I hear it all the time when I’m at work – money myth after money myth. People think they’re spouting off wisdom, but I end up shaking my head in disbelief soon after our conversation ends. The biggest myths about money often sound wise at the time, but when you dig into them and think about the outcome of the actions, one should quickly realize that they’re absolute myths.
The 10 Biggest Myths About Money
Almost everyone knows that I’m interested in personal finance, so that often becomes the natural path of conversation. After many discussions, questions, and sometimes arguments, I have developed the 10 biggest myths about money that are constantly being spouted as we speak. My advice would be to watch out for these myths specifically, but also to think carefully about any financial advice that’s given to you. Free advice is often worth what it costs to receive it – absolutely nothing.
It’s not always about how much you make – it’s about how much you keep. There are plenty of people in this world that earn more than $100,000 a year, but they will never be wealthy because they spend everything they earn! On the flip side, there are many stories of teachers that earn just $40,000 a year and become millionaires simply because they spent far less than they earned and always invested the difference.
#2. Buying is always smarter than renting
If you have a need for a chain saw once every 10 years or so, is it smarter to own a chain saw or rent one? While it might be fun to own one and show it to your friends on occasion, it’s really much more wise to rent it when you need it. You don’t have to worry about upkeep, repairs, and you don’t have to clear out space to store it.
Even with your residence it can be smarter to rent. I would much rather see a couple living in a cheap rental, saving up for a huge down-payment on a home vs. jumping right into a home purchase with practically no money. The cheap rental is likely less expensive than a mortgage payment on a large home, the large down-payment saves on interest payments, and the experience will teach them that living on less is not all bad.
Talk about the biggest myths about money – I still can’t stand hearing this one! “It’s wise to always have a mortgage payment because I get thousands of dollars in tax credits.” Ughhh. This is wrong on so many levels. In fact, I should probably devote an entire post to it someday.
First of all, it’s not a tax credit – it’s a tax deduction. Your income is simply lowered by the amount of mortgage interest you paid that year.
Secondly, receiving a deduction on interest is not earning you money in any way. Here’s how it actually works. Over the course of the year, you pay thousands of dollars in interest payments to the bank (this is your “thank you” for the bank’s willingness to lend you money) and then you get about 25% of that money back through taxes. So essentially, you’re paying $4,000 in interest to the bank so you can gain $1,000 in tax money. Your net gain? Negative $3,000…. Pretty stupid, huh?
#4. Paying with cash is always smart
Many people pat themselves on the back for saving up the money for a purchase rather than just going out and buying it on credit. While this is probably wiser than going into credit card debt, it doesn’t automatically make it smart.
Let’s say that I really want a $20,000 BMW. I decide that instead of just running to the bank for financing, I was going to scrimp and save and wait until I have that $20,000 in my bank account. Smart, right? Well, kind of…but not really.
It’s better to pay cash for cars, but is a $20,000 BMW a good idea? Probably not. It’s going to depreciate in value crazy fast, the maintenance is more costly because it’s a foreign luxury car, and the repairs definitely won’t save me any money either. I’m probably better off buying a solid $7,500 car with cash and putting the remaining $12,500 in an emergency fund.
This is one of the absolute biggest myths about money. I currently own a 2001 Honda Civic that has NEVER left me stranded in the 3 years that I’ve owned it. Some of my friends have vehicles that are 2011 and newer, and they have been stranded several times. Just because your car is newer does not necessarily mean that it’s superior or more dependable. Honestly, you’re almost better off waiting 5 years or more to see the track record of a certain model car. If it has proven itself to be reliable, then it’s time to make a purchase.
#6. I don’t earn enough money to start budgeting
It doesn’t matter how much or how little you earn – everyone should track their income AND expenses. In fact, if you aren’t budgeting, then I can almost guarantee that you’re wasting money somewhere.
#7. Rich people inherited their wealth
Nope. Not true. Of the biggest myths about money, I probably hear this one most frequently – probably because it makes people feel less crappy about themselves. Here’s the logic – “Rich parents hand money over to their kids and that’s why they’re wealthy. I don’t have rich parents, so I never had a chance to be wealthy.”
The truth is, of typical millionaire, fewer than 20% of them inherited 10% or more of their current wealth. Put simply, if you aren’t wealthy, it’s your own fault.
If your house is always your biggest asset, then your finances are out of whack. Think about it. How much money does your house earn for you? Absolutely none. Oh, but it appreciates in value….yeah, maybe 3% each year, but it costs 1% to maintain, so it’s truly a terrible long-term investment. Based on these factors, why on earth would you want to stick all of your money in your house?
Instead, I would suggest living in a modest home all your life and using your extra cash to invest in the stock market, buy rental homes, or start a business. The less money you spend on your home, the more likely it is that you’ll get ahead in life.
#9. Insurance is always a wise purchase
Another one of the biggest myths about money has to do with insurance. There are some very dumb people in this world that never buy insurance for anything, which is absolutely ludicrous. But, there are some so-called “smart” people that seem to have insurance for EVERYTHING. They insure their kids, they insure the gas lines outside their house, they insure their televisions, their iPads, and even their old flip-phones! Let me tell you, it isn’t always wise to buy insurance. In fact, I make it a point to insure as little as possible.
First of all, do I need to insure my children? Absolutely not. They provide absolutely no income to my household and I do not depend on them for my livelihood. Therefore, I don’t need insurance on their lives. If (God forbid), they die, then I would use money from my emergency fund to cover the funeral expenses.
Do I need to have life insurance? Not necessarily. If my house was completely paid for, I had no other debts, and I had $250,000 in the bank, I would think my wife would survive, wouldn’t you? Therefore, I don’t really need life insurance. Technically, I am self-insured because I have already prepared for the terrible disaster of losing my life.
Insurance is only smart for those catastrophic events that you can’t afford. Home insurance, medical insurance, business liability insurance – these are the types of insurance that you absolutely need (for most of us anyway). If you want to shell out an extra $100 for a TV warranty, that’s your business, but I definitely wouldn’t do it.
#10. My kid’s college fund is more important than my retirement fund
Some of the biggest myths about money are wrapped around emotions. We all love our children and want what’s best for them, but does that mean that we should ignore our own needs to pay for our child’s wants? Absolutely not.
Think about it. When you grow old and decrepit and run out of money because you paid for your children’s college costs instead of your own future, do you think your kids will be happy about paying for your $70,000 retirement home stay each year? Ummm, probably not. And honestly, you’d be holding them back financially.
As hard as it might seem, it’s actually better to fully-fund your retirement and help your child with college expenses only when you can. It will teach them to work hard for what they earn, they’ll be grateful for what you can give them, and they won’t have to shell out any money for you when you’re old. Your kid’s college fund is definitely NOT more important than your retirement fund.
Did I miss any of the biggest myths about money? Do you agree or disagree with any of the myths above?
AUTHOR Derek Sall
Derek has a Bachelor's degree in Finance and a Master's in Business. As a finance manager in the corporate world, he regularly identified and solved problems at the C-suite level. Today, Derek isn't interested in helping big companies. Instead, he's helping individuals win financially--one email, one article, one person at a time.