People lie. They might think they’re being honest when they give you financial advice, but just like the majority of Americans, they simply just have no idea how to earn, save, and invest money.
Top 10 Financial Lies You’ll Hear in Life
Ever since you turned 18 and considered living life on your own, you began to open your ears to the financial advice of those that are supposedly older and wiser. Unfortunately, much of this “financial wisdom” is actually financial lies that has been misconstrued in minor ways over the short term, but have turned into MAMMOTH financial lies over the long term.
If you want to succeed in life you’ll need to be able to identify these financial lies, and more importantly, be willing to swim upstream and take action on them. People might look at you like you’re a simpleton or are just plain retarded, but let me assure you – those financial lies are still lies, and anyone that believes in them will remain broke…for life. Do NOT be one of these people.
Financial Lie #1: College Debt is Necessary
Yes, college is expensive. Does it need to drive you deeply into debt? No.
With the combination of the options below, don’t you think college should still be affordable?
- attending an in-state college at discounted rates
- live at home instead of in the overpriced dorms
- get scholarships with good grades and a thorough search for all that free money
- work during the summer AND during school
- don’t spend thousands of dollars during Spring Break…you’re a broke kid
Related: Top 10 Tips for College Students
Financial Lie #2: Student Loans Are Smart Because of the Tax Credit
There are some pretty significant financial lies out there regarding a college loan tax credit. Many believe that it’s smart for them to hold onto their college debt because they receive a credit on $2,500 of their payments. With this credit, grads figure that the smartest option for them is to keep the loan and use their hard-earned money elsewhere.
First of all, there is no such thing as this tax credit. According to the IRS, students may deduct up to $2,500 from their income if their interest payments meet or exceed the $2,500 threshold.
In other words, college grad Suzie makes her regular $600/month student loan payment ($250 of which goes to interest) and by the end of the year, she has paid $7,200 toward her student loans – $3,000 of which was purely to pay the interest on the note. Since Suzie has paid more than $2,500 in interest payments, she is allowed to deduct $2,500 off from her income and will therefore not have to pay tax on it.
So, is this college debt smart? Let’s recap. Suzie paid $7,200 toward her student loans for the year. Since she paid $3,000 in interest payments (which contributes nothing to her principal balance), she was able to save about $625 on her taxes (roughly 25% of the $2,500 deduction).
I don’t know about you, but wouldn’t it feel better to pay for college up front, pay yourself $7,200 a year after that, and pay an extra $625 in taxes?? Feels like a pretty solid win to me. Sorry college friends, but hanging onto those loans is pretty dumb….
Financial Lie #3: Leasing is a Great Way to Get a New Car
- With cash
- With a loan
- Through a lease
Many people have fallen in love with the car lease because the monthly payment is low, and they always get to drive a new car each year. But, is this a smart method of transportation?
Well, let me ask you this instead. Where do car dealers make the majority of their money? On cash deals? Car loans? Or leases?
Hands down, the leases generate the most money for a dealership, which ultimately means that the customer of the lease is dishing out the most cash. …Not a great deal for the consumer AT ALL.
It turns out that the $189 advertised lease price can often turn into $400+ a month when you consider all the other charges. It sure sounds like a deal, but it makes the list of the biggest financial lies instead!
Financial Lie #4: Buy a House Sooner Rather Than Later
I was born and raised in West Michigan. When you live here, you’re expected to do three things before you’re 23 years old:
- Get married
- Buy a house
- Fill it with children
I don’t know why everyone here is in such a rush, but if you’re 25 years old and haven’t done any of the above three, you’re simply a hopeless case that will likely amount to nothing in life – at least, that’s what I gather from the expressions of the locals.
Let’s zero in on one of the three expectations – the house. Is it smart to buy a house sooner rather than later, or is it another one of those financial lies? Well, in this case, it depends on how you do it.
If you have no money, are single, and decide to buy a 4 bedroom, 2 bath house with $0 down, then you most definitely weren’t ready to buy a home. By pulling the trigger early, you’ll just end up house poor due to the large mortgage, the insurance, the taxes, and the maintenance. Without the proper cash and income, buying a house can be one of the financial lies that hurts you the most! If you can’t afford to buy, then rent as cheaply as you can and save your money as rapidly as possible.
A home starts to become a financial blessing when you pay 20% down and have a mortgage that’s easy to pay each month. You’ll build equity quickly and your bills will be easy to cover each month.
Financial Lie #5: Get a 401k Match? Invest Immediately
If you work for a company that offers a 401k match, should you invest enough to get the full match? For many, yes it’s a good idea (I’ve done this for years and it has grown my investment balance quite nicely). But, the answer is not always yes.
Here are some reasons why going after the match is occasionally on the list of financial lies:
- You have credit card debt with high interest
- You have other high-interest consumer debt
- The stock offering through your company is lousy
Some of you are still raising your eyebrows at this one. Let me ask you the question this way. Would you ever borrow money at 15% interest to invest into your 401k? Of course not! It’s simply risky and irresponsible. But, many are choosing to do exactly this when they invest instead of paying off their credit card debt first.
Financial Lie #6: Buy the Best Insurance
I get this advice all the time:
“Save yourself the financial trauma of a car accident. Buy low-deductible insurance to cover it.”
Essentially, many more people are starting to pay $30 more for insurance each month so they won’t have to pay $1,000 for a potential car repair after an accident (mainly because they don’t have $1,000 and would rather buy a bunch of stuff instead of saving it). But does this move pay off? Not even close.
According to Forbes.com, the average driver will get into an accident every 17.9 years. If you’re paying an extra $30 a month to lower your repair bill by $1,000, you’ll effectively be paying $6,444 to do it. Ummm…that’s pretty dumb. Don’t believe the financial lies. Just stock up the cash in case you get into an accident.
Financial Lie #7: Buy a Reliable Car, Not a Junker
When people say this, they basically mean:
I have proven this stereotype wrong over and over again. In fact, I almost prefer to drive a 10 year old car for less than $5,000 for the below reasons:
- I can research countless records of the dependability for the make and model
- The car won’t hurt my net worth with its depreciation
- I feel like a normal person, not a rich snob that will faint from a door ding in the parking lot
- The repairs are typically quite cheap, if there are any
If I had the choice between buying a $3,000 Honda Civic and a $12,000 Audi, I would choose the Civic every time. It’s more dependable, the repairs are cheaper, and the gas mileage is far better. Just because a car is old doesn’t mean it’s a junker.
Financial Lie #8: You Work Hard and Deserve a Vacation
Financial lies like these come at us often, but you know what? Just because you work hard and get tired from time to time doesn’t mean that you’re entitled to charge a vacation on your credit card. That’s idiocy. You don’t take a vacation because you work hard. You take a vacation because you saved up the money and can actually enjoy it.
Financial Lie #9: Accept 0% Interest Offers Every Time
Here’s the thought process behind this one.
“Money today is worth less than money tomorrow (thanks to a fairly consistent 3.5% inflation rate each year), so if you get the chance to borrow money for free, you should take it every time.”
By paying the bill two years from now, you essentially paid 7% less for that item. Ingenious huh? …I’m not so sure.
Much of the time, the 0% interest offer is what’s known as ‘deferred interest’, which means that if you don’t pay the full bill within the stated time-frame (often one or two years), then the full amount of the deferral is added onto your non-zero balance.
Much of the time, people that play this game run into financial challenges at about the time the bill needs to be paid in full, which is exactly what the company was hoping you’d do. Suddenly, your $1,000 laptop is costing you over $1,200 with the deferred interest, which is why this made the list of financial lies.
If you can’t afford to buy something with cash, don’t buy it. If you have the cash to buy something, then use it. Ignore the 0% interest trap.
Financial Lie #10: Buy Quality Over Quantity
People use this excuse all the time to make themselves feel better. They go out looking for a $200 television, which would buy them a decent Vizio, but instead, they come home with a 60″ Samsung that cost $1,000.
“I bought it because the Samsung brand is much better and it will last a long time.”
The truth is, you’re a sucker that can’t say no to yourself. Instead of spending only the cash you had, you overextended yourself and your future for a luxury item. Not smart.
If you’re truly buying a quality product because you’re going to use it the rest of your life, then good for you. That’s smart. But, if you’re buying overpriced name-brand clothing or expensive sub-woofers for your car, then you’re not smart – not even close.
Watch out for financial lies in life. They can seem smart, but they’ll sometimes trap you even worse than the obvious scams.
Have any of these financial lies ever trapped you?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.