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Top 25 Personal Finance Myths

作者：廣南子於 2007-10-21 13:55 發表於最熱鬧的華人社交網路--貝殼村

作者分類:理財心經|通用分類:其它日誌

Someone once said that if you were to make a list of your 10 closest friends and acquaintances and order your earnings and theirs from smallest to greatest, you'd probably find yourself somewhere near the middle. All that this means is that we are subtly influenced by our friends, even when we're not aware of it, especially in matters of money. Being somewhere in the middle is probably more comfortable for the average person.

If you are that rare person at the high end of the list, then you probably don't need to read this article. If you are not, then find out what's holding you back. There are hundreds of personal finance myths which are either misunderstood, taken out of context, or just plain incorrect. Here are our top 25.

General Perceptions

There are a lot of very general negative feelings and perceptions about money in several societies, built up over several generations.

I don't deserve to be rich.
Why not? Intuition suggests that no matter which religion you follow, there are people who are successful and got there by honest means. What is wrong with that? Believing this myth cripples your willingness to be open to opportunities. Keep in mind that the government, Medicare, and other programs are not going to take care of you as much as you think.

Rich people are scum.
Or greedy, selfish, uncaring, or whatever. It's just that the scummy rich are more played up in the media because it sells newspapers. Of course, the rich didn't get that way by giving away their money. At least not until they are ultra-rich like Bill Gates, Warren Buffet, and others who have donated to the Bill & Melinda Gates Foundation. One principle you could live by is this: you can't help the poor if you are yourself poor. Idealism is romantic, but reality is more sobering. This is a variation of the belief that "money is the root of all evil." What the Bible really says is that "the love of money is the root of all evil" (Timothy 6:10). These are two wholly different things, but the misinterpretation causes some people, even whole societies, to shun money. Become wealthy, then start your own prosperity project and give away wealth to good causes of your choosing.

You have to have X dollars to be wealthy.
Wealthy is what you think it is for you. Don't try to keep up with the Joneses. Keep things simple. CNN Money has 10 rules for building wealth. [via LifeHack] Key is starting early, or at least starting now. Compound interest takes care of some of the growth, but if you are not keeping up with inflation, then you are not building wealth.

Those with obvious material wealth must be rich.
Experience suggests we humans get jealous or resentful for so many reasons, and witnessing someone's material wealth is often one of them. But don't be so sure that the neighbor with all the cool ATVs, skidoos, swimming pool, and latest car is actually wealthy (has liquid assets), or even happy. He/She could be deep in debt to maintain the facade.

Money makes you happy. Money makes you unhappy.
Well which is it? Money does not have the power in and of itself to make you happy or unhappy. There are happy poor people and miserable rich people. More money does help with the bills, provided you know how to manage your wealth. But people with more money can also spend more than necessary and actually end up with less. Read this money sermon by Coty Pinckney for a bit of insight.

There's only so much money in the world.
There isn't enough in the world for everyone to be wealthy. This couldn't be farther from the truth. Honest economists — yes, there are some — have said that there is more than enough money in the world for every single human being to live comfortably. Some people also believe that the Internet is the great leveller that will help redistribute at least some of the world's wealth, for those pioneers who participate.

Becoming rich is hard work.
It can be easier than you've been told. Dr. Marsha Sinetar's book Do What You Love, The Money Will Follow is one of the best guides for an organic approach to wealth. It also does not have to be linearly dependent on your earnings. It does not mean you don't have to work hard and smart at it at first, but it doesn't have to be "hard" in the sense that it's not enjoyable. And eventually, it gets easier to build your wealth — once you've made your mistakes.

Working hard and saving your money makes you rich.
These are components of becoming wealthy, but not by themselves sufficient. Saving is linear; investing increases your wealth. Jesus said to "multiply talents." This has been interpreted to mean that you should multiply your wealth. Do more than save. Start by having a small sum automatically deducted from your paycheck each pay period and deposited into a 401(K) or Roth IRA.

Earning lots of money makes you rich.
Only if you actually save and invest it. If you spend it all, like some high-earning individuals, then you are not rich. Wealth is defined by liquid assets and investments, not how much you earn from a job. In fact, people who earn more money but have no plan for the so-called disposable income end up doing just that — disposing income. Some do it out of guilt of having "more than necessary", others because they feel they owe it to themselves to "have something nice", and still others to "keep up with the Joneses".

Pinching pennies is the way to wealth.
Hardly. What this really does is set up an emotional enivronment of lack, causing you to miss out on opportunities to gain wealth because you become focused on every little penny. In fact, penny-pinching is actually one common catalyst of divorce.

Spending and Saving

It's been said over and over, but too many people are not clear on the concept: to build wealth, you have to save more than you spend. Once you gain the money, however, you can spend some and enjoy yourself.

Buying on-sale items saves money.
It's that "use your coupons" myth in another form. What really happens is that the items you buy on sale are items you want, not need. It's even worse if you drive out of your way to buy it. A lot of people shop at big box stores on the premise that they are saving money, even if they drive miles there and back, spending gasoline and time. They also buy giant boxes of food items and sometimes end up eating more of it than "because it's cheaper" than they normally would have. Also remember that if you purchase a $100 item at half-price, you didn't just save $50; you just spent $50.

Two incomes are better than one.
This is not always true, as two incomes often tempt or require you to spend more, resulting in less savings. If you do have two incomes in the family and can actually manage on one, save the excess instead of spending. That might feel like a bit of sacrifice, but you could always use the savings for a yearly family vacation. Saving then puts you into the frame of mind of realizing that you do not have to spend to show off luxuries now, bought on credit. Instead, you are paying because you can afford to, later, after your money has collected interest.

You need to earn more to save.
Try this. What happens if you suddenly start earning less money in your job? You adjust, right? So save a percentage of what you make and set it aside somewhere. If you are undisciplined, have it deducted from your paycheck automatically into a 401(K) plan or Roth IRA (Individual Retirement Account).

Saving is hard, and I don't make enough.
What's hard is developing a bit of savings discipline. Sure, you need to sacrifice a little, but it's a question of what is more important to you. Annually, there are approximately 48 weeks of work for the average professional, or about 240 work days. On each of those days, if you are spending $4–6 on breakfast in the cafe near work, then ask yourself whether getting up 15 minutes earlier to have breakfast at home for about $1–2 is worth saving $3–5/day x 240 days = $720–1,200 per year. If it's not an inconvenience for you, what could you do with that money? If you want somewhere to save it, for easy access, you could try an online savings account. These give you more interest than a regular savings account, and they are more liquid than stocks or bonds. To give you a leg up, track your finances by using the right tools

Credit, Debt and Loans

Credit and debt seem to have the biggest collection of myths.

Debt is bad.
Managed debt is actually good, and builds up your credit rating. On the other hand, credit card debt tends to be amongst the worst, so eliminate that first. Any debt where the cost is used to gain wealth (such as property or stocks) can be good if managed properly. But get the best rate you can find, not necessarily the first offered to you.

Co-signing a loan is no big deal.
Tell that to all the ex-spouses or friends that got swindled, intentionally or unintentionally, by someone they knew. Think twice before you co-sign a loan, no matter who it is. Because legally, you are responsible for its payment if the primary signer skips out on it. And if it all goes bad, your credit rating will be affected (PDF, 2 pgs). Unfair but true.

Zero percent credit cards save you money.
Of course they don't (always). They tempt you to spend more than you otherwise might have. If you don't make the payments on time, the interest rate you pay is probably higher than normal. And of course, we all know that misuse of credit cards (usually due to poor personal finance discipline in payments) results in a bad credit rating.

Zero percent car loans save you money. This is a variation of the last point, except that in this case you are probably paying the interest up front. That is, you could probably find the same car for less elsewhere, and the loan interest would be paid out over time. There are several other related myths, as the Triple-A points out, despite the popularity of zero percent car loans.

You must have a credit card to survive.
Sure, some things just cannot be purchased without a credit card or an enormous deposit. But people got along without credit cards in the past and can still do so today. Though the advent of RFID-enabled contactless credit cards seems to be changing that, as there are some outlets including vending machines that are refusing cash. Nevertheless, it is still possible to live without a credit card, though it sometimes takes more effort to get by without one. Just make sure that what you want is something you really need.

Investing

Investing has its own slew of myths, often perpetrated by the uninformed or those who gave up after their first loss. Get your losses out of the way.

You have to earn Y% each year on your investment.
Again, you have to define wealth and increase for yourself. What do you want out of your savings and investment? Money for a vacation? Money for retirement? Payouts every month? If the latter, go for a dividend-paying mutual fund or stock. If for a retirement, try an appropriate plan such as long-term stocks and funds in a 401(K) or Roth IRA. For short-term, liquid investments, try an online savings account. Though keep in mind that the latter, while relatively safe, are probably just keeping up with yearly inflation.

Property is always the best investment.
Note that property can sometimes be a great investment if you already have wealth and know what you're doing. But if you can't afford the property and have to take out a large mortgage or even a double mortgage, you should think twice. Real estate debt is not always appropriate. Don't forget to factor in the property taxes, property insurance, maintenance, and all the other costs. Sometimes it actually is better to rent.

Property is always the best investment, part 2: it's an easy way to build wealth.
If you have a residence and want to invest in additional properties, consider how much effort it will be to maintain them, including actual maintainance costs, property taxes, and the bother of finding reliable tenants. Unreliable tenants can destroy your property value, ruin your credit rating, wreck your wallet (in court costs) and generally sap your energy like a bunch of vampires (though tenants generally feel the same about landlords, thinking they are rich leeches). And a property management service costs money.

Property is always the best investment, part 3: mortgage is tax deductible, which is great.
What about all the mortgage interest you are paying over time? What about saving more money first and starting with a smaller mortgage? This reduces your monthly payment, and you can invest the savings in mutual funds, stocks, or CDs (Certificates of Deposit). Sure, you'll be taxed on the capital gains, but do the math and you'll find that you'll be out ahead in the long run, not behind.

Dollar Cost Averaging (DCA) works for all investments.
DCA works best for market indexes (or stocks or funds that mimic them) because they work on the premise that an index will eventually recover, even if it takes a few years. A regular stock or mutual fund may not recover, so DCA is not always suitable.

A positive average return over several years means profit.
Randy Carver gives an example of a client who had invested in a fund with a positive average over two years. In year one, the fund gained 100%. In year two, it lost 50%. Total actual gain for money invested at the start of year one is zero. But one magazine indicated that the average return over two years was (100-50)/2 = 25%. Averages for investing returns just don't work like that, and are meaningless when any negative returns are involved. What's worse, the fund took a management fee, and the investor actually ended up in year two with less than he started. Mutual funds are notorious for this sort of thing.