Let us face it, there are a lot of urban myths in the world, and many involve personal finance. But I am here to debunk some of these myths, and hopefully, help sets you straight. I recently read an article on Kiplinger’s website on this very subject and while not really surprised by the myths they discussed I did think I would add to them and share their insights with you. Now I am certain you may have heard on if not all of these myths so kindly indulge me and listen to what I have to say about these personal finance urban myths.
Many people think that you do not have to start saving until you are at least 40 years old. If you have read any number of my previous posts, you are aware of my thoughts on this subject. And they are save as much as you can as early as you can. The power of compounding interest over long periods of time can do more than saving more at a later stage in your life. Start as soon as you start making money by saving at least a portion of your paycheck on a regular basis.
How much of a difference will this all make you are asking? Well, consider that a 25-year-old saves $500 and then a $100 a month all the while earning an 8% return until they are 65. Now you are saving for approximately 40 years, and the return is not unheard of as the stock market averages about 8% over the long haul. That 40 years of savings will grow to be over $335,000 at age 65. Not too shabby. Now let us consider someone who waits just ten years to start saving for a 30-year period. They invest $2,500 and then a $100 a month and they will earn the same 8% annually. They will end up with only $167,000 in their account. See, it pays to save earlier in life than it is to wait and save more or worse the same amounts. If these figures do not get you to act, I am not sure what will but do not be the one who waits until they are 40 to start saving for retirement no matter how much more you are “going” to save.
Next is the myth that only the rich will enjoy tax breaks. Not only is this a total myth if it is one you believe chances are you are paying too much in taxes every year. Now the government does not release figures on how much people overpay mainly because it is to their advantage for people to overpay them. But the US Government Accountability Office estimates that the amount people overpay may be as much as a billion dollars a year by not claiming their due deductions. The tax code is not something that most people understand, and it is designed to be that way as to take advantage of people. Hire a good accountant or use a respected software to help prepare your taxes and look for the overlooked deductions such as retirement savings, home ownership, or starting a family. Many of the deductions are designed to aid and assist the working middle class.
Now this myth is more popular it seems among an older generation, and that is gold is a good investment. Well, the fact is gold is really a terrible investment for many reasons the first being prices are normally flat over a long period of time and secondly it is extremely volatile in nature. Gold does not appreciate like an equity does and does not pay interest like a bond. If you must own gold or feel as if you do buy an exchange-traded fund instead of the real thing or better yet a gold mining company that is established and hopefully pays a dividend.
Now the next myth is one that most younger people fear, and it too has unwarranted fear, and that is Social Security will not be there when you retire. While true, the system needs and overhaul in the way it operates the system as a whole is broken not dying. The trust fund is in the black until 2019 and liquid to the extent it will be able to pay almost 77% of its obligations through 2033 with no changes. If we can get Congress to make some changes, the trust will extend well into the future. And let us look at it this way, Social Security is the most successful pension and insurance in the country. But if you are still worried about the shape of Social Security treat it as it was meant to be treated, and that is a supplemental source of income in your retirement. Look to your savings, other pensions, and annuities to make your retirement better.
All trade deals are bad for American workers, not so fast. This one will require you to think outside the box a bit as it was one of the few myths I had not really confronted or thought about much in the past. Yes, trade deals can hurt some manufacturing jobs but on the flip side, many more jobs are generally created in service industries. And many of these jobs actually are higher paying jobs than the ones lost by the trade deal. And trade deals open the US up to more competition which leads to better goods and services to the average American, which helps the economy. Imports and exports account for about 30% of the GDP so the more free trade will ultimately help the US economy. And since we have the world’s largest economy any benefits would be felt worldwide and not just here in the US.
The following myth is one I have touched on in the past, and that is borrowing from your 401(k). While for some it is a viable option it is also one that comes with some potential hazards. Yes, you are borrowing from yourself and paying yourself back, but it comes at a cost no matter if you experience any of the hazards. First there is the lost earning ability of the money in the 401(k), and secondly, you are paying yourself back on taxed funds that will be taxed a second time when you withdrawal the funds from the account. And the hazards are if you do not pay the loan back you will be penalized and taxed on the amount that has not been repaid. And if you leave your job for any reason you will be forced to repay the loan within 60 days or face the same consequences as not paying back the loan. It is best to borrow from your retirement accounts as a last resort.
Credit cards are bad and should be avoided at all costs. This is the picture people such as Dave Ramsey preach but if used responsibly there is no reason to fear credit cards. They do have value such as extended warranties and cash back rewards. But the key to using them responsibly is to pay them off each month to avoid the high costs of their interest. And if you cannot pay the card off every month pay as much off as you can and avoid using it again until such time that you can pay it off in full at the end of the month. But always pay more than the minimum required to help ease the high charges that you will pay in interest.
Finally, not only older or the rich need a will. Wills are a good idea for anyone who has anything that they will leave behind after they pass. And if you die without a will you die intestate which means the state will determine how your estate is disposed of after you have passed. The state’s laws and not your wishes will be followed, and no one wants that. And if you need convincing think of the late singer Prince and look at his family fighting over his rather large estate. A will would have eased many of those issues and at an affordable price as well.
I hope that this post has shed some light on some of the more prevalent personal finance urban myths. If you need more information or have questions, feel free to contact me.
