10 Personal Finance Myths Experts Like to Tell

 

Experts like to tell personal finance myths.

It isn’t that they try to deceive you on purpose; it is just that the nature of expertise is to offer tried and tested advice. This means that in times of change when the world no longer fits in our ‘tried and tested’ notions, expertise lags behind the world.

And our world has been changing. Our beliefs about debt and money must change with it.

The new network economy is gradually gaining ground from the industrial economy.

Jobs are being outsourced.

Young people are expected to have to change careers approximately twenty times over their lifetime, and they need to have the skills and competencies to do that.

We are connected through technology rather than space (this also means global competition for work).

I can go on. But hopefully, you are already getting the message: it is a new, and rapidly changing, world we are living in. This new world comes with an entirely different set of personal finance rules as well.

This is how ‘tried and tested’ knowledge can become part of mythology at best and obsolete dogma at worst.

Now let us have a look together at some of the personal finance myths that experts still like to tell.

#1. You can’t be wealthy if you don’t own a house

This was probably true for my parent’s generation and this says something given that I am no college kid. In fact I have reached the age where my children are in college (or beyond it).

There is a lot written about the pitfalls of owning a house. As someone who has owned a house (with a mortgage) for the last 25 years, I can attest these are all true.

But there is another reason why owning a house is not such a great idea today.

For the previous generation owning a house was a major thing; it gave security in many ways and ensured that there was something left for your children to inherit. When my parents passed away, they left no cash. They did leave their apartment, a summer house and some land.

My parents’ generation craved the security of owning a house; they could also afford it – they really had jobs for life.

Today’s economy demands flexibility in all possible ways. One of these is the ability to move and do it fast.

Have you calculated the costs of selling your house and buying another one?

No? I suggest you do. And you’ll be converted to the opinion that owning a house doesn’t make much sense; at least it doesn’t make much sense until you are older. Much older.

How about getting wealthy?

What is stopping you?

You can still save, invest and make sure that your income is increasing and your spending stays the same (or increases at a much slower rate). This is how you get wealthy.

And you know what? I’ve always said that what I’d like to leave behind once I’m gone is legacy, not inheritance. If there is something to inherit it will be three gold bullions under my bed – one for each of my three sons.

(Oh, and if it were up to me I’d sell our house in a blink and start renting.)

#2. Ownership is better than hire

This is mainly about cars. Some personal finance experts are so much against leasing cars that they call it ‘fleecing’.

This time we completely live what we preach – we’ve been leasing cars for well over fifteen years now.

We are just waiting for our brand-new Range Rover Evoque to arrive.

In brief, I believe that hire is superior to ownership because it affords:

• Flexibility;
• Versatility;
• Hassle-free use;
• No depreciation costs;
• Capital flexibility (you can do other things with the money otherwise tied in possessions, like buy some appreciating assets); and
• You can usually afford to hire more than you could buy.

That is it. We can safely turn this one on its head.

#3. Frugality is an absolute virtue

Being careful and not wasting is great. In fact, our ERR strategy for money management has as one of its foundations eliminating all waste, including wasting money on stuff you no longer use, no longer need and not wasting resources like food and energy.

Frugality can be taken too far, however, and it can reach a point where our lives become so much poorer that it is not worth it.

Another scenario is to buy into what is known as ‘extreme’ frugality; like most extremes, this can be extremely wasteful. This is when you drive for two hours to save 5p on a can of beans (or worse, 3p on a litre of petrol). This is when you cut your own hair and lose business because people think you are desperate. You get the picture.

Here at The Money Principle headquarters, we practice what we call ‘frugal artist’. I’ve written the Manifesto of a Frugal Artist so you can have a look if you’d like to know more about this one.

For now, it is important to remember that frugality is not an absolute virtue and it comes with many conditions.

#4. Start saving/investing young

This is a great favourite of mine.

Standard personal finance wisdom has it that people should start saving money, putting it in the bank and investing in pensions, stocks and shares, and others very early. In fact, the same wisdom has it that the earlier you start the better off you are – because of compound interest.

You know what? If you earn enough to put some money on the side, this is fine by me. But you’ll have to recognise that in today’s economy prosperity, or even the ability to make a moderately decent living, is linked with continuous learning and up-scaling your skills and competencies.

When you are young you are in the spring of your life. This is when you have to plant the seeds of your future prosperity. These seeds are, as a rule, not money. If you plant these seeds though you’ll be able to save and invest a lot later in your life.

#5. Compound interest is the miracle that will make you wealthy

Reputedly Albert Einstein said ‘Compound interest is the eighth wonder of the world. He who understands it earns it…he who doesn’t…pays it.’

I have no problem with the second sentence although your initial situation is probably not a matter of understanding compound interest. As to the first sentence, I have no doubt that from Einstein’s point of view compound interest would be a ‘wonder’: after all it goes completely against Einstein’s theory about the relationship between mass and energy.

Compound interest is about manifesting money from nothing. Let me explain.

Interest is what the bank pays you because you’ve lent it your money. Banks use your savings to speculate (in other words they create money from money, not money from creating value).

When you don’t use the interest but leave it with the bank it makes more money from money and pays you interest on the interest.

No miracle there.

My problem with the extolling of compound interest is somewhat different.

Do you know how long it will take you to get wealthy at 1-2% interest (today you’ll be doing really well if you get 5%)?

Have you asked yourself how compounding works when you lose 40% of the value of your investments in a year?

That’s what I’m talking about.

Please save and invest; by all means. We all need ‘white money for black days’ as my grandmother used to say.

Just don’t allow yourself to be duped into believing that compound interest is some miracle that will make you wealthy. You are not a vampire (I apologise if there are any vampires reading this: you will get wealthy eventually.)

#6. Retirement is a dream and early retirement is a fairy tale

Retirement is not a dream. It can be done.

Early retirement is not a fairy tale: some of my friends did it. I’ll be doing it.

You just have to tackle it differently. (I’ll probably write more about this later in the year.)

#7. There are safe investments/ savings

Yes; put your money in a pension fund over 40 years – it is safe.

No, it isn’t. Bad things can happen and most of these are outside your control.

The economy can go south (in fact, it is going there). The stock market can crash and take decades to recover (or shall we say, your money will take decades to recover.) The pension fund can be mismanaged, or the rules changed; or…

Only investments that you have complete control over are safe. And on this one, I agree with James Altucher – the only investments over which you have complete control are investments in yourself.

#8. It is all up to you

Many bloggers and other personal finance experts will tell you ‘to take control’. They’ll tell you that it is your fault that you are unemployed and in debt or that is your achievement that you are making inroads into the wealth-building game.

And to a degree it is true, but it is by far not the whole truth.

What you do matters immensely. But it brings to bear fruit only when you and your environment are aligned.

It doesn’t matter much how much you save if the environment in which your life takes place is not conducive to an enterprise.

If you still don’t believe me, go and build a prosperous business in Syria; or another country where there is war. Or try and be entrepreneurial in an administration-led, bureaucratic society.

You won’t be able to; trust me on this one. After all, I come from a former Eastern Bloc country where all enterprise was not simply frowned upon – you could get in serious trouble with the authorities for that.

Your financial destiny is always about you, your environment and how you read and mobilise it.

All I’m saying is that you should learn to read your environment very well and to mobilise circumstances and people in it even better.

#9. There is ‘good’ debt

Personal finance experts will tell you that there is ‘bad’ debt and there is ‘good’ debt. Bad debt is when you get in debt because of overconsumption (which is every time when you’re spending more than your income, and it doesn’t matter much whether you consume a lot or not).

Good debt, on the other hand, is what you borrow for your mortgage.

Okay, here is the deal. Borrowing money to buy a house is understandable but debt is debt. I don’t buy the ‘good’ debt – ‘bad’ debt thing.

There is ‘debt’ and ‘leverage’ and the difference is clear. When you buy possessions (including a house) borrowing is ‘debt’.

When you buy income-generating, appreciating (potentially increasing their value) assets, borrowing is ‘leverage’.

That’s all.

#10. Education doesn’t matter; hard work does

I believe that this is more a matter of misunderstanding than thought through myth. What doesn’t matter much today are university degrees; particularly ones that you managed not to work hard to get.

On the other hand, education matters more than ever. And it is not any odd education: to prosper in today’s economy you need broad knowledge on different subjects and domains. You also need to be able to manipulate this knowledge and apply it to solve problems and contribute immense value. Oh, and all this is best rapped in creativity – because robots have already been taking over more casual jobs.

As to hard work, I believe that it only gets you tired and gives you bad posture. What you have to learn is how to work smart, not hard.

Finally…

We’ve all heard these personal finance myths and we’ll be hearing them for some time to come.

We don’t have to fall for them though.

Our world is changing, our lives are changing and our personal finance rules have to change with it.

Which of these you believe are the most damaging personal finance myths? Do you think some of these rules of personal finance are still valid?

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