The 7 Biggest Financial Myths

When it comes to finances, our communication about it is filled with expressions that are carried from one generation to the other, until they become unquestionable truths that take up mental space and clarity, while often leading us to mediocre financial decisions... when they are simply myths perpetuated by time. Just because something is common practice doesn’t mean it’s the wisest practice.

In this article, we gathered the main financial myths so that you can avoid some of the common pitfalls by considering more possibilities and strategies before you’re lured exclusively by these popular sayings.

1. My house is my main investment.

It’s one of the most common myths even though its pervasiveness can vary slightly according to the culture of each country. Here in Portugal, we have an established owner culture, which means that, in general, people would rather buy than rent a house. The thinking trap is that renting is throwing money out the window each month.

If you think about it for a little bit, it doesn’t make much sense, because we don’t apply that same logic to the money we spend on food or transportation, we understand that those are basic needs. And housing is no different.

What you need to do to figure out the best solution for you, is some math, it all comes down to that.

Multiply your rent for 12 (months) to figure out how much you pay in a year. Then multiply that value for 20 (which is the number of years of a mortgage). Here’s an example for a €700 rent, (700 x 12) x 20 = 168,000. If you were to buy that very same house for €250,000 that means it’s wiser to rent than it is to buy.

On top of failing to do some basic math, a lot of people don’t take into account all the costs associated with buying a house, including the interests, insurance, condominium fees and so fourth. You can use our simulator to get an accurate number of how much it costs to buy a house. But for the sake of our example, a house with an asking price of €250,000 will end up costing a whopping €365,000 in total. If you take that money and divide it for 240 (which is the number of months of a 20 year mortgage) you would be paying €1520 monthly. Which means that renting allows you to live in the same house for less than half of what it would cost to buy. If you saved the difference (1520-700= 820) and invested that amount, after 20 years you would have about €334,000 in compound interests. Not bad right?

Of course there are other factors to take into account when it comes to deciding if it’s best to rent or buy. Namely mobility, how easy it is to rent the house in case you need to, how much you income you expect to make, and many others.

If investing is applying money today in the hopes of having more in the future, instead of assuming your house is an active investment you need to sum up all the costs and get clear on how much you expect for it the future to determine whether or not there are better options when it comes to investing.

2. It’s always better to pay cash than to loan or pay with your credit card.

The idea that it’s always better to pay cash still lives inside so many people’s minds. And, if it is true that sometimes paying cash can grant you discounts or bonuses, in other cases it can leave you with no resources.

To start with, credit cards offer insurance, theft and fraud protection, that can come in ver handy in certain situations. If you’re travelling abroad, and your wallet is stollen with your credit cards all you have to do is a phone call to cancel them, if by the contrary, you’re carrying money with you, than you permanently lost that money. There are also some buying options that allow you to pay interest free installments. We’re not trying to push you down the mindlessly shopping avenue, or convincing you to overuse your credit card, what we are encouraging is some reflection as to what the solution to each particular case is.

And lastly, in case of an emergency, it might be best to use a credit card exceptionally than to lose your ability to pay for your day-to-day most basic needs. Again, each case is different, and a universal response is hardly ever effective in meeting the needs of each particular situation.

3. I’m too young to invest and too old to start saving for retirement.

Whenever you catch yourself starting a sentence with: I’m too... just stop and breath for 5 seconds before you continue. In the financial department the notion that you’re too young to invest, too old to save is keeping you away from a better financial future.

Let’s take Warren Buffett's example, the most successful investor of all times bought his first share when we was 11 years-old. He learned early on with his mistakes, he studied other investors and refined his strategy over the years. Starting early gave him a vantage point that very few can compete with and goes to show that age shouldn’t be a limiting factor when it comes to investing.

Even if you think you’re too old to save for retirement, anything you save is better than nothing. Wouldn’t you rather have an extra €1000 in your retirement than not have it?

Regardless of your age, don’t let the regret of not starting as young as you might have, stop you from doing what you can do now. Establish a realistic goal, ask for advice from people you trust and have showed solid results in this area e choose the strategy that fits you and your goals. In the end of the day, whether you start early or late, the surest way to not move forward is simply not starting at all. Let go of the ideal, and embrace the possible and you might get surprised with what happens.

4. When the market is falling, the best thing to do is sell everything before it gets worse.

Investing in stocks requires a long-term perspective, one in which you don’t easily get carried away by the inevitable market fluctuations. Warren Buffets advice when it comes to this is don’t buy a share you’re not willing to keep for years in a row. You need to understand that less than 20% of all market corrections turn into Bear Markets, therefore, when the market is falling, eventually it will rise again. The only time to sell is when you made a significant profit, before that, if you hold on the storm will pass. (link to fear of aversion article).

To invest in the stock market its paramount that you have the ability to remain stable and not react to each and every storm that comes by. Between 1980 to 2015, on average the market achieved positive returns 75% of the time. Which means, that even though the occasional drops happen, they just normal market movements, economies bounce back after every crisis and those who are resilient enough to see the bigger picture will benefit in the long-run.

5. I don’t make enough money to save.

The sentence alone is a telling sign that saving is vital. If you have too much time left by the end of your salary, that’s one more reason why saving is important. No matter how little you can save, the habit of putting a side a little bit each month will generate the motivation and persistence to better manage your money, regardless of how much you’re currently making.

There’s this widespread idea that the transformations we long to see in our life wil come from an extraordinary event, but more often, those changes happen when we consistently take small steps that moves us closer to our goals, in a gradual and sustainable way.

Inaction perpetuates the patterns we’re trying to break, it’s through action that we learn to acknowledge our abilities and our strength, therefore, so action is too small or insignificant. It’s only by doing and trying that we get to see the effects of our actions.

6. Investing is for rich people.

It’s like saying exercise is for athletes. Investing is not for rich people, it’s for people committed to better financial health. Today, with investment platforms that offer the possibility to invest as little as €1, it makes no sense at all to stay away from the investment game.

Though traditionally, stockbrokers worked only with people with a certain amount of wealth, today there are different possibilities for different people and investing is no longer a thing of a few, but something we should all be learning and getting into. Investing is definitely not for rich people it’s for financially smart people.

7. Financial freedom is only for those that win the lottery.

It’s this type of thought that prevents us from taking the driver seat of of our lives and heading towards the freedom we long for. Financial freedom is not for people who win the lottery, especially because according to statistics, approximately one third of the winners files for bankruptcy, so financial freedom is for people committed to it.

When it comes to freedom, every person has to find their own definition and version of it, which ultimately, implies deciding how you want to live and what you value most. For some people it might be never having to work again, for others it might look like having their money generate more money, or even having enough to live a certain lifestyle. Possibilities are endless. It’s with that definition that you need to establish a goal and a plan of action, testing it and course correcting whenever necessary, while also establishing and celebrating important milestones. If it’s really important to you, know that it’s possible. Believing is the first step.