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Personal finance lies are plaguing millennial society. They make us believe personal finance is too complicated and too difficult to comprehend. They hold us back from learning about how money works and what to do with it.
Are you falling for any of these 10 personal finance lies?
10. You only need a financial plan if you have a lot of money
It’s actually kind of the opposite. It’s when you’re broke and scraping by that you really need to figure out a financial plan. How do you gain a lot of money? You make a financial plan when you have none.
“Financial Plan” sounds a bit intimidating, but it’s really just a simple plan for generally handling your money. It answers basic questions about how much money you:
- make
- save for emergencies
- invest
- for retirement
- to make your dreams come true
- use to pay down debts
- spend
Then it outlines a plan to improve your financials.
9. A college degree will always pay for itself
Not so much. All across the country graduates are drowning in student loan debt, and many of us aren’t even using those degrees.
Take Liz from Less Debt More Wine, for example. She graduated law school with $193,000 in debt and found that she didn’t super love lawyering, so she moved into freelance work. She’s happier now, but she still has to pay back all that debt plus interest.
Or take me! I didn’t know what exactly to do with my life, so I just kept going to school, assuming I’d figure it out along the way. Now I have an M.B.A. in Management and Strategy that I don’t use. Luckily, I took advantage of some ways to save big on college and ended up with minimal debt.
Moral of the story: higher education is great. But don’t assume the degree will pay for itself through increased income.
8. Personal finance is complicated
Personal Finance is only complicated if you want it to be.
If you want to be a fancy investor who’s uber involved with frequent stock trading and sophisticated deals, sure, you can make it all kinds of complex! But if that doesn’t interest you, there’s no reason to go there.
Have you heard of the 80/20 rule? It says 20% of your effort will provide 80% of your results. Well, we can teach you the 20% that will make an 80% difference in your finances in just our first 5 blog posts!
When you think about it, no matter how complex people want to make personal finance, it all comes down to 4 core principles:
- Reduce Expenses
- Reduce Debt
- Increase Income
- Increase Assets
As you spend less and pay off more of your debt, you can funnel more of your money into assets that generate additional income. Simple.
7. You need to hire a pro to manage your finances
Hiring a pro is an option, but it’s totally not a necessity. Especially when you’re just starting out.
Who knows your financial situation better than you do? Who knows your financial goals better? And who else is willing to manage your finances without getting paid to do it? 😉 These all make you perfectly qualified to manage your own finances.
With all the DIY banking and investing available online, and the support and knowledge of the S&S Community, you can handle 99% of your finances on your own. That other 1% is optional, and we’re full of advice for helping you find qualified professionals to protect the money you worked so hard for.
6. Personal finance is boring
Ok, this can be true, but only if you’re doing it wrong.
The wrong way to do it is muddling through without really knowing what you’re doing. Of course it won’t be fun if you don’t understand it. Then it just makes you feel dumb, and feeling dumb is the worst!
The right way to do it is to get a basic understanding of some things you can do TODAY that will make the biggest change in your finances and your life. Like making that Financial Plan we just talked about 😉
Starting out with a big win is crazy motivating! Then as your wealth starts increasing, you’ll find it’s actually FUN to check all your balances and see how your balances have grown on their own while you were going about your life.
5. Personal finances take too much time to manage
There are so many free tools available online to automate the entire process for you! You can be involved as much or as little as you want. The most time-consuming part is reviewing your statements and recent spending to get a clear picture of your current financial position.
Setting up new accounts (like retirement accounts and dream funds) take a little time, but you only have to do it once, then you can automate the settings and go about your life. As you begin to notice your wealth growing, you might actually find yourself wanting to take more time to be more involved in your finances.
You can actually create your financial plan and set up all your accounts in just 5 days with our totally free 5-Day Financial Fix Challenge. It’s an intense 5 days, but when it’s over, you’ll have:
- A complete budget
- An emergency fund
- A retirement account
- An investment fund for your dreams
- An automatic money transfer system so you don’t ever need to remember to move your money to your saving and investment accounts. Your financial plan will basically run itself.
From that point on, I just do a financial check-up once each year.
4. Some investments are risk-free
Nothing in life is risk-free. And investments are no exception. But that’s ok because there are ways to manage that risk.
First, keep in mind that the real risk is in the short-term. Over the long-term investments like stocks, bonds, and real estate all increase. The problem is that in the short-term they increase and decrease and increase and decrease.
So if you can wait out the market downturns, you’ll come out ahead. But if you need access to the money tied up in your investments when the market happens to be down, you’re SOL.
This means that you want to keep the money you’ll need in the next few years as safe as possible.
You’ve heard people talk about “diversifying their portfolio”, right? Sounds fancy, but they just mean that they’re putting all their eggs in several different baskets so if so if one of the baskets is somehow destroyed, it’s not a huge deal because they still have all the other baskets with all the other eggs.
That’s why we love Index Funds so much.
Index funds are like sampler baskets of a bunch of different assets, like stocks or bonds. They passively follow a Market Index (like the S&P 500, for example), so you don’t have to choose individual stocks or bonds. You just ride a wide selection of the stock or bond market as a whole.
So basically, you’re putting your eggs in hundreds of different baskets all over the market with very little time or effort required!
And you can diversify further by buying different categories of Index Funds: Bond-Based Index Funds will be safer than Stock-Based Index Funds, for example. But Stock-Based Funds earn higher returns over the long-run, so don’t shy away from them if you have some time to ride the market.
3. You should try to beat the market
Lots of really smart people think they can outsmart the market. They think they can hand-pick stocks that will perform better than the market average, so they can earn higher returns than the average investor.
But studies show that’s bogus.
Hand-picking stocks is more like gambling because individual stocks can rise and fall based on completely unpredictable circumstances out of the investor’s control. So these investors might get lucky sometimes and pick winners. But over the long-term, the smart way to invest is to just keep pace with the market instead of trying to beat it.
You know those Index Funds we just talked about? This is another way they’re awesome. By definition, Index Funds passively follow market indexes (like the S&P 500, for example), so they always keep pace with a large section of the market automatically.
This becomes especially important when it comes to investment fees.
See, because Index Funds just passively follow the market, they don’t have to be actively managed, so the investment fees are super low – just .11% on average. Compare that to .84% for actively managed mutual funds.
And again, these passive Index Funds usually perform better than actively managed funds (like mutual funds) over the long term. So if you want to pay less in fees and have better results, stick with Index Funds.
2. You need a lot of money to become an investor
This is one of the most damaging personal finance lies because it prevents people from investing when they’re young and broke, which is a giant mistake. Maybe even an $831,751 mistake.
See, there’s this magical thing in personal finance called Compound Interest. Compound interest is making money on the money your money is making!
Wait, what?
Ok, you probably know about earning interest. Interest is the amount the bank pays you for storing your money with them. You stash your money in an account, and every month a tiny amount of money shows up in your account. So your money is making money.
But compound interest takes this to the next level. That interest your money earned is now sitting in your account and able to earn interest of its own. So now you’re making money on the money your money is making.
And the more time your money has to make its own money, the more your wealth will grow exponentially.
Let’s look at an example. Aurora started investing $458.33/month at 25 (if that sounds like too much money for you to save, check out our doable Millionaire Savings Plan). We’ll assume that she earns a 7% return on her investment every year (which is on the low-side. IRL, she could probably be closer to 10%, but we’re playing it safe).
40 years later, Aurora has invested a total of $220,000 ($5,500/year for 40 years), but there’s $1,203,031 sitting in her account. That $983,031 difference? That’s all compound interest!
It looks something like this:
Oh, and getting back to our financial lie…
Pssht, no, you don’t need a lot of money to be an investor. In fact, we can show you how to start today with just $5!
1. You must be debt-free
This lie has truly good intentions. Good financial professionals (like Dave Ramsey, whom we love!) are really concerned about how much debt Americans get ourselves into. High-interest credit cards, excessive auto loans, out-of-control student loans, and keeping-up-with-the-Joneses mortgages.
In fact, The Simple Dollar crunched some numbers and found that a typical American family could be paying $8,037 or more just in interest every year. Over 30 prime earning and debt years, that’s $241,110! Just. In. Interest.
So you can’t really blame Dave and everyone who agrees with him for promoting a message of living debt-free. They just want to save you all that money.
So why does “you must be debt-free” top our list of personal finance lies?
Because it unnecessarily restricts you from using smart debt to improve your life and build your wealth.
I think of debt kinda like the ocean: it can be dangerous, so you want to have a healthy fear of it. But you’re not going to completely avoid it because of the potential danger, right? You might miss an adventure or a business opportunity. So you’re just going to manage your risk by being careful.
My advice is to take on debt, but only if it serves a specific, long-term goal that more-than-makes-up-for the interest you’ll be paying.
In 4 Ways to Use Smart Debt to Improve Your Life, we looked at how debt can be used to:
- Build Good Credit
- Get Your Education
- Invest in Real Estate
- Start to Grow Your Business
See how each of those is a long-term goal? And they’re all expected to save you more money, or bring in more income, than you’ll pay in interest.
In fact, with mortgage interest rates still at historical lows, I’ve done some math, and realized I am actually better off not paying off my mortgages to be debt-free.
Just like money, debt is a tool. If you use it wisely, you’ll come out ahead.
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Do you agree with our list of personal finance lies? What would you change?
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