recession

Five Money Myths to Nix Today

how-much-does-car-insurance-cost-todayMost of us should know better than to succumb to these common money myths, but there we go, tripping up over these obvious pitfalls again. Don’t hamper your financial future by neglecting the simple money myths below.

Myth No. 1: My 401K Is the Best Place to Save
Fact: We’re bombarded with so many reminders to take advantage of our company’s 401K, that few of us question their actual value. While it is true that 401Ks can offer some terrific benefits for people specifically trying to save for retirement, for most other savings needs, it’s probably not your best option. Since you’re heavily penalized for early withdrawals, using a 401K as a primary savings mechanism can backfire if you need the money sooner – such as for a down payment on a house or an unemployment emergency. (401K loans are an option in some cases, but these carry their own problems.)

Instead, regard as 401K only as a superior savings vehicle for your retirement. Nothing else. Heck, even as a retirement vehicle, 401Ks are only certain to beat IRAs if you get a company match, since you’re often limited in the investment options you can choose and the associated fees may be relatively high. Clarify your specific savings goals, and use your 401K accordingly.

Myth No. 2: A dollar saved is always a dollar earned
Fact: Yes, a dollar saved is certainly a dollar earned, but there’s more to just saving money. Simply saving money and stuffing it under your mattresses won’t be enough, as you also need to generate interest income to see any real growth — and to offset inflation. Think about it: If inflation averages about 2%, that means a dollar earned today will be worth about 98 cents a year from now. That means you need to invest your money (hopefully earning returns above the rate of inflation) for it to actually be a dollar saved. The difference in even 1% greater returns can mean many thousands of dollars over your lifetime.

Myth No. 3: Earning more money allows me to spend more
Fact: If you’ve worked hard to earn a raise, spending a little more seems a justified reward for your accomplishments. But as soon you start thinking in this way, you’ll stall your ability to grow financially. If your expenses also grow to meet the size of your new paycheck, you’ll be back to square one. The fact is that the little “extra” that you get added to your paycheck should primarily be used for savings and debt servicing, otherwise, you’ll be in the same position as before. What’s the difference between a guy who makes $30k and spends every cent and one who makes $50k and also spends every last dime? Probably not much, since neither is actually getting ahead financially.

Myth No. 4: Getting money help is not my cup of tea!
Fact: Sure, none of us want to pay somebody else for something we can do ourselves — and in most cases, you shouldn’t. But when it comes to managing your finances, sometimes difficult decisions really do require some outside support. Tax accountants, lawyers, and financial advisors are absolutely appropriate when money concerns extend beyond your expertise. Not using them when they’re really needed can cost you big time.

Myth No. 5: I can pick stocks well enough to beat the market
Fact: If you can really do this, I, and everyone else who has ever invested a single dime would like to meet you. Why? It’s simple — Over the long-run, no single investor (or investment) consistently beats the market. Not mutual funds, not individual stocks, not star money managers, not hedge funds…nope, nobody does. Research consistently shows that passive investment vehicles –such as broad index funds — are usually the best bet for most investors. Sure, you may have an M.B.A. or just be really handy with a balance sheet — but nobody (and I mean nobody) outperforms the market in the long run.