TikTok personal finance advice is going viral, but be wary - Vox.com

Posted: 18 Jan 2021 06:00 AM PST

People are learning all kinds of new things on TikTok: how to do viral dances to popular songs, how to make hot cocoa bombs or paint an accent wall. They are also learning dubious financial information from unverified sources with millions of followers.

Personal finance TikTok, also known as #FinTok or #StockTok, has become a massively popular segment of the app that, at its best, is made up of experts who make videos discussing how to get out of credit card debt, explaining the difference between a Roth IRA and a 401(k), and encouraging young people to start investing for retirement.

At its worst, however, Finance TikTok perpetuates financial myths, scams, and dangerously misleading information. TikTok's ability to take an average user's video and show it to millions of people in a matter of hours or days is unmatched. As a result, what users end up seeing often isn't good advice from trusted sources, it's just one random person's experience making thousands of dollars off buying and selling Tesla calls. Other times, it's business owners promising to make you a millionaire — all you have to do is give them your money first.

"I love the content, but people should not invest on the basis of a TikTok video," said Josh Brown, CEO of Ritholtz Wealth Management, who has a YouTube channel and TikTok of his own. Not that it's not good for young people to get interested in the stock market and personal finance — just that videos of unverified claims that happen to go viral might not be the best (and certainly shouldn't be the only) source of information. "People would be better served reading books than following TikTok gurus on trades."

What's happening on TikTok is hardly a new phenomenon. Day trading has been around since the 1970s, and scams have been around forever. People tend to evangelize risky investments during a bull market, when it's far easier to make money because the stock market is going up overall. During these times — and we're in one now — it's also far easier to position oneself as a financial genius, when really, everyone else is making money, too.

Below, Vox business and politics reporter Emily Stewart breaks down 10 of Finance TikTok's most viral investing videos and what they're actually selling, and why you might want to think twice before falling prey to a get-rich-quick scheme, or worse, accidentally doing something illegal. This commentary is not intended to provide specific advice or recommendations on any investment product or strategy. The bottom line: The best financial advice is the kind that's tailored to your life, and likely can't be contained in a 60-second video. Speak with your own financial advisor or investment professional to decide what's best for you.

1) The claim: If you start an S corporation, you don't have to pay taxes

This is a realtor responding to the TikTok prompt, "What's a piece of information that feels illegal to know?" with the claim that by starting what's known as an S corporation, you can buy everything you own as a "company expense" and therefore do not have to pay taxes on it. She also says that it allows you to take one corporate vacation per year, and that you can employ yourself and your children without paying taxes. She ends the video with the acknowledgment that "It feels really shitty to do it, but it's kinda how you avoid paying taxes."

What this really is: An S corporation is indeed a thing, but not a thing that means you don't have to pay taxes.

Why you should think twice: "All I have to say is anybody who takes tax advice from her likely takes stock tips from their hairdresser and medical advice from their grocer," said Barbara Weltman, a Florida-based tax attorney and author of J.K. Lasser's Small Business Taxes 2021. "It's wrong on so many levels, I don't know where to begin."

An S corporation is a specific type of corporation defined by the IRS whose setup allows for some tax relief. It can have up to 100 shareholders and is a "pass-through entity," which means income and losses are passed through to shareholders, who then put them into their own tax returns. S corporations also get personal liability protections, so creditors with claims can only go after the corporation's assets, not the shareholders' personal assets.

Say you have an S corp and employ and pay yourself. You still have to pay FICA taxes (basically Medicare and Social Security taxes) on your salary, and then the salary is taxable income to you. If you employ your children and pay them as well — the IRS scrutinizes family transactions, so they actually need to work — again, there are still FICA taxes on their wages. Also note that the IRS tends to take a pretty close look at S corps to make sure there's nothing fishy going on.

In other words, S corps are not the way to live a tax-free life. "'Obviously, people shouldn't follow this kind of advice," Weltman said.

2) The claim: The Federal Reserve has secret million-dollar bank accounts for every American citizen

A woman alleges that there is a letter on the back of your Social Security card that correlates to a bank account owned by the Federal Reserve, attached to your name, and containing millions of dollars. You can access it, she says, by looking up the routing number of your local bank and entering your Social Security number as the account number. "I've used it on energy and the payment has gone through," she claims.

What this really is: A myth!

Why you should think twice: This myth has been around for a while — and hate to break it to you, but it's not true.

Back in 2017, the New York Times dove into this myth and the Federal Reserve's attempts to combat it. Multiple Fed banks issued warnings to the public not to fall for this trick. "Any video, text, email, phone call, flyer, or website that describes how to pay bills using a Federal Reserve Bank routing number or using an account at the Federal Reserve Bank is a scam," the Atlanta Fed warned at the time. It clarified that Federal Reserve routing numbers are for sorting and processing payments between banks — not making online payments. The Times reported that 107,000 payments totaling more than $100 million had been reversed because of the scam in just a three-month period that year.

Fed accounts could be a thing someday — but they won't come with millions of dollars in them. There is a growing movement for the central bank to give every American an account, which would make payments faster and give banking access to people who are currently unbanked or underbanked. In times of crisis, the federal government could use such accounts to get people payments, such as stimulus checks. But, again, they're not going to be filled with millions of dollars of free money.

3) The claim: You can become a millionaire if you open an MPI account

Curtis Ray is a personal finance entrepreneur with 1.2 million followers on TikTok whose videos claim to show viewers how to make millions of dollars using compound interest. Specifically, he tells them to do that by opening an MPI account with his company, MyMPI.

What this really is: A hybrid investment-insurance product — like expensive, binding life insurance — being sold by a guy who makes money if you sign up, promises to make you very rich, and says that if it doesn't work out, it's on you.

Why you should think twice: To understand exactly what's going on here, I reached out to Curtis Ray himself — and some other experts for their takes.

Compound interest is a common and often smart investment strategy, but Ray is pushing a very specific approach to it: his own. In fact, he insists no one else's version of compounding is right but his. What he pushes is Maximum Premium Indexing, or MPI, with SunCor Financial, of which he is president and CEO. "MPI itself is more a philosophy than it is a product itself," Ray said.

His website promises a "triple advantage of retirement planning" of life insurance, stock market growth, and compounding interest. It is essentially a type of indexed universal life insurance, which is a permanent life insurance tied to stock market indexes — in this case, it's S&P 500 index call options. People put money in and then can open a line of credit from its cash value to get money out, during retirement or before. For the first 15 years, there are high surrender charges if you decide to cancel. It pays out when you die. These types of products have drawn scrutiny from regulators over promised potential gains.

Ray acknowledges that what he's advocating for is expensive at first because of the setup fee but insists that it evens out over time. "It's like buying a Tesla. Tesla's not cheap to buy, but guess what? Once you buy it, it's basically free to drive," he said.

If it doesn't work out because someone can no longer make payments, well, that's their problem, not his. "You're the risk in the plan, it's not the plan that's the risk; you're the risk. Because if you're not in it long-term, don't do it," he said. "If this is not a priority to you, to build financial freedom, do not do it."

And even if the cost may be on the high end, Ray says the extra money is worth it — he claims his approach could lead to up to four times the average retirement income. "Who cares what I get paid? If I can produce you up to four times more retirement income, what does it matter what I get paid?" Ray said, "Although I don't get paid very much ... even if I got paid 500 billion times what a financial adviser got paid, if I produced you up to four times retirement income, what does that matter? It's about the net results; we've got to have the vision of what we want, and if you get that, then that should be the reason you do it, not because of fees or taxes or anything else that people try to trick you on."

While Ray and proponents of these kinds of products argue that in the long run, they're better, many experts disagree.

"This appears to be an old idea and costly insurance product with a new shtick," said Zach Teutsch, a financial adviser at Values Added Financial. He added that most of the time, these types of products are too expensive to be a good fit for most people.

Investopedia dove into the pros and cons of indexed universal life insurance versus 401(k)s and IRAs and determined the latter is usually the better bet: The fees are generally lower and won't eat away so much at returns, and you don't have to worry so much about the fine print.

Brown also pointed out that for young people — as in, the TikTok audience — paying for life insurance likely doesn't, um, make a whole lot of sense. "There's absolutely no reason for teenagers and people in their 20s to be buying life policies rather than investing in index funds. It's overloaded with unnecessary fees and surrender penalties," he said. "Life insurance is life insurance; it's not a substitute for investing."

Ray says that financial education is important to him and that he uses TikTok as an "attention-getter." He suggests you read his books. "There is so much knowledge inside those 200 pages that your brain is going to explode," he said.

4) The claim: You can pay less on hotels if you buy their points

A man claims you can purchase points directly from a hotel's loyalty program, then use them to pay for your stay. (He says you'll get discounts that way.)

What this really is: Hotels do reward customers for buying into loyalty programs, and sometimes, buying and paying with points can be a good deal. But these types of tactics are for those more advanced in the world of travel points, and there are other places to start.

Why you should think twice: Buying points directly from a hotel chain or airline in order to book a room or flight can work sometimes, but not always. And there's risk involved — the room or ticket you want might change by the time you go to redeem the item. Once you buy points, you can't return them. It's cash you can't get back.

"In general, there are arbitrage opportunities with buying points. But for the average person, I don't recommend it unless you have a specific redemption in mind," said Brian Kelly, founder and CEO of the Points Guy.

Before buying a bunch of points to book an expensive, full-price room through, say, Hyatt.com, Kelly said that a better route is to look at sites such as AAA or HotelTonight, where you can often find a better deal. It's also important to weigh the value calculation you're making — for some people, buying points to buy a first-class airline ticket may be worth it for a comfortable experience, while for others, it's not.

If you're new to the points game, buying points isn't the best place to start. "The best place to start is just getting an intro credit card with a nice sign-up bonus," Kelly said. He emphasized that that doesn't necessarily mean a no-annual-fee card — look at the perks and benefits to calculate what's the best deal. If you can't pay off your credit card bill every month, these types of cards may not be for you, because the interest rates can be so high the points benefits are basically wiped out.

"The points game is winnable, but you need to be on your game in terms of paying off your bills in full," Kelly said.

5) The claim: Just buy Tesla calls!

A TikToker documents himself buying $15,000 worth of Tesla calls and loses thousands within a few minutes, but a few hours later ends up making about $7,000 in total. (To his credit, he does warn viewers not to try this at home.)

What this really is: Options trading, a risky strategy.

Why you should think twice: Options trading has been a major theme in the recent day trading trend brought about by apps such as Robinhood. Options give traders the right to buy or sell shares of something in a certain period. They're sort of a way to bet whether a price will go up (a call option) or down (a put option).

Buying a call option on Tesla or any stock is relatively easy, but experts warn that it's not necessarily advisable for everyone. Options can be a way to make a lot of money, but they're a way to lose a lot of money, too. "Options are generally expensive," Teutsch said. "This is foolish. This level of volatility will generally wipe people out eventually." Investopedia has good information on options pricing.

He said there are cases where it makes sense to make leveraged bets, such as buying a house with a mortgage, but generally, leveraged bets on the stock market are for long-term investors who have a lot of assets available or for highly sophisticated investors who are positioned to deal with the volatility. "If losing the money invested would significantly, negatively affect a person's financial life, they should probably invest significantly less in this idea, or not at all," he said.

Some investors are attracted to options trading because it's exciting and can feel more like gambling than investing. But investing isn't really supposed to be exciting. And it's possible to make a couple of good bets early on, only to eventually get wiped out — a common story. In June 2020, a 20-year-old day trader died by suicide after believing he'd lost hundreds of thousands of dollars on options trading.

Believing Tesla's stock will go up has largely been right this year, and Elon Musk has an army of fans determined to stand by him and Tesla through thick and thin. But Tesla's rise might not last forever — in the past, Musk has tanked Tesla's share price with a tweet. And single stocks go up and down all the time.

"You gain so much confidence when you make one correct move, but it is so hard to make that same move over years and years," said Chris Browning, the host of the podcast Popcorn Finance. "People get into options because they're tempted with the idea of them being able to make massive gains that would dwarf investing in something simpler."

If you want to get into options, Bankrate has a good primer on how they work. But, again, know what you're getting into.

Also note: We're in the midst of a bull market, meaning that pretty much everyone is making money. Lots of people are making money right now because the market is going up, not because they're an investment genius.

"They don't know that what they've done is not repeatable, and the tragedy is that after that success, you talk yourself into, 'This is my expertise,' and so the dollar amounts get bigger, which means eventually the losses get bigger," Brown said.

6) The claim: Just short the stock market!

This is a viral TikTok of hedge fund billionaire Bill Ackman explaining how to short the stock market using a metaphor about coin collecting. (It did not help my personal understanding of short selling whatsoever.)

What this really is: Again, a thing, but risky.

Why you should think twice: Short selling basically means you think the price of a stock or an asset is going to go down. Like options, it can be risky and is generally something for more experienced investors — and even they can screw up.

Take Ackman, the man explaining what a short trade is in this video. He is the founder and CEO of the hedge fund Pershing Square and a billionaire. In 2012, Ackman announced a major short bet against Herbalife, a nutrition company he alleged was a pyramid scheme. He spent years on his campaign against Herbalife, at one point getting into a heated argument with fellow billionaire Carl Icahn over it on live TV and at another getting choked up while talking about it. Eventually, he gave up and unwound his short position. (No need to worry about Ackman; his firm had a 70 percent return in 2020.)

"That is a tool for sophisticated traders, and even then, the results are mixed and the risk is very high. For the average individual investor, don't even think about it," said Greg McBride, chief financial analyst at Bankrate.

If you short a specific stock, you can wind up being right, but you can also wind up being wrong — lots of people have famously shorted Tesla for years and thus far aren't having much luck. And as for shorting the whole market, well, that's probably not the best idea, either. While the market rises and falls in the short term, in the long term, the general trend is up.

"Shorts can be very dangerous. Since markets trend up, you have to get lucky to make money this way," Teutsch said. "If you buy something for $50, your potential loss is limited to $50. If you short sell, your potential loss is infinite. I suspect a lot of people short-sold during March of the Covid pandemic and lost their shirts when the stock market recovery happened sooner — and more sharply up — than many expected."

7) The claim: Just copy the investments of rich people!

Here's a guy whose investment went up 16 percent in two weeks by copying the exact investments made by CEOs.

What this really is: Copying public information filed with the SEC.

Why you should think twice: The Securities and Exchange Commission (SEC) has a bunch of disclosure requirements for investors and companies, including ones regarding holdings and trades.

What the guy in this video is doing is using a screener that tracks something called Form 4s on the SEC's website. Those are "statements of changes in beneficial ownership" that are required whenever insiders of a certain company — directors, officers, and shareholders who own more than 10 percent of its stock — buy or sell shares. You can look up this type of information on the SEC's website.

There are other trackers that follow 13F forms, in which institutional investment managers with at least $100 million in assets under management disclose their holdings at the end of every quarter. And ones that follow Schedule 13D forms, which are filed when someone acquires 5 percent or more of a company's shares — often a sign of an activist investing campaign.

Can you follow these moves? Sure. Should you? Well, it's complicated. There are different disclosure timelines on the trades — Form 4s have about a two-day lag, Schedule 13Ds about a 10-day lag, and for 13Fs, it's 45 days. You also don't know why insiders or big investors are making certain trades, or what the underlying strategy is.

"They're working on a much different scale than the average person is," Browning said.

Stock-picking is a tricky business, whether you're following someone or going off your own instincts. In 2007, billionaire investor Warren Buffett made a $1 million bet that an S&P 500 index fund would outperform a handpicked portfolio of hedge funds over 10 years. He won the bet: The S&P fund returned about 7.1 percent annually on average; the hedge funds, which are paid millions of dollars to invest, 2.2 percent.

8) The claim: Pay as little on your down payment and mortgage as possible

Our friend Curtis Ray is back, saying that it's best to spend as little as possible on your mortgage and down payment, and then invest the money you're not spending in an MPI.

What this really is: There's no one right way to approach your mortgage, and you should talk to a professional, many of whom will tell you this is not a bad idea.

But also, this guy is saying not to pay your mortgage because he wants you to invest in a product he's hawking.

Why you should think twice: I asked Julia Gordon, president of the National Community Stabilization Trust and an expert on mortgages and housing, about how to approach mortgages. Her advice was something that should be abundantly clear by now: "First of all, no one should ever get their financial advice from TikTok. It is obviously completely personalized to your own situation."

That aside, here's a look at this advice. The conventional wisdom is that when you're buying a home you should put in a 20 percent down payment. That's not realistic for everyone, and if you can't afford it, that shouldn't necessarily be a deterrent to buying a home. "For people who are ready for homeownership for other reasons but for whom the down payment is the only obstacle, it might make sense for them to explore low down payment options," Gordon said. "But they will pay for that over time."

Mark LoCastro, a spokesperson for the personal finance website SmartAsset, said that if your credit score allows you to take advantage of low interest rates and get a mortgage with less than 20 percent down, this approach might make sense. "This will allow you to invest the remaining money (you saved on the down payment) in the market, where historic returns would likely make up for the extra interest you'll pay throughout life on the loan," he said.

But, he warned, there are potential downsides: Putting less down could mean higher interest rates, fewer available mortgage products, and additional payments, such as private mortgage insurance.

Using SmartAsset's investment and mortgage calculators, LoCastro ran some hypothetical numbers on a 30-year fixed loan for a $250,000 home, one with a 3 percent down payment and one with a 20 percent down payment. He assumed a 2.86 percent interest rate on both, and on the 3 percent loan, he assumed the money saved on the smaller down payment — $42,500 — would be invested in the S&P 500. The "pay less and invest the rest" strategy is the "clear winner," he said. "Just be sure to take into account how higher rates and PMI might result in you paying more over the life of the loan." And, of course, there's never a guarantee of investment returns, and there's no one right fit for everyone.

McBride emphasized that there's also an emotional component to this approach — a lot of people feel better when they have less debt and own more of their home, and they get nervous when their investments inevitably fluctuate. "The math of not accelerating payment on your mortgage and maximizing your 401(k) every year only works if you've got the discipline to then hang in there and hold on to those investments even when the markets tumble," he said.

9) The claim: Actually, you should pay more on your mortgage

This woman makes the case that if you pay half your monthly mortgage payment every two weeks, you can save money on interest and pay off your mortgage faster.

What this really is: There's (still) no one right way to approach your mortgage, and you should talk to a professional.

Why you should think twice: This, again, could make sense for some people, and the best bet is to talk to a professional for advice.

One thing Gordon emphasized for homeowners to keep in mind with regard to their mortgage is how old they are and when they think they're going to retire. "In the olden days, as it were, people got mortgages when they were young and starting out ... and then they literally retired the mortgage when they were ready for retirement, which provides you with a bump in income you might need if you no longer have a regular salary," she said.

In recent years, that's changed, and people are increasingly going into retirement still carrying mortgages. That's not the end of the world, but it's certainly something to take into account when figuring out post-retirement finances and whether you can afford to have a mortgage when you're no longer working. "People tend not to think about that when they refinance when they're 45 or 55," Gordon said.

Of course, how much you pay down your mortgage also depends on how much you can afford. Some people can't afford to make big payments. "If your mortgage is higher than you can comfortably carry, refinancing and stretching out the terms so that your monthly payments go down is one way to help address financial pressures," she said. "We're going to see a lot of that in the next year or so as we work through the people who lost jobs or lost income due to Covid."

McBride, again, emphasized the emotional aspect of this — some people just feel better if they're paying their mortgage down. "That's a risk-free return."

The main takeaway, per Gordon: "It's great that TikTok people have gotten you thinking about trade-offs — now talk to a qualified housing counselor to get personalized advice for your own financial situation." You can find a directory of federally approved counselors here.

10) The claim: Invest in compound interest as early as possible

Former pro skater turned investment firm co-founder Mikey Taylor says that 18-year-olds should invest $300 each month in the stock market for eight years, and by the time they retire, it'll be worth $1.8 million.

What this really is: A pretty solid long-term investment strategy.

Why you should … maybe consider it: The idea behind compound interest is quite simple: Money makes money, and that money makes money. You know how your credit card bill keeps going up because of interest when you don't pay it off, even if you don't spend more money? That, but in reverse. There's a quote that compound interest is the "eighth wonder of the world" that's been dubiously attributed to Albert Einstein, but regardless of whether he actually said it, the concept stands up.

Generally, experts say the best way to really take advantage of compound interest is to start investing early — maybe putting money into a handful of index funds, or whatever vehicle you choose — and then keep investing and wait. Time is the big factor here. The more you have, the better.

"It's like rolling a snowball down a hill," McBride said. "The longer the hill, the bigger that snowball's going to be at the bottom."

There are no guarantees how much money you'll wind up with — ultimately, markets fluctuate, though in the long term they go up. But if you dramatically oversimplify it and as an exercise assume money will double every 10 years, $1,000 invested when you're 18 would turn into $32,000 by the time you're 68. "There are a few challenges, though," Teutsch warned. "This match doesn't account for inflation, fees, or taxes. Fees are coming down, but not the others."

There's also a factor called sequence risk — a formal term for what amounts to bad luck if the market goes south when you're retiring. Someone saving since 1968 and planning to retire in 2008, when the financial crash hit, may have suddenly seen their investments cut dramatically if they were heavily in the stock market. That's why a lot of times as investors get closer to retirement, they put their money into more stable vehicles, such as bonds.

But generally, we can assume the TikTok audience is young, and so the "invest early and often" concept stands. "Doing something like consistently investing a reasonable amount of money, especially if you're young, can have huge impacts," Browning said.

It does take discipline: Money you're putting into an investment account is money you're not spending day-to-day.

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