7 Personal Finance Urban Myths BUSTED!
Money is a problem.
I’m sure at some point in your life you’ve run into some money issues yourself, haven’t you?
And I don’t just mean not having enough.
I’m talking about taxes, retirement, investing, property, credit, wills…
The list can go on and on.
The problem is that there’s no playbook or a set of rules when it comes to your personal finances.
And that’s given rise to a number of popular urban money myths.
Myths that have the insane power to be able to destroy retirements, crush investments, put you in the deep end with the tax man.
That’s why I’ve decided to do a little money myth busting, and I want to get to the bottom of 7 well know money myths…
And I want to BUST them once and for all!
Let’s get to it!
The 7 Personal Finance Fiasco’s You Need To Avoid
Money Myth #1: Credit Cards Are The Devil!
A lot of people think credit cards are bad news.
And they’re right.
But then again, a lot of smart money-managers think the opposite.
And they’re right too.
How does this work?
Well, a credit card is exactly what you choose it to be.
If you’re not cautious, it’s easy to rack up a crazy amount of debt and a massive balance pretty quickly.
And the worst part is you’ll rack up interest if you don’t pay within the billing cycle.
But on the other side of that coin there are some fantastic benefits to managing yourself and your credit card spending.
If you’re smart about your credit card and how you use it, you can build a solid credit record.
Why does this matter?
Well think about every time you buy a car, a property or even your first home.
A better score will help you secure a lower rate, which ultimately means you pay less money towards whatever you’re purchasing at the end of the day.
The best thing to do here is to pay off your credit card balance within a calendar month (or whatever period the bank has stipulated where the interest doesn’t kick in yet).
Alternatively, simply don’t extend yourself.
That holiday might seem great now, but when it affects 20 years of bond payments, you might want to reconsider and just save instead.
Money Myth #2: Retirement Is Something I Only Need To Worry About In My 40’s
There are tons of opinions out there about retirement.
And it’s led to a lot of muddy water and confusion about what the right thing to do is.
In fact, according to a leading South African Financial Institution, only 10% of South African retirees are able to maintain their standard of living in retirement, and of those actually retired as many as 60% experience a shortfall between their income and expense in retirement.
Imagine getting to retirement and not being able to afford it?
And it’s because of stupid myths like these that these things actually happen.
It annoys me like you have no idea, mostly because it’s so easy to avoid!
Just the other day I was having a chat with a friend who told me his father’s RA ended up being way under what he’d expected and he had to make adjustments for his retirement.
He even mentioned that if his father had just come to him as little as 5 years earlier it would’ve been a different story.
What I’m trying to say is that when it comes to your retirement, EVERY second counts.
Which means you need to start saving as soon as possible.
The sooner you start, the sooner you can let the magic of compound interest do its work with your money.
In fact, the difference in the final lump sum between someone who starts at 30, and someone who starts just 3 or 4 years prior, can be quite a few million.
Despite both putting away the same amount…
Three years might not sound like a lot but when compound interest comes into the equation things jump drastically.
Waiting till your 40 to start saving for retirement is risky and you’ll end up having to put away such a large amount of money every month that your lifestyle and quality of life will change drastically.
But that’s even if you can afford to do so, and most people can’t!
Is it possible to start at 40? Of course it is, if you put away enough money.
But I don’t know many people who’d want to put away between 30%-60% of their salaries, let alone people who can actually do that.
Save yourself the trouble, start putting away sooner.
Trust me when I say it’ll probably be one of the most important financial decisions you’ll ever make.
Money Myth #3: My Home My Retirement Plan
According to the same report mentioned above, a retired couple will need R600,000 between them a year to be considered ‘financially healthy’.
However, the national average is sadly just R202,608.
Whether you agree with those numbers or not, it’s food for thought.
I can’t tell you how many people I’ve come across that think their home is their retirement plan.
And they believe this because they think they can sell their house, downsize a little and live off the difference.
If this is you, you’re going to end up sorely disappointed!
Sure, as you get older you won’t need the big house, 5 bedrooms, three bathrooms and designer kitchen.
The kids will be long gone by then and at that stage what do you do?
Sell the house of course.
The big craze at the moment for active retirees seems to be “lock up and go” style properties.
The only problem is that the relationship between house prices and house sizes isn’t directly proportional.
By that I mean a four bedroom house isn’t exactly twice the price of a two bedroom house in the same area (let alone different areas).
And a two bedroom unit isn’t double the price of a single bedroom unit.
And not everyone wants to move.
Besides, when you take into account the costs involved with selling and moving, you’ll soon notice that it all eats a big chunk of the proceeds anyway.
For the sake of a simple example, imagine you sell an R1,000,000 three bedroom sectional title unit to buy a R600,000 two bedroom unit.
That only leaves you with around R300,000 by the time you deduct all the costs involved.
And if you want to live the lifestyle you want and deserve, I’m sorry but R300,000 is simply NOT going to cut it.
According to the stats above you’ll barely last 3 months!
If most men and woman live until they’re 80 or 90, that’s a still whole lot of living left after you’ve downsized your home.
How would you finance the remaining 20 or 30 years of your retirement?
That’s why it becomes crucial that you know what you need for your retirement. You need to calculate this exact amount in order plan properly!
Without that benchmark in mind, you’re setting yourself up for failure.
You also need to be realistic, take into account the lifestyle you want, and really ask yourself if your home is going to help you achieve that?
That’s why you need a retirement plan, and your home isn’t it.
If you fail to plan, you plan to fail.
If you’re looking for ways to boost your retirement plan so you don’t have to worry about your home being one, why not have a look at our FREE report “5 Things You Can Do Right Now To Boost Your Retirement” right here.
Money Myth #4: Tax Only Really Matters For Rich People
If you believe this, I guarantee you that you’re probably paying too much in tax.
Taxes affect every one of us, even if the only tax melodramas you see are on the news affecting fat cat CEOs.
And a little can go a long way.
Fill in your tax submissions correctly and depending on your situation you can be in line to get some tax back.
That’s not something that only rich people enjoy.
SARS offers a slew of tax savings and deductions for a number of reasons.
When it comes to the working middle class these are intended as incentives to push you into paying your taxes.
You can get tax back on your investments, from your properties, your annual salary can push up your payout depending on your work situation.
There really are a number of thing you can actually take advantage of.
A few extra thousand a year can go a long way, but you need to come to the tax party first in order to enjoy this.
Tax isn’t just for rich people.
Money Myth #5: You Should Dip Into Retirement Savings When You Need It
You may rationalize that you’re paying yourself, so the loan doesn’t really cost you anything as you’re replacing every cent.
But let’s say you’re earning 10% on the collective investments in your retirement pot, and paying the exact amount you’ve borrowed, you’re shaving your return by the growth you would’ve achieved.
Not to mention all of the compounded growth on those earnings as well.
So you’re hurting yourself twice.
You’re also skewing your ‘growth curve’, meaning you would actually need to put a lot more back in to counteract the growth you’ve lost by drawing the capital out.
Sometimes borrowing also stops you from contributing further whilst you’re focusing on paying back the original amount borrowed.
This just compounds the long term hit that your nest egg takes!
Don’t compromise your retirement because you didn’t plan properly.
Create a ‘rainy day’ fund so you don’t have to dip into your retirement pot.
With enough time factored in, whatever life throws at you doesn’t have to financially cripple you.
If you’d like to build your wealth so you don’t have to dip into retirement savings, have a look at our FREE guide “How To Become A Great Investor In 3 Simple Steps” right here.
Money Myth #6: Wills Only Count If You’re Rich
More than half of South Africans don’t have a will.
Die without one and you let complete strangers decide how to split up your estate, or worse yet, even raise your children.
It's called dying intestate, an act (or failure to act) that leaves the divvying-up process to state law.
In some instances, minor children can’t inherit cash or moveable property.
So, wills aren’t just for who gets your toothbrush.
You also need to decide what route you’re going to go.
Are you going to draft a DIY will, or are you going to do it through a professional?
Both have their pros and cons and you need to be 100% sure either way
Even if your will is only spelling out funeral and burial wishes, you should still have one.
Money Myth #7: Gold Is The Best Investment You Can Make
This differs depending on which generation you speak to, but I find this view extremely popular with baby boomers.
Gold has been a popular investment vehicle for years in South Africa for obvious reasons.
But what you need to realize is that gold is a highly volatile investment.
Especially if you don’t know what you’re doing.
It’s prone to sudden price spikes and drops depending on the economic environment - Gold pretty much lives in its own little world.
The fact is that gold has seen its fair share of ups and downs, but the important thing is to have a diversified portfolio.
Holding a little gold in your portfolio, be it physical gold, through an ETF, gold futures etc can be a good thing.
It’s a great risk management tool.
Gold can protect your portfolio against inflation, against a financial collapse and even against the devaluation of a currency.
Gold can also protect you against macroeconomic and geopolitical risks, not to mention it can give your portfolio a helping hand during times of global uncertainty or crisis.
But all that glitters isn’t gold, which is why a diversified portfolio is your number one aim.
Gold rightfully should have its place in your portfolio, but is it the best investment?
I think not.
If you’d like to learn a little more about holding gold and how it fits into your portfolio, simply download our gold report right here.
Avoid These 7 Urban Money Myths and You’ll Avoid Money Problems
There might not be a personal finance playbook…
But avoiding these myths is as good as having one in your back pocket.
They’re easy mistakes to make, but thankfully if you know how, they’re even easier to avoid.
Credit cards can be extremely useful if you use them properly.
Retirement is something you should start in your 20’s if you can help it. The sooner the better!
Your home is NOT your retirement plan.
Taxes and wills are not just for rich people.
Dipping into your retirement savings is the quickest way to destroy it.
And gold is not the best investment you can make.
Avoid the contrary to these money myths and your personal finances should be fine.
Until then, here’s to good money management.
The Money Lab