5 Worst Money Lies We Were Taught
Personal finance can be a confusing and daunting topic. There is so much conflicting information out there, it's hard to know what to believe. Unfortunately, some of the biggest money lies we've been taught can have a major negative impact on our financial wellbeing. So in this post we are going to go over the 5 worst money lies we’ve been taught and why we should stop believing in them.
1 - Big Salary = Big Wealth
The first worst money lie we’ve been taught is that in order to build large wealth, we need a big salary. Society tells us that unless you make a large six figure salary or are born into a rich family, you can’t become wealthy. This lie is one of the biggest reasons why so many people live paycheck to paycheck.
Unless I have a high income we can’t get ahead, so why try. Let’s live today to the fullest and spend everything I got. Dr. Thomas Stanley published a book titled The Millionaire Next Door in 1996 and in it he published the profile of a typical American Millionaire. What was most surprising about his findings was that a big salary or income wasn’t a prerequisite to building wealth. It was actually based on how much he or she saved and invested that led them to achieving the millionaire status, and this makes perfect sense when we run the numbers.
We might imagine that a doctor earning $400,000 per year would obviously become a millionaire pretty quickly. However, if this doctor is spending $400,000 a year, it doesn’t matter how long he or she makes that high income, he or she wouldn’t have accumulated any wealth throughout his or her lifetime of earnings. After 10 years of making $400,000 a year, this doctor would be just a broke physician with a lot of toys.
A doctor making $400K could still be broke
However, imagine a carpenter that makes $60,000 a year his entire life. Let’s say he saves 20% of his income, $12,000 or $1,000 a month through his career. And he diligently saved and invested it in the market over a period of 30 years. Of course in a low cost index fund - my favorite. The total amount that he invested into the market would total $360,000. However, with an average 8% rate of return, his total portfolio would actually be around $1,359,398.
A carpenter making $60K could be a millionaire
Not bad for having made only $60,000 a year. And we aren’t even considering an additional raise or high savings rate. This is the irony. After a lifetime of work, the diligent carpenter would have more wealth than the physician who made close to half a million dollars a year. When we believe that you need high income in order to become wealthy, it's easy to accept defeat and throw in the towel. However, this will only lead to a lifetime of misery and financial worries. Even a small salary can allow us to build a sizable amount of wealth if we are diligent and patient with our saving and investing. Don’t accept the lie that only high income individuals can build wealth.
2 - Good Debt vs Bad Debt
The second worst money lie we’ve been taught is that when it comes to debt, there are actually two camps: good debt vs. bad debt. The danger about this lie is that it enables us to accept debt as a normal way of life and acceptable. It’s very similar when people talk about good fat vs bad fat. Not many of us really understand the difference, but how many of us use it as an excuse to justify our eating habit. “Hey this twinkie might have good fat, which I need, so I should be ok eating it. Right?”
Yes, there are technical nuances that make certain debt less dangerous than others. For example, fixed home mortgage debt is probably the most common so-called ‘good debt.’ It's very simple, straightforward and the industry is highly regulated. When we buy a 15 year fixed home mortgage, the numbers are pretty straightforward and transparent when we look at the amortization table.
However, most of us make financial decisions most often based on emotion, rather than logic. The danger of accepting that there is good debt out there makes us at times feel better about going into debt. We tell ourselves that good debt is growing our net worth so it's ok to have them.
I’ll be clear with you. There is no such thing as good debt and you should never feel good about having debt. No matter how great the interest rate or the terms are. When we accept debt as a normal way of life, it can quickly cascade into a borderline dangerous mindset of justification. We could start to fund an elevated lifestyle with that low interest fixed home mortgage. Then we could start creeping into tapping into our home equity line of credit. They are all good debt so no harm right?
Wherever we go, there is no shortage of people willing to give out loans. At the checkout counter at Banana Republic? How many times have you been asked to open up a Banana Republic credit card and get 50% off on your current purchase? At the bank to withdraw some cash? Bank associates are more than eager to talk to you about their new loan packages or taking out a line of credit on your current home. Or this is my favorite. During a vacation with the family, a friendly gentleman approaches you about free concert tickets. You only need to attend a 2 hour information session about a great real estate investment you don’t want to miss. My recommendation, don’t make eye contact. Just walk away.
When something is so highly marketed, be wary of its intention. Most often people are selling it so hard because it makes them so much money. And the worst part is it's coming out of your pocket. Debt is so prevalent and built into the fabric of our society that sometimes people associate personal finance with getting the right loan product. Having good personal finance habits and getting good loan packages are very different. Don’t believe the lie that there are ‘good’ and ‘bad’ debts. All debts are dangerous and just like fire, should be handled with utmost caution.
3 - Investing Is Complicated
The third worst money lie we’ve been taught is that investing is complicated. The media loves to highlight the image of investing as being super complicated and risky. It throws out fancy jargons like Alpha, Dividends and Capital Gains. And if you don’t understand it, it goes out of its way to make you feel like you are the dumbest person in the room.
But it only sounds and feels complicated because the financial industry is working hard to make you feel that way. It’s the ultimate financial marketing machine at work. And what happens to many of us is that we get so overwhelmed we never pull the trigger to investing in the market. Or we rely on a so-called professional to manage our money for us. And this can be detrimental to our wealth.
The truth is, investing doesn’t have to be complicated. You don’t need to understand all the jargon to start reaping the rewards of compounding returns. I remember when I first started out, I was so overwhelmed by everything I read and heard about investing that I didn’t know where to start. I was scared of making the wrong move and losing all my hard-earned money. What finally got me started was taking baby steps. I began by investing in a very simple index fund that tracked the total market, and over time, I became more comfortable and confident.
What I learned along the way was that creating an effective investment portfolio doesn’t require a degree in rocket science. With just two or three simple funds and no more than maybe 30 minutes a year, any one of us can become a bonafide investor. Don’t believe the lie that investing is complicated. It can be as easy and simple as picking what to eat for lunch today. And the best part is, unlike lunch, you only have to do this once every few years.
4 - With Effort, I Can Beat The Market
Alright, the fourth worst money lie we’ve been taught is that with enough effort, we can beat the market. And this is a great segway once we are thoroughly convinced that investing doesn’t have to be complicated. Once we feel comfortable investing, it might be tempting to think that with just enough effort, I should be able to do better than the market right?
Let me clarify my point from earlier. Yes, we can all invest in the market. An effective portfolio doesn’t have to be complicated. And we don’t need a financial advisor who makes investing look more complicated than it is. However, that doesn’t mean the market return is something we can manage.
The stock market is one of the most complex entities, if I can even call it that, in the world. There’s a lot of math involved, but also a lot of human emotions and geopolitical factors that go into making the stock market to either move up or down. So to say that no one can predict what the market will do tomorrow or next week is an understatement.
Once we get comfortable with some of the fancy terms we mentioned earlier like Alpha, Dividends and Capital Gains, we might start to believe that we can control the outcome of our investments. However, what we should actually take away from new knowledge is that we actually know less than we thought.
The stock market news, our friends that work in wall street or even the specialized forecasts that try to predict the outcome of the market have no idea. Let me talk about a great analogy that JL Collins, the author of the Simple Path to Wealth uses to explain this concept. In his book, he refers to the stock market as being made up of two things - the actual beer and the foam:
The Beer represents the actual underlying business that the stock represents. The product that this company sells. The people that develop great ideas and bring them to the market. It's what makes the beer, a beer.
The Foam represents the late night, short-term stock crazed news. The rumors of who the new CEO is going to be. What new products Apple might be launching. This type of news drives the daily and weekly volatility of a stock. It’s interesting, but this is not tied to the core fundamentals of the business.
If you want to really build wealth, you must ignore the foam. Networks make money by getting people to watch more of their content. And the way they do this is by talking more and more about the foam; the short-term ups and downs. Who would want to sit glued to their television when the host is talking about the benefits of long-term index investing?
The market isn’t what we see on the news. It’s made up of thousands of businesses that are creating value for its customers, that will in the long run drive the market up. And the truth is that even the smartest economists in the world don’t completely understand what’s happening in the market. One guy is saying the market will crash. Another one is saying it is fine. Who do you listen to? Neither one. Ignore the noise and focus on the long term fundamentals. Buy low cost index funds and hold them forever.
5 - Credit Card Is The Devil
The fifth worst money lie we’ve been taught is that credit cards are the devil. And this one, I was a firm believer of it for a while. Over ten years ago, I went to my first Dave Ramsey conference. It was one of the first times in my life where a personal finance guru really resonated with me and I soaked in every word he said.
Of course, my wife and I were under $105,000 of student loans, so we were pretty desperate for any help. One interesting takeaway I had from this conference was Dave Ramsey’s fanatical hatred towards credit cards. He would make a show of cutting up the credit cards on stage and for some reason I started to get swept up by the emotion as well.
Looking back now, I really didn’t have a credit card problem before the conference. But afterwards, I sure felt like I did. I dutifully followed his example, went home and told my wife we needed to cut up all our credit cards. Thankfully, we didn’t cut them all up since we needed at least one to do our daily transactions. Since then I’ve gotten wiser about personal finance in general and use credit cards fully to my advantage rather than something that works against me.
However before I talk about some of the benefits of credit cards, I do want to say, if you are having trouble paying off your credit card balance month to month, then it's ok to believe this notion until you get yourself into a better financial position. Credit cards are dangerous if not handled effectively and at the end of the day, there is no credit card benefit that outweighs the cost of paying extra interest. But if you are a responsible card user, below are some of the amazing benefits that I’ve been able to take advantage of by owning just the right credit cards:
Free Hotel and Free Flights: A lot of cards allow you to earn and/or transfer points for free hotel and free flights. I regularly use my chase sapphire reserve credit cards to book free hotel nights at Hyatt or fly for less than 12 dollars on Southwest.
Additional Warranty: A lot of cards extend warranty on your purchases. So if you buy that new microwave and it breaks down after the manufacturer's warranty, it might still have some coverage through your credit card. Avoid buying the highly marketed extended warranty and check your credit cards policy.
Free TSA-Precheck and Global Entry: If you have a travel related credit card, there is a good chance that it covers the fee for the TSA-Precheck or Global Entry application. Most often every 4 years. If you fly often, TSA-Precheck and Global Entry will make your travel experience so much better. You don’t have to take off your shoes or belt and the line is significantly shorter than the regular TSA line. And the best part is it's free with your credit card.
Credit cards are like double edged swords. In the wrong hands they can cause some serious damage. However, in the hands of the right people, they can be powerful tools.
