14 MONEY MYTHS
1. Don’t Pay Off Your Mortgage Early Because You Will Lose The Tax Deduction
If you file your own taxes, you likely are well aware that mortgage interest is one of the biggest deductions available on your tax return. Put simply, every dollar you spend in interest, will count against your income, and lower your tax bill. If you are in the 22% tax bracket, a dollar of interest will save you 22 cents on your taxes. So while the concept isn't entirely wrong, you do get a deduction for interest, it’s really not worth it as you are essentially trading dollars for quarters. The tax cuts and jobs act made what was already a bad deal even worse, as it raised the standard deduction high enough that most filers are no longer itemizing their deductions at all, meaning they are trading dollars for… nothing.
2. Buying Is Always Better Than Renting
Once upon a time buying a home was often thought of as one of the cornerstones of long-term wealth building. Nowadays, the math has evened out to the point where depending on the location, you could make a strong case for renting being the better financial decision. While either option could be a great choice, the key question to ask yourself is how long you see yourself living in the home. If you can’t see yourself there for at least five years, you may do better to just rent.
3. Leasing A Car Is What Wealthy People Do
Leasing is sometimes seen as something that sophisticated; wealthy people do. That notion could not be more wrong. Statistics would actually suggest that in your neighborhood, the family with the highest net worth, is also the most likely family to drive the oldest cars. Not only do wealthy people not own new cars, the NEVER lease cars. If you crunch the numbers, you will see that leasing is by far the most expensive way to own a vehicle. If you rework some of the algebra in the lease terms you will see that most leases come with an assumed interest rate in the 20 percent range.
4. Investing Is Only For The Wealthy
Investments of the wealthy may make the headlines but being in a high tax bracket is certainly not a requirement to invest. Most every American has the opportunity to utilize some sort of retirement savings account from 401ks to Roth IRAs. Starting early and saving often is the most likely path to eventually becoming a millionaire.
5. My Partner Handles All Of The Finances
Please don’t allow yourself to be put into this category. It is not fair to you, and it is not fair to your partner. Having one person in charge of the finances can result in major problems from several reasons. It leads to high rates of what I call “financial infidelity” where the person in charge is hiding various aspects of the finances. It also creates an absolute nightmare of a scenario if the partner managing the finances passes away unexpectedly. Hopefully neither of those events ever befalls you, but even without those extreme cases, studies show that couples who plan together have a significantly higher success rate at reaching their financial goals.
5. Student Loans Are Good Debt
I am not completely opposed to student loans, but I will be very clear on my stance. Student loans are only to be taken out after all other options are exhausted. Those options include, savings, parents’ income, student working during school, scholarships, choosing a less expensive school, living at home, etc. There are countless ways to reduce the cost of college, and that is what should be addressed first. There is no reason on earth a student loan should be taken out for a student to go to a private out of state school. This is going to sound brutal, but your dream school needs to be school you can AFFORD. Not the school with the prettiest campus.
After school selection the other consideration is to treat a student loan like an investment, and only make the investment if the return will be worth it. What this means is don’t put yourself hopelessly in debt pursuing a degree that doesn’t have a high earning potential. I know that career may be your “passion”, but I can promise your passion won’t seem as alluring when it comes packaged with crippling debt.
6. Old Cars Aren’t Safe
We can keep this one very simple. This entire phrase is simply used as a justification for people who want to buy cars they can’t afford. An “old” car made in 2008 is still plenty safe. It just isn't nearly as pretty.
7. Old Cars Eat Up All Your Money In Repairs
I love old cars. I grew up with a father who takes great pride in old Japanese made vehicles that can make it to 300,000 miles. As someone who has plenty of experience with old cars, I can tell you firsthand this myth is completely false. My current vehicle is a 2009 Honda Pilot. I bought it with 144,000 miles. It currently has 195,000 miles. The total I have spent in repairs…. $295. Now to be fair, that total is simply for the parts as I replaced the suspension myself. But the estimate from the local shop was only $700. I could go on and on about how much less my old car depreciated than a brand new one. But we don’t even have to get that complex to see the savings. That $700 in repairs alone is less than the interest that would have been paid on a new car in that same amount of time.
8. Always Get The Extended Warranty
Repeat after me “Warranties are always a waste of money”. There is a very simple reason why these get pushed so hard whether you are in a car dealership, or a checkout kiosk at Walmart. Warranties are almost purely profit for the warranty company. The simple version of the formula to calculate how much to charge for a warranty? Expected payout in the event of loss/damage x likelihood of event)+company overhead + profit margin. You will always come out ahead by forgoing the warranty and simply assuming the risk yourself. The final thought on this, is that if you are thinking, what if I can’t afford to buy a new iphone if mine breaks? You probably shouldn’t be buying that new iphone anyways.
9. “I Earned This”
I will throw my generation under the bus with this myth. Millennials basically coined the phrase “I earned this” and its wicked stepmother “treat yourself”. Now, I have no problem with people treating themselves, or earning things for themselves. The problem is that these phrases are usually tied to the act of buying something you really shouldn’t be. Example “treating yourself” to a fancy dinner and drinks and charging it to your credit card. There is only one way that the phrase “I earned this” is true. If you can afford to pay for whatever you are buying with cash.
10. I Don’t Need Life Insurance
This is not always a myth. Some people really don't need life insurance. If you don’t need it then the last thing you should do is waste money on life insurance. If you want to know if you need it, ask yourself these questions.
· Does anybody depend on my income?
· Do I have a mortgage that needs paid off if I die?
· Do I want to leave my kids money to go to college?
If any of those was a yes. You NEED insurance. You should only be looking at term life insurance. No matter what the salesperson says, all of the other kinds are a complete waste of money.
11. The Stock Market Is Too Risky
The stock market IS risky. But how risky it is depends on your time horizon. If you invest for just one year you have about a 66% chance of making money. If you have 10 years you have about a 99% chance of making money. In the financial industry we call that your time horizon. It is one of the most critical considerations when building an investment portfolio. The longer you have to invest, the more risk you can take because you have time on your side to allow for down markets to recover. If you are saving to buy a home next year, then I agree, the stock market probably IS too risky. But if you are saving for retirement, it probably isn’t.
12. Better Products Cost More
Did you know that when Mazda first brought the Miata to the United States it sold horribly? This surprised the company as the model had sold well elsewhere, and all of its fundamentals were solid. They knew they had a great car with phenomenal acceleration, top of class handling, and a stylish look. But it just didn’t sell. The following year they reintroduced the same car, with one change. A significantly higher price. With the higher price, they could not keep Miata’s in stock. They sold like wildfire. The Mazda executives learned a very strange fact about American consumers. We are very prone to equating quality with price. It’s the same reason that name brands still sell at grocery stores, even though the generic brand is often produced by the exact same company. While sometimes the saying is true, it definitely isn’t always the case.
13. Your Income Will Be Lower In Retirement
This is the myth that has brought so much popularity to 401k plans and traditional IRAs. For some people it is true, their income goes down in retirement. For most people however, it is not. ESPECIALLY if you have been a diligent saver and have built up a health balance in one of those aforementioned accounts. When you turn 70 and social security kicks in your income will take a big jump up, but the real bomb occurs when you turn 72 and you are also required to start removing large chunks from your retirement accounts. The best way to avoid this future tax bomb is to work with a good financial advisor to maximize your gap years before you turn 70. Take advantage of that time while your income is low to get those retirement accounts taken care of and lower your lifetime tax bill.
14. Money Doesn’t Buy Happiness
As far as the lower and middle class are concerned, this statement is one of the greatest lies ever told. While there is certainly some truth to the law of diminishing returns when it comes to money, having enough to provide for your needs and some of your wants can certainly make life a lot happier. In my opinion, the only people who use this phrase are those who have never known what it is like to face hard times.