#1 of 20 Dangerous Money Myths — It’s Always a Good Idea to Hold a Mortgage
Mortgages serve a good purpose. They allow you to own a home faster than you could if you had to come up with the money on your own before you could move in. But the mortgage concept has been oversold. I often hear people say that it’s always a good idea to hold a mortgage, even if you are able to pay off the mortgage and own the house in full.
One argument that is often put forward is that, if you have the funds needed to pay off your mortgage, you are better off investing it in stocks than doing away with the interest payment you make on your loan. This does not make sense, at least not as a general proposition. Why would a bank lend you money for less than what it can earn in stocks?
Banks write mortgages to make money. They charge an interest rate high enough to earn a profit after paying all their expenses. You are incurring a cost when you take on a mortgage. It’s often a cost that is worth taking on because of the benefits of having a mortgage. But it is a mistake to think that a mortgage is cost-free or that there is not a benefit associated with paying off a mortgage.
There are exceptions to the usual rule. There have been times when banks have written mortgages calling for low rates of interest and regretted making those loans. In such cases, there really is a good case that can be made for holding onto the mortgage even after you have the funds to pay it off. But such cases are exceptions to the usual rule.
#2 or 20 Dangerous Money Myths — Stocks Are Always Best for the Long Run
There is no one asset class that is always best for the long run. There never will be one. There never can be one.
Why? Because the long-term appeal of an investment always depends on how popular it has become. The less popular an asset class, the more likely it is to provide an enticing long-term return. If there ever were an asset class that became widely thought to always be best for the long run, that asset class would soon become so overpriced that the reason why many purchased it would no longer apply.
The book Stocks for the Long Run was published in 1994, when the P/E10 level was 21 and the most likely 10-year annualized real return for stocks was 2.6 percent (see “Return Predictor” tab). Six years later, the P/E10 value was 44 and the most likely 10-year annualized real return for stocks was a negative 1 percent. The book capitalized on the popularity of an idea that had driven long-term stock returns down to very low levels even before it was published, and its own popularity drove long-term returns down far lower still. Stocks really are best for the long run only when most investors do not view them as being such.
#3 of 20 Dangerous Money Myths — Everyone Should Aim to Save 10 Percent of Income.
Everyone should attend three baseball games per year, wear yellow twice per week, and eat twice as many Mounds with Almonds bars as they do plain old Mounds bars.
These ideas make no sense. Neither does the idea that we all should aim to save 10 percent. We are individuals. We all pursue different life goals making the best of different financial circumstances. Some of us should be saving zero or even going into debt for a time (so that we can attend school, for example). Others of us should be saving 80 percent of post-tax income, as I did for a time when I was trying to speed up the financing of the career shift that now permits me to spend the hours of my day writing articles like this one.
There is no one saving percentage that makes sense for all of us. This pernicious idea is largely responsible for the common perception of saving as a chore and a duty and a bother. It is only when you compare the life enhancement that can be obtained from saving with the life enhancement that can be obtained from spending that you come to appreciate how exciting a money allocation option saving can be.
#4 of 20 Dangerous Money Myths — To Retire, You Need an Income Stream of 80 Percent of Your Pre-Retirement Income
It might be reasonable to believe that to retire, you need an income stream of 80 percent of your pre-retirement spending (the thinking here would be that you will be able to avoid job-related expenses in retirement). There is no necessary connection between pre-retirement income and post-retirement spending.
Again, this money myth is dangerous because it causes people to develop bad habits of thinking about money management. The more you save, the less of your pre-retirement income you need to replace in retirement. The idea that it is pre-retirement income that you need to replace seems to be based on a thought that most of us save insignificant amounts of our income. When you start buying into those sorts of assumptions, the financing of a retirement becomes difficult indeed.
#5 of 20 Dangerous Money Myths — It’s Difficult to Finance an Age-65 Retirement Today
Why would this be so? Our parents and grandparents planned age-65 retirements. Most of today’s workers earn a good bit more than they did. So why is it so hard for us to achieve the financial goals that those who came before us were able to achieve?
It’s because we have bought into the idea that financing an old-age retirement is all but undoable. The reality is that most of us earn enough to be giving serious consideration to retiring long before we turn 65. If we aimed for big goals, we would achieve them. But most do not even view an early retirement as a remote possibility. It is highly unlikely that you will achieve goals that you do not pursue.
#6 of 20 Dangerous Money Myths — Non-Cable Television Is Free
How do they pay the actors and the directors and the stockholders of the broadcasting companies? Watching “free” television costs you money. If it didn’t, they wouldn’t be providing it to you for “free.”
But you don’t ever buy things because of the commercials you have seen urging you to do so, right? The unsettling reality is that just about everyone else says that they do not do so either.
#7 of 20 Dangerous Money Myths — You Show Your Love for Someone By Buying Them Gifts
A good number of people receive so many gifts during the Christmas holidays that they feel a slight annoyance at the task of having to open them all. They of course do not want to hurt the feelings of the people who were kind enough to buy something for them. But most of us don’t need more stuff and it is a pain to receive more things we do not need, things that will go to waste or fill up the yard-sale table a few months down the line. We’ve gone berserko re this one.
Give your loved ones your time. That’s the thing that you could give that would really be “just perfect.”
To give time, you need to have some to give. That requires that you be freed of paycheck dependence. That requires that you not spend so much on gifts. Do you see how it all connects and how it is you and your loved ones who are coming out on the losing end by your too easy acceptance of an idea that has been promoted by people trying to get us to buy stuff?
#8 of 20 Dangerous Money Myths — Putting Money Into a Section 401(k) Plan Is Always a Good Idea
It usually is a good idea to put money into a Section 401(k) plan. When there is an employer match for contributions made, the deal is too good to pass up.
It’s a mistake, however, to believe that there is no loss associated with agreeing to have your money removed from your control for decades. $10,000 that you can spend today is worth more than $10,000 that you can spend 20 years from now. When you give up control of your money for a significant length of time, you give up something of significance.
#9 of 20 Dangerous Money Myths — We Need Houses of Twice the Size of Those We Grew Up In
I have seen some beautiful big houses. I understand the appeal.
There’s a cost.
Most of today’s families are smaller and most of today’s houses are bigger. This does not make sense.
A big house costs more to furnish and to clean and to paint or wallpaper. A big house gives you a place to store lots of stuff. That makes it easier to justify buying lots of stuff.
There are a lot of people who would be financially free today but who are not because the idea entered their head to buy a big house.
#10 of 20 Dangerous Money Myths — No One Has a Right to Stop Working Before They Turn 65
Why is that? If two people earn the same income and one elects to save a large percentage of it so that he can retire early and the other elects instead to buy lots of stuff, can we really say that the second person is morally superior to the first?
We have choices available to us that those who came before us did not possess. I believe that we need to exercise care in electing what choices to pursue. But I do not buy the idea that it is morally preferable to spend wastefully and to work until old age than to spend carefully and retire early. Early retirement is an achievement that should be applauded.
#11 of 20 Dangerous Money Myths — “Retirement” Means Never Again Doing Anything Productive
This dangerous money myth is the mirror version of the one described immediately above it. While some tell us that we are wrong to want to retire early, others insist that we adhere to their particular vision of “retirement” or forget the idea altogether. Yuck!
As it becomes more popular for people to retire in their 40s and 50s, people naturally are going to recraft the retirement concept to serve the needs of those who overcome paycheck dependence (either in whole or in part) at a time of life at which they still have lots of ambition and energy remaining to them. Make your retirement mean what you want it to mean. Retire only from those aspects of the daily grind that lack appeal for you.
You have my blessing to work harder in your “retirement” than you ever did in your years of corporate employment. That’s what I do.
#12 of 20 Dangerous Money Myths — Kids are Always Expensive
Some spend a lot of money on their kids. Some do not. As is so re so many money topics, it is the choices we make that determine how much we spend.
It would be a terrible mistake to think that kids come without financial consequences. It is also a mistake to think that there is only one way to have kids, the expensive way. If you want kids and are concerned about the cost, I urge you not to buy into this dangerous money myth without first running some numbers and thereby learning some customized realities.
#13 of 20 Dangerous Money Myths — Going to School Is Always Worth the Cost Incurred
Not anymore it’s not.
There was a day when having a college education gave you a big edge in the employment market. That day is gone. The cost of an education is greater than it was in the past and the payoff is less. Even the more affordable degrees from top online schools can be risky. Whether the potential justifies the cost depends on the circumstances.
#14 of 20 Dangerous Money Myths — Corporate Employment Is the Safest Bet
Corporate employment is a risky bet today. Job security is less than what it once was. And the loss associated with toeing the company line and not developing your skills to the extent you might have developed them in more entrepreneurial pursuits is greater.
There are many circumstances in which corporate employment is still the most sensible move. It’s no longer always the safest bet, however.
#15 of 20 Dangerous Money Myths — Eating Out Is a Convenience Almost Always Worth the Cost
Is it? How much traffic do you have to endure getting there? How easy is it to find a parking place? How long do you have to sit at your table before you are served? How often do you have to send something back? How many times do you regret overeating after eating out? Is the bloated feeling brought on by the huge portions served not an inconvenience?
#16 of 20 Dangerous Money Myths — It’s Not Possible for Those Going Through Hard Times to Save
I once was quoted as saying that just about anyone can save something. That comment generated a good number of hostile e-mails from people who are earning modest incomes or who are in difficult circumstances (they have illnesses or are single parents). I of course sympathize with the people who sent the e-mails.
I still believe that it is possible for just about everyone to save something. If you rationalize not saving anything when you are in one set of circumstances, you will later find yourself rationalizing not saving anything when you are in all sorts of other circumstances. We all think we have it hard. Some really do have it hard and some really do not. But we all rationalize about these sorts of things. So we need to be careful about supplying ourselves justifications not to save.
Say that you are in circumstances that make it hard to save but that you manage to save something nevertheless. The dollars might not end up meaning all that much. You know what will end up meaning a lot? The feeling of empowerment you experience by having taken action to improve your circumstances. The tougher your circumstances, the more you need to experience that feeling.
You should not deny yourself at least a small portion of the good feeling that can be had only by saving money unless your circumstances are truly exceptionally difficult. I don’t encourage people in tough spots to save something because I am lacking in sympathy. I encourage it because saving is something that really can turn things around.
#17 of 20 Dangerous Money Myths — Budgets Are Boring
Everyone likes to talk about themselves. So why is it that so many view a budget — which is a document focused on their personal priorities and plans — as “boring”? It’s because of our wrongheaded view of what saving is all about.
Stop thinking of a budget as a document that says “No!” to what you want to do with your life and budgets stop being boring. A budget is a friend that helps you and guides you and instructs you as to how to achieve your most important Life Goals. A budget is a document that teaches you how to get a “Yes!” to questions for which those without budgets always hear a “No!”
#18 of 20 Dangerous Money Myths — No One Can Pick Stocks Effectively
I am a proponent of indexing for those who do not have the time available to learn how to pick stocks effectively. It takes lots of time and those who are not willing to put in the time are better off buying index funds.
However, I see it as a big mistake to give up entirely on the idea that you can pick stocks effectively. Perhaps today you cannot do so. Life is for learning. Invest in index funds for now but remain open to the idea of picking stocks as your knowledge of what is required grows.
I believe that the idea that it is impossible to pick stocks has been advanced in part to make those who index feel better about their decision to pass on the gains available by doing so. It’s not the job of investing experts to make us feel good about doing things that hurt us. It’s fine for experts to assure us that it is not necessary to pick individual stocks effectively to earn a good return. But they should also encourage us to learn what we can about how to pick stocks as opportunities present themselves. In the long run, picking up this skill can become a big plus and many of us can indeed pick it up in time.
#19 of 20 Dangerous Money Myths — It Is Skill with Numbers That Makes a Money Expert
That’s not been my experience. I am a Numbers Dunce. That holds me back in some areas. My strong sense is that it helps me more than it holds me back. I believe that one of the reasons why I was able to identify the flaws in the Old School safe withdrawal rate studies is that I was not impressed by the mathematical gymnastics being evidenced in these studies. When you cannot work numbers well, you tend to rely on your common sense to figure things out. The Old School studies offer impressive numbers manipulations but are lacking in the common sense department.
The more I study the topic of financial freedom, the more I find this to be so. Numbers are important. Money topics are often discussed using the language of numbers. But the drivers of most money decisions are emotional in nature. We need more experts who focus on the emotional side of both saving and investing topics.
#20 of 20 Dangerous Money Myths — Discussion Boards Are a Waste of Time
Internet discussion boards get no respect. One of the reasons why the Campaign of Terror has been such a problem for us is that site owners do not take their promises to protect us from abusive posters seriously. My sense is that discussion boards are loss leaders at many money sites, and the site owners are not willing to commit the resources needed to see that the published rules are enforced in reasonable ways.
Boo, baby!
The internet discussion board is a powerful communications medium of the future, especially in the money area. Discussion boards permit us to find out how real live human beings are implementing the advice they pick up from reading books and articles and web sites. And discussion boards permit for follow-up questioning about points that are not clear. In the investing area especially, we have learned that a good bit of the conventional wisdom does not stand up to serious questioning. The same is true to a lesser extent in the saving area as well.
Money decisions are made by humans, not machines. Discussion boards are the perfect medium for learning about how humans put money ideas to work in the real world.