A close friend of mine (hey Scott!) has a habit of sending me financial advice he finds on social media and asking me, “hey, is this legit?” For the most part, it is misleading advice at best. However, millions of people watch these videos, believe what they hear, and are putting their financial future (and the risk of an IRS audit) on the line.

Let’s dissect a few popular social media financial “tips” that may not be the wisest choices:

1. Day Trading for Quick Gains:

Social media is rife with stories of individuals claiming to make thousands of dollars in a single day through day trading. While some may indeed experience short-term successes, this strategy can be extremely risky. Day trading requires a deep understanding of the market, significant capital, and an appetite for high-stakes gambling. Most novice traders end up losing money due to emotional decision-making, high transaction costs, and market volatility.

2. Buy Now Pay Later Schemes:

The trend of “buy now, pay later” services like Afterpay and Klarna is popular on social media. Some influencers endorse these services, saying, “Shop without worrying about money; you can pay later in installments!” However, these schemes can lead to debt traps with high-interest rates. As one user discovered, “I ended up with more debt than I could handle, all because I thought it was easy.”

3. Using Leverage to Invest in Stocks:

Some influencers promote using leverage, such as margin trading, to amplify stock market gains. While this tactic can magnify profits, it can also magnify losses. Leveraging involves borrowing money to invest, and if the market moves against you, you could end up owing more than you initially invested. It’s a risky strategy best left to experienced investors who fully grasp the consequences.

4. Misapplying the Augusta Rule for Personal Business Expenses:

The Augusta Rule, often employed by businesses, allows them to deduct expenses associated with their homes if they use part of their home for business purposes. However, some influencers on social media incorrectly advise applying this rule liberally to deduct personal home expenses as business expenses. In fact, one self-proclaimed financial expert claimed, “you can write off your whole home if you work from your kitchen table.” (Newsflash – you can’t). Misusing tax deductions can lead to serious legal consequences and audits by tax authorities. Consult a tax professional for guidance before playing with rules like this.

5. The Oversized Car Deduction Myth:

Another financial tip often misinterpreted on social media is the idea that owning a car weighing over 6,000 pounds (like an Escalade) allows you to claim substantial tax deductions. While it’s true that some businesses can deduct vehicle expenses, the rules are stringent. Cars weighing over 6,000 pounds typically fall into a specific category designed for vehicles used primarily for business purposes, such as heavy-duty trucks. Attempting to deduct such a vehicle for personal use can result in IRS scrutiny and penalties.

While social media can be a valuable source of information, it’s essential to exercise caution when taking financial advice from self-proclaimed experts. Financial decisions should be based on sound principles, research, and a long-term perspective. Consult with qualified financial professionals and educate yourself thoroughly before making any significant financial moves. Remember, there are no guaranteed shortcuts to financial success, and responsible financial planning is the key to achieving your long-term goals.