth Advisory.

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Author's photo

Zina Kumok (142 posts)

Zina Kumok is a freelance writer who specializes in personal finance. As a former reporter, she has covered murder trials, the Final Four, and everything in between. It has been featured in Lifehacker, DailyWorth, and Time. Read how she paid off $ 28,000 in student loans at Conscious Coins in three years.

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