Debunking Personal Finance Advice On TikTok

What started out as a social media app where Gen Z and Millennials (and the occasional Baby Boomer) would share viral dances has since grown into a hub for free personal finance education.

“FinTok” (aka Personal Finance TikTok) is the name of the growing platform trend where users, or self-proclaimed experts, offer advice on what to do with your money. Topics range from credit card debt and 401 (k), investing and retirement.

Like everything on social media, however, not all of the “expert” advice you see is necessarily true. What a user says that works for their finances won’t apply to the millions of other TikTok viewers watching.

Paxful, a cryptocurrency trading platform, has found that about one in seven videos of TikTok’s financial influencers is misleading, encouraging users to make financial decisions without stating any type of disclaimer. Paxful also revealed in its “Influencer Investors” article that more than half (52%) of the influencer accounts they analyzed had posted at least one deceptive video – and those accounts collectively have 9.46 million followers.

To help you identify fake news from reliable and accurate advice, CNBC Select asked Brian Walsh, CFP at SoFi, to comment on the common misinformation he sees spreading on TikTok.

Here are the three most common general personal finance tips that he sees take control of the social media app.

False. Videos that tell you to invest in X and Y stocks just because someone else rich and famous is doing it – or a company insider is doing it – is a red flag.

You may come across TikTok videos that tout investing in certain companies like Tesla, Amazon, and Alphabet or that distinguish specific funds because successful people invest in them.

An example is this TikTok user who copied the exact investments of CEOs for two weeks. In the 60-second video, he says, “Thank you rich people! “

But while imitating the financial behaviors of successful people may seem clever, it is only appealing on the surface.

“Just because you buy or sell stocks because someone famous or rich doesn’t mean it will be effective,” Walsh said.

Why? Because powerful people have more disposable income. They can afford to take a lot more risk than the average Joe. Their income is often high enough that a small setback or loss in their investments doesn’t leave them bankrupt or deter them from continuing to invest.

They may also have better knowledge and awareness of the market (or the advisers who brief them), which unfortunately are factors that don’t apply to every person on TikTok, Walsh explains.

“I do not say [their advice] would never work; instead, you should invest based on your comfort with risk, keeping your personal financial goals and your financial situation in mind, and not just emulating what the rich and famous do, ”he says.

False. Walsh has seen a handful of videos on TikTok encouraging people to emulate the holdings of investment managers, or stocks, who have performed well in the past.

An example is this TikTok user who shows on a heat map how much people have made by buying and holding Bitcoin. In the video, he deduces that those who buy HEX, another type of cryptocurrency, can get rich as well.

Again, Walsh cautions to be careful: “Past performance doesn’t predict future performance,” he says. Just because a top performing equity or fund manager has performed well in the past does not mean that it will remain so over time. When following specific fund managers, keep in mind that the content of the investment manager’s portfolio (stocks, bonds, mutual funds, etc.) is dated and has likely changed since then.

“You would basically just follow what they did, probably at different prices and technical factors,” says Walsh.

False. TikTok is full of videos on how to get rich quick. “There is no quick way to Richie Rich,” says Walsh.

Common get-rich-quick schemes seen on the social media platform promote investing, real estate, and passive income as easy ways to become a millionaire overnight.

“Get rich quick programs seem as prevalent as emergency diets that will help you lose all that unwanted weight overnight, and unfortunately, they can be just as dangerous,” says Walsh.

Home rental and flipping videos are the scariest, he says. Influencers encourage you to borrow money to buy rental property, use the rent you collect from tenants to cover your bills, and then monetize the property for future profit.

Walsh highlights a few things to consider here: First, using debt to buy investment property is risky. You don’t always know if your rental property will be a success, but you still have to pay off the mortgage.

Managing rentals is also complicated and far from the quick or easy income earner that people say. Remember, you won’t always have a line of qualified tenants waiting to live in your home, and the property’s value doesn’t always increase, at least not immediately. If your goal is to sell or “flip” a home, be prepared to wait for a favorable market and / or the right offer.

“Passive income or rental income isn’t always a bad idea, but if you plan to pursue this approach, you need to understand the risks and be fully prepared for the challenges along the way,” says Walsh.