As financial advisors, we often find that our clients fall victim to believing things about spending, saving, and investing money that simply aren’t true. Understanding these money myths, as well as the truth behind them, is vital to making better financial decisions that will benefit you and your family in the long run. In this blog post, we’re busting the top 4 money myths we hear from our clients.
Myth #1: All debt is bad debt
There is a huge stigma around the word “debt.” It has a bad reputation and is almost always looked at negatively, or as something that needs to be paid off ASAP. Those that have a lot of debt are often ashamed of it and sometimes are looked down on by others. However, not all debt is bad! Properly managed debt can even make you wealthier. Yep, you read that right!
Let’s break this down a little bit more.
- Bad debt: Don’t get us wrong, some forms of debt are in fact bad for your financial situation. This is debt with high or non-deductible interest rates, such as credit card debt. You want to get this kind of debt taken care of and paid off as soon as possible.
- Good debt: A properly structured mortgage or student loans are examples of good debt. Mortgage interest is tax deductible. Also, having a well-structured mortgage can keep more money in your hands, and as we always say, cash flow is king. Then there are student loans, which should be looked at as an investment rather than a cost. Controlled student loans that are amortizing can be extremely cost-efficient and valuable.
Myth #2: You should fund your retirement plan to the max
We spend a lot of our time and energy helping our clients prepare for a comfortable and enjoyable retirement. All too often, people come to us saying “I’m contributing X to my 401k, so I’ll be good for retirement, right?” Most of the time, there are better, more efficient ways to make sure you have enough saved for retirement than pouring your paycheck into a 401K. We believe with the right financial plan, you can enjoy your hard earned money now, and also have the retirement you want later.
When you put your money into a retirement plan, you lose control over it. It gets “stuck,” and you can’t get it out before a certain age without paying a hefty fee. On top of that, the government can change that age limit for withdrawal, which means if you were planning on receiving that money at age 60, and they bump the age up to 65, you would have to pay the fee to get your money back out. Our last note on this is that your retirement income doesn’t have to (and shouldn’t) solely come from a 401k. There are other options for income streams in retirement.
Myth #3: You need term life insurance
Term life insurance applies to a fixed time period (or term) with fixed payments over that term. At first glance, term life insurance may seem to be the most life insurance you can get for the least amount of money. In reality, though, it is the most expensive form of life insurance. Also, to really benefit from it, you have to die early (or before it’s over). When you look at it from that perspective, it doesn’t make a whole lot of sense to put your money in that bucket over other forms of life insurance.
Myth #4: You should compound your interest
When you let your interest on savings or an investment compound, it goes back into the original sum, which may seem like you are saving or investing more—but also means that you will pay more in taxes. You can avoid letting your interest compound by taking the interest and dividends and moving it somewhere else to pay down debt, make another investment, start or add to a wealth coordination account, etc. A wealth coordination account is actually specifically designed to capture new money that is saved or created from within the model (such as interest). When the interest doesn’t compound, then the tax doesn’t compound either, which can mean huge savings for you!
We hope we have “demystified” some of these common misconceptions about money. If you would like to learn more about these common money myths, how to keep your money moving, and how to have the retirement you’ve always wanted, check out our book, Your Retirement Smile. Everyone’s financial goals and needs are different, so you should always talk with a professional advisor to decide what the best move is for you, but educating yourself is a fantastic first step towards a bright financial future.
Need financial planning or wealth management advice? Worried about your retirement? Give us a call or visit our website to learn more and schedule an appointment with us!