Do you avoid talking about money with your friends and family? If so, you’re certainly not alone. A lot of us shy away from serious conversations about money. It’s one of the few topics that seems off-limits, even for Facebook.
However, not talking openly about money can lead to serious misunderstandings about how best to prepare for your financial future. In my experience, it’s better to seek out answers from reliable sources and have the conversation so that you can know your options for saving, investing, and financial security.
Here are a few of the most common financial myths that I’ve seen people fall for:
Myth #1: To be an investor, you have to be rich (or have lots of money)
When you turn on Fox Business or CNBC, you’re likely to see interviews with extremely wealthy investors – this can lead to the perception that all investors are wealthy. People may think that if they’re not worth millions, they can’t invest or that their small amount in the bank is not worth investing. But the reality is that investing is not just for the rich.
I’ll often meet with people who hold too much cash because they think they don’t have enough to invest or that it will be too expensive to get started. But holding lots cash can negatively impact long-term financial savings. With cash, the purchasing power of the savings erodes over time. This means that in the long run, you will have to save more of your income to achieve the same results as someone who is saving less, but has chosen to invest for the long-term.
There are several low-minimum options for individuals who want to start investing. If your employer offers a retirement plan, start there. In an employer-sponsored retirement plan, whether it’s a 401(k) or 403(b), you don’t need to contribute a lot up front and there are no initial fees to get started. If your employer does not offer a retirement plan, look into opening an individual retirement account (IRA).
Myth #2: I don’t need an emergency fund
An emergency fund helps protect against unforeseen circumstances that can have serious financial consequences. It’s a way to cover unexpected medical bills, car repairs or everyday expenses if you unexpectedly lose your job.
Many people believe these emergency situations won’t happen to them, but it’s when you least expect it that it can be most financially damaging. A dedicated emergency fund, set aside in an easily accessible savings account, can help prevent needing to charge expenses to a credit card. The average credit card interest rate is more than 18 percent, so if you are not in a situation to pay off an emergency expense such as a hospital bill or mechanical repair right away, the charge can quickly snowball.
The fund should cover three to six months of household expenses and can be built up gradually. Start by putting a small percentage of your paycheck into a dedicated savings account each month. Then, re-visit the amount in the account annually. You may need to increase the total amount saved as monthly expenses increase over time.
Myth #3: Speculating leads to financial gain
There is often a lot of hype around ‘hot’ investments. Just a few months ago, you couldn’t turn on the news or read the paper without hearing something about Bitcoin’s rapid rise, high flying technology stocks or the meme stock craze. And while hot investments sound intriguing, and cause fears of missing out, such speculation can lead to out-sized losses. More often than not, speculative buying happens when a stock is at or near its peak and followed by selling as the value is dropping, this is the opposite of buying low and selling high. Investment decisions should be based on a long-term strategic plan. I often tell clients “Don’t make short-term decisions with long-term money.”
Myth #4: You get what you pay for
With most products and services, there is an assumption that a higher price indicates greater value or quality. But when it comes to investing, lower cost tends to reward investors over time. Academic research has shown that high investment costs make outperformance difficult over the long-run, potentially impacting your future goals. Warren Buffett says “Most investors will find that the best way to own common stocks is through an index fund that charges minimal fees.”
Would you rather pay 0.04% for an S&P 500 index fund or 0.81% for the average active fund trying to beat the same index?
Be sure to seek out advisors who offer an independent, transparent fee-for-service model.
About the author:
Brooke Petersen, CFP®, ChFC®
Investment Consultant
Brooke is an investment consultant with Conrad Siegel that specializes in asset management and financial planning for individuals and families. He works one-on-one with each client to develop custom plans that help them achieve their goals such as retirement, investment allocation, risk management, college savings, and estate planning. You can learn more about Brooke and the Conrad Siegel team at conradsiegeladvisors.com
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