Just like before getting married or after finding out you’ll become a parent, what to do with your money is something parents, friends, and neighbors love to give unsolicited advice about. Now, their advice could have been necessary for them or was learned from making some unfortunate financial mistakes, but that doesn’t make it true for us. The rules of this game often change and playing by the old ones can leave you at a disadvantage. So, let’s debunk some of these old myths.  

1) Credit cards are Bad!

Myth: Credit cards just let you spend money you don’t have, end up owing interest and get you in trouble. You should use a Debit card or cash instead.

Truth: Credit cards are only dangerous if you don’t use them wisely. As long as you pay off the card’s balance in full every time and don’t spend more than you can afford to pay off, you’ll never have to pay interest on your card or run into any issues. You just have to pay attention to it. In fact, credit cards have a lot of benefits you generally don’t receive with a debit card. For just a few;

• Credit cards usually have better protections against fraud

• Many allow you to earn rewards points or cash back, which is almost like a discount on your purchases

• Credit cards help you build your Credit Score

So, when we look at credit cards from this perspective, they’re actually better than debit cards or cash! It's just about how we use them.

2) Investing is too Risky for my Money!

Myth: Just look at the stock market today! I’d lose all my money in a crash!

Truth: Although the value of the stock market does change, the odds of losing everything are historically small if you invest long term in a broad, diversified investment like an S&P 500 Index Fund. Since its creation, the S&P has had 26 Bear Markets (market decrease of 20% from record high) and they have lasted an average of 289 days. On the other hand, there have been 27 Bull Markets (continuous rise in market value) and those have lasted an average of 991 days. That’s more than 3 times as long! These long Bull periods have resulted in the S&P 500 having an average annual Return on Investment (ROI) of 10.5%.

Now, a savings account could be arguably safer. You’re guaranteed an interest rate and you know you won’t lose money. However, the average interest rate for a savings account is 0.06% according to BankRate.com. Even if you manage to find a savings account with a 1.5% interest rate, how does that fair against inflation? Even without accounting for today’s exceptionally high inflation rate, the Federal Reserve’s goal is to maintain a 2% annual inflation rate. So, let’s use an example to compare both against inflation. We’ll say you have $10,000 to do either and plan to retire in 30 years. We’ll also be nice and say your savings account yields a 1.5% interest rate;

Total Initial x (1 + Rate) ^Total Years = Total at Retirement

If Invested, $10,000 x (1 + 10.5%)^30 = $199,925 at Retirement

If left in Savings, $10,000 x (1 + 1.5%)^30 = $15,630 at Retirement

Inflation over time, $10,000 x (1 + 2%)^30 = $18,113 at Retirement

So, because of inflation, what we can buy for $10,000 today will cost $18,113 in 30 years. If we only save our money, we have $15,630 after 30 years and our $10,000 has lost $2,483 of purchasing power! If we invest on the other hand, we’ve gained nearly $182,000 after inflation. Now for legal reasons, I must remind you that past performance is no guarantee of future performance. However, an educated guess would leave us expecting investing to not only outperform savings but be essential just to beat inflation. If that’s enough to get you started, you can use these links to invest now and get some rewards! (→E*Trade← or →WeBull←)

3) All Debt is Bad Debt!

Myth: Being in debt prevents you from ever being financially stable! It just sucks money out of you.

Truth: Debt is bad when it causes your money to lose value. What do I mean by that? High Interest Debt, like unpaid credit card debt is losing value. You can pay upwards of 20% or more in interest on an outstanding balance and a typical purchase usually loses value over time. However, Low Interest Debt for an appreciating value, like a Mortgage, can be a tremendous asset. If you look at the current housing market, home values rose an average of 18.8% from 2019 to 2021. If the home’s value rises more than you pay in interest, you’re actually making money each year. For an example, let’s assume you buy a $200,000 house on a mortgage at a 3% per year interest rate, but the house value increases by 4% per year. You own the home for 10 years and we use the same equation as our previous example;

Total Paid with Interest = $200,000 x (1 + 3%)^10 = $268,783

Total Value Growth = $200,000 x (1 + 4%)^10 = $296,048

In this example, you actually made $27,265 in profit! That seems like good debt to me. However, the 2008 housing crisis reminds us that home prices don’t always go up and it’s possible for the math to go the other way, but if you do your due diligence and research your investment, you can make debt work for you. That’s what the wealthy 1% call leverage, or using debt to purchase appreciating assets to earn profits.

4) I don’t need any Emergency Savings.

Myth: I don’t need to have a savings account just for emergencies! I’ll just use a credit card until I get paid.

Truth: So, if our first busted myth brought you around to credit cards, this one might keep you from going too crazy. In some cases, a credit card can be enough to cover an emergency expense. If you’re just replacing a car tire or maybe fixing a refrigerator, a well paying job may be enough to cover the balance on pay day. But what happens if you lose that job? What happens if that “reliable” paycheck doesn’t show up?

If you’ve been paying attention to the financial news, you may have noticed a number of companies including Ford, Peloton, and Netflix have already announced layoffs in 2022. With other companies announcing hiring freezes, those laid off may not have a soft place to land. So, if that paycheck stops, what do we do? This is where Emergency Savings comes in handy. Experts generally recommend 3 to 6 months worth of expenses to be saved for this type of emergency. Depending on your type of work and family situation, you may want to save more or less, but this is a good start. Also, you need this to be liquid savings, meaning you have it saved in an account you can access directly, with no penalty. Having to take an early withdrawal penalty or have a big tax bill from selling investments will only make your problems worse. Better to have it and not need it than the other way around.      

5) I should wait to save for Retirement.

Myth: I don’t need to start saving for Retirement now! I can start when I’m 40.

Truth: You could start saving when you’re 40, but then will you have enough to retire at 65? Well, let’s use the 4% Rule (something we talk about more in this link) and assume you need $50,000 a year in retirement. According to this rule, you can safely retire as long as you only withdraw 4% of your total investments each year. We determine that number using the equation below;

Total Retirement x 4% = Annual Expense

4% = 4/100

So, Annual Expense x (100/4) = Annual Expense x 25 = Total Retirement

$50,000 x 25 = $1,250,000

In our example, you will need $1,250,000 to retire. Now, can you get there by age 65? Let’s say you can put $10,000 into an S&P 500 Retirement Index Fund per year, and you manage a 10.5% ROI the whole time, as mentioned previously. Except this time, you start investing at age 40 while your twin sibling, Taylor, starts at age 25, only contributes $5,000 a year, and stops investing at age 50. Let’s see how you both fair at 65;

As you can see, over 25 years you contributed $250,000 and only ended up with $1,171,876. A bit shy of our retirement goal. Taylor, on the other hand, only contributed $125,000 over 25 years and ended up with $2,619,908 at 65. Taylor ended up with $1,448,032 more than you and invested $125,000 less! That means they made more than double what you made investing half as much! What was the one thing Taylor had more of than you? Time! Taylor’s time in the market was the only differentiating factor and resulted in more than double the results. Of course a 10.5% return is pretty high, but you can fact check me with other rates and timelines using this cool Investment Calculator. No matter what, it’s the time in the market that makes the difference. So, if you want to open an IRA and start now, you can use either of these two links and earn some extra rewards! (→E*Trade← or →WeBull←)

The Wrap-Up

So, do any of these myths hold any truth? They actually do. If you don’t pay attention to finances, debt and credit cards can do serious damage. If you invest into the stock market and get scared at the first bear market and sell, you’ll lose money in the process. What we need to remember is;

• Credit Cards and Debt can be valuable tools if you know how to use them.

• Tracking your spending is essential to keep from getting into trouble.

• The Stock Market is only risky if you don’t learn what to do.

• If there is a major emergency, having some liquid savings can help you recover.

• The longer you wait to invest for retirement, the longer until you can safely retire.

The rules of the personal finance game change. The best way to know them and use them to your advantage is by constantly seeking education and trying to learn more. Financial Literacy is the Number 1 Key to Financial Success, so keep learning!

Links

If you’re ready to open a personal account or an IRA with E*Trade, click this link (→E*Trade←) and you will get rewarded once you make a qualifying deposit!

If you would rather start with WeBull, you can open a personal or IRA account when you click this link (→WeBull←) and you can earn up to 5 free stocks after fund your account!

*Disclosure* This is NOT financial advice and I am NOT a Certified Financial Planner. All information is provided for educational purposes only and is not to be construed as advice. Everyone’s financial situation is different and requires individualized planning. Seek out a Certified Financial Planner for assistance with your own financial situation.

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