One of the challenges in our modern financial world is the financial entertainment industry, which long ago left actual financial news reporting in the rear view mirror, and now acts as a conduit for financial conventional wisdom. These days financial “news” is little more than advertising, wrapped in a cloak of respectability by the sophisticated PR firms that actually run the financial media. Like reality TV, most shows are scripted — by institutions with agendas that are closely tied to the interests of their advertisers.
With that backdrop, it’s no wonder that so many people believe in harmful financial myths. Here is the highlight reel of conventional wisdom money myths.
The Concept of “Good Debt”
Maybe you’ve seen financial talking heads on TV talking about “good debt” vs “bad debt,” which is like arguing about good cancer versus bad cancer. Debt is debt, and adds a margin and cost to whatever is being financed. Over time, interest and loan origination fees add significantly to the cost without adding any value.
So, does that mean that you should never borrow money? No! I realize that sounds contradictory, but it depends on the venue. There’s a huge difference between borrowing money to buy a multi-family housing unit that’s cash flow positive, and borrowing money for a 3 bedroom, 2½ bath stick-built home on a quarter-acre in the suburbs. One is how you get rich, the other is how you end up with a lifetime of debt, and a home in a neighborhood that gradually decays. For the multi-family housing unit you’ll be organized as a corporation which, if setup and managed properly, will shield your personal assets from liability. With the home in the suburbs, purchased through the retail real estate market, you have all the financial responsibility and very little of the actual ownership.
A Home Is a Good Long-Term Investment
You would think that after the greatest meltdown in the history of the retail housing market, that people would finally learn that a house, purchased through the retail mortgage industry, is a dismal investment — but you’d be wrong. According to a new Gallup poll, as reported by the Motley Fool, 30% of Americans believe a house is the best long-term investment they can make. Excuse me while I bang my head on the table a few times because, adjusted for inflation, houses have a dismal return outside of a few hot real estate markets. A home that you live in, when viewed as an investment, gets absolutely crushed by stocks when it comes to returns.
You Should Be Saving 10% of Your Income
The amount of money you should be saving will vary depending on what’s going on in your life. Some months it may be 10%, other months it might be 60% and still other months it might be zero. Or, like me, you might need to live off savings for a while to finance a career change. Cash is a resource, nothing more. There will be times you know you’re going to need more cash and, if you’re living within your means and practicing frugal habits, times you’ll be able to save more. My grandfather used to say you should put hay in the barn when the grass is long. That’s good advice even today.
It’s not any harder to retire today than it was in my parent’s generation; it’s just different. If you’re ambitious and practice a thrifty lifestyle, there’s no reason you can’t retire at 55 or even 45 if you get a few breaks along the way. It all depends on how far below your means you’re willing to live, and how you invest your money. If you’re trying to finance decades of luxury travel at 80% of your current pay, you will be working forever to chase that dream. If you’re willing to set more modest lifestyle goals, you could retire a decade early. I have a friend in the IT business who just retired at age 55. He lives in a custom-built luxury RV parked in a tropical resort and spends his days kayaking, scuba diving, and surfing.
College Is Always Worth the Money
This one is a little more subjective, and the numbers still support the notion that those with a college degree make more in the long run, but the math is far more complicated today. There are many college/degree combinations that don’t make that much more than high school graduates, and a few that are money losers. The fixation with college overlooks a world of well-paying trades that supply both a satisfying lifestyle and steady employment. I, personally, have never met an unemployed BMW mechanic, though I have met several who earn near six figures. I’ve also met few unemployed welders, electricians, or robotic technicians. Go to a job fair attended by thousands of people looking for those skills and you’re likely to come away disappointed. There are many, many alternatives to four year colleges — and I encourage everyone to explore those options.
Sometimes money myths are merely conventional wisdom that no longer applies. Personal finance is a moving target, and it’s important to stay up with the times.