3 Pieces Of Financial Sayings That Are Just Wrong!
People often learn about money through the way they grew up. They can also learn about money from other places and people, but it is interesting to hear some of these bad pieces of financial advice being spread to so many people. It is as if kids and even adults need some sort of financial class to help them get through life.
Listening to Ramit Sethi on YouTube talking to a couple about their money issues, you can see that sometimes money habits are spread down from parents and relatives. The one guy saw an extra couple hundred dollars sitting in his emergency fund and spent it, but at the same time, his mom could not afford to pay rent. It comes down to how we learn about money.
Here are three sayings that have been passed down that are entirely wrong with looking at money.
“Renting is Throwing Money Down the Toilet.”
You have probably heard this saying many times over and over again. The saying is to get people to buy property. It makes sense. Suppose you are going to pay rent, why not spend that same amount of money on a piece of property? That all sounds easy enough, but how much does a property cost? Can you get a loan? Do you have a big enough deposit? What are property taxes? How much will it cost to fix problems on the property?
These are all valid questions you must ask yourself. As property values increase, it may seem like a good investment for the future. However, when you sell your property, you will need to find a place to live (or rent…).
When interest rates were 3% or lower, buying a property would have been a prime time. With higher interest rates, the cost of owning a house has increased. Rents have risen, too, and many will point out that you are paying someone else’s mortgage. That may be true, but if you go out to eat, do you complain about paying the restaurant’s mortgage?
Housing is a fickle subject with many people, but the truth is that you must do your numbers. Buying is probably a good route if you plan to live in a place for a good period. You may also want to rent in the area to understand what it is like.
Renting is not throwing money down the toilet. It is providing a roof over your head. You can easily stack cash into the stock market or make other investments. Do the math and make the right decision for yourself.
“ If You Get Paid Less, You Pay Less Taxes.”
Many people think the less money you get paid, the less taxes you have to pay. That is true, but why would you want to get paid less? People complain about costs rising, and now you want to get paid less, too.
The tax system is not a flat tax system; it is a marginal tax rate. That means if you make under $11,000, the tax is 10%, but with a standard deduction of $13,850 as an individual, that money is tax-free. $11,000-$44,725 is taxed at 12%.
Being married also helps those rates. So why would getting paid less help any of that at all? It is just bad financial advice. If you get a bit too much, you can put some of that away using a 401k or a Traditional IRA. Those vehicles can help lower your taxable income. You can even live in a foreign country with a lower tax rate and pay less using the Foreign Earned Income Exclusion.
The more money you make, the more you can save for a house, retirement, vacations, and anything else. You should not think of making less so the government can take care of you. It seems like a lazy way to live life.
You Don’t Have to Worry About Retirement Until Later
If you are young, in your 20s or 30s, you may feel that retirement is a long, long time away. It is true. In 30-40 years, you can sit back and stop working because it is retirement time. Can you retire if you don’t start saving until it is too late?
Many people, when they are young, feel that retirement is too far away, so why worry about it? The power of compounding interest makes a huge difference in how your money grows over the long term. Time is your asset, and money put in today can grow so much more if you don’t wait to invest until later.
A compounding example: Sam and Suzy are high school friends who learned about saving early on. Suzy started saving for retirement at age 22, putting away $2,000 yearly at a 10% return, and needed to stop at 33. Sam spent his money on vacations, a car, and other things and started saving at 34. He put away $2,000 a year with a return of 10% until he was 65. Suzy invested $24,000 over 12 years, and Sam invested $64,000 over 32 years. At age 65, Suzy had $993,307, and Sam had $442,503. Suzy invested less but started early. When she allowed her investments to grow over time, they grew $550,804 more than Sam.
Why be Sam and start later in life when you can start early and allow time to build that portfolio much faster?
Final Thoughts:
Financial advice is not all the same. People learn about personal finance from all over the place. Some advice requires you to think about and do the math to determine whether it is a good decision. Start learning more about money, and stop relying on lousy advice you overhear.
