5 of the Biggest Money Myths
A look into some of the biggest myths about money.
Andre DeGagne is the Founder and Managing Director of Calgary based Dentro Financial
As a financial planning company, we run into all kinds of reasons why people cannot take control of their finances. Today, we are going to discuss five of the biggest myths about money that are holding you back from breaking the cycles that keep you trapped, stressed, and overwhelmed. This information is intended to be educational and help you tackle some of the false information about money. As always, we recommend speaking with a Certified Financial Planner to get a comprehensive financial plan. Let’s get started!
1: When I make more money, I will have more money!
You could be making $40,000 a year or $400,000 a year and have the same investments, net worth, and money. This is because it is not how much you make that determines how much you have. It is how much you keep. If you spend every dollar you earn regardless of your income, you will not have “more money.” To combat this cycle, you need to establish a budget that puts savings first and spending on toys last.
2: You have to be rich to invest!
Whenever anyone talks about getting rich through the markets, they always bring up Warren Buffet. We hear things like, “If only I had more money, I could get rich like Buffett. I have read all his books and know exactly what to do.” Although today we are not here to debate investment strategies, it should also be noted that Buffett recommends that the majority of equity investors buy low-cost index funds, but for some reason, that point never comes up in these discussions.[i]
Warren Buffett started investing when he was ten years old and continues today into his 90s. Like most of us, he did not start with a lot of money, but he did start with a clear understanding of how important time in the market is. No matter how much you have to start with, building the habit of saving money every month is far more important than how much you save. For example, if you save $100 a month for 30 years and generate a 6% rate of return, you will have invested $36,000 and gotten back $100,451. However, if you wait ten years to get started but save $200 a month, you will only have invested $48,000 to get $92,408 back. This is because of this simple principle that no matter how much you start with, the longer you can save, the more you will have. Also, do not wait for the perfect timing as it will never come. Get started today!
3: All debt is bad!
Although, there are “bad debts” such as high interest (over 6% per year) lines of credit, loans, and credit cards that, if not used strategically, can get you into trouble. Other loans will help you advance your life and help strengthen your finances. These loans are known as “good debts.” Good debt is something you borrow at a relatively low-interest rate to improve your financial position. For example, taking out a student loan to increase your earning potential. In Canada, not only do student loans from the federal and provincial governments have relatively low-interest rates, the interest you pay on them can help reduce your taxes. Other examples of good debt include a mortgage on your house or rental property or a loan to start your own business.
Debt is a tool designed to help you get ahead and should be treated with respect. Debt trouble occurs when you start using “bad debt” to make lifestyle purchases like cars, clothing, and toys. If you get into this habit, breaking the debt cycle can be challenging as your credit card bills will get more and more expensive.
4: The bank said I could afford a larger house, so I should buy one!
You got a letter in the mail from the bank stating that you have been pre-approved for a larger home: does that mean that you should go out and buy it? In almost all cases, the answer is no. Buying too much home is often one of the biggest money mistakes that you can make. In Canada, the main calculation used to determine how much house you can buy is a formula known as the Gross Debt Service (GDS) formula. This formula states that the total monthly cost of your mortgage payment, property tax, heat, and 50% of your condo fees cannot be more than 35% of your total monthly income.[ii] However, if you go up to this threshold and also factor taxes (30.5%) into the equation, it means that you only have 34.5% of the money you make for everything else.
For example, if you make $75,000 a year before taxes ($6,250/month) and buy the most house you can you will only have $2,156.25 left to live off. This means that all of your groceries, utilities, restaurants, vehicle payments, gas, and savings need to come from this amount. However, if you can keep your GDS around 25% it means that you will have an extra $7,500 a year for your lifestyle. Having this extra cash will reduce your stress levels and will help you build up your savings. There are situations where the city you live in makes this very challenging. For example, if you live in Vancouver, Toronto, or Montreal these numbers might need to be adjusted as houses are expensive.
5: Company matching programs are a scam!
If you were offered a 3%, 4%, or 5% raise and did not have to do any extra work, would you not quickly say “yes!” and sign the paper before your bosses change their minds? However, by saying “no” to your company’s matching program, this is what you are doing. You are saying “No it is ok I do not want the extra free money, you keep it.” A matching program is designed to add more money to your future and investments, but for some reason, the simple fact that we have to save a little bit of our paycheck to get this pay raise makes it challenging. Yes, these matching plans have rules including, you cannot use the money until retirement. However, if your company “matches” it means that if you put 4% of your paycheck away for yourself, the company will give you an extra 4% for your future. In the end, you will have more money to get ahead and retire sooner.
We hope that you enjoyed this article and that it has helped you break through some of the biggest myths about money. When you hear any of these, remember that they are only myths and that they are holding you back from taking control of your money.
We are helping people take control of their finances and reach their financial goals, one day at a time. You can learn more about Dentro Financial at dentrofinancial.com
[i] Bogle, John C. The Little Book of Common Sense Investing: the Only Way to Guarantee Your Fair Share of Stock Market Returns. Hoboken, NJ: John Wiley and Sons, Inc., 2017.