- 3 Money Myths That Could Derail Your Retirement
- 1. Safe investments are ideal
- 2. Your expenses will decrease in retirement
- 3. Long-term care isn't a priority
- 11 Money Myths Busted: Common Financial Advice You Should Ignore
- Money Myth #1 – You Should Carry a Balance on Your Credit Card
- Money Myth #2 – Renting is Throwing Away Money
- Money Myth #3 – Everyone Needs a College Degree
- Money Myth #4 – You Should Have “x” Amount Saved by a Certain Age
- Money Myth #5 – You Need a Budget
- Money Myth #6 – All Debt Is Bad
- Money Myth #7 – Cash is King
- Money Myth #8 – Only Wealthy People Can Afford to Invest
- Money Myth #9 – Stocks Are Too Risky
- Money Myth #10 – You Can Save Later
- Money Myth #11 – Use Your Credit Cards as an Emergency Fund
- Final Thoughts
- 5 Myths We Believe About Women & Money
- Myth #1: Women Need More Help Managing Their Money Than Men Do
- Myth #2: Women are Naturally Risk Averse
- Myth #3: We Can’t Save Because We’re Buying Too Many Lattes or Shoes
- Myth #4: If We Follow All the Rules, We’ll Be OK
- Myth #5: Personal Finance is Just Personal
- Photo of woman managing finances courtesy of Shutterstock
3 Money Myths That Could Derail Your Retirement
Managing your finances can be complicated, and there's endless advice out there about how to best handle your money — especially when it comes to investing and preparing for retirement.
While a lot of it is good advice, some of it can steer your retirement in the wrong direction. These three myths may seem harmless, but they can ultimately throw off your entire retirement plan.
Image source: Getty Images
1. Safe investments are ideal
Everyone wants to protect their money, so it makes sense to want to stash your cash in the safest investments possible. Especially if you were burned during the Great Recession, you may think it's best to avoid the stock market to prevent another major loss.
But so-called “safe” investments can actually be riskier over the long term than investing in the stock market. Less risk also usually leads to less of a reward, and lower-risk investments, such as CDs and money market funds, typically see returns of only around 2% to 3% per year.
And even the best savings accounts have interest rates of just 2%. With inflation hovering around 2% to 3% per year, that means your savings might not even grow enough to keep up with rising costs of living.
In other words, your money could actually be losing value the longer it sits in these “safe” accounts.
The stock market, although it has its ups and downs, typically offers much higher returns over the long run.
The key is to invest in low-cost index and mutual funds, which in general are safer alternatives to investing in individual stocks.
These types of funds spread your money across dozens or even hundreds of different stocks, limiting your risk while still earning average rates of return — around 7% to 10% per year.
That's not to say you shouldn't have any lower-risk investments. A strong, diversified portfolio has many different types of investments to create a healthy balance. But if you put the majority of your money toward low-risk investments, you ly won't see the returns you need to reach your retirement goals.
2. Your expenses will decrease in retirement
One of the first steps when preparing for retirement is to figure out how much you expect to spend each year. Many people assume their costs will go down, predicting they'll only be spending around 70% to 80% of their pre-retirement income.
That may be true, as some costs will be eliminated once you leave your job. You won't pay to commute anymore, for example, and you'll probably be spending less on dry cleaning and other work-related expenses. But you may be spending more in other areas.
Retirement is essentially one long vacation, which means you have plenty of opportunities to spend money.
It may be more tempting to go shopping every afternoon simply because you can, or you might want to take a monthlong trip to the beach because you no longer have to worry about using up all your vacation days at work. If you don't set a limit on your spending, it can quickly get control.
You may also be spending more on healthcare in retirement than you did while you were working. Planning for healthcare costs can be tricky, since you won't know exactly what you'll face.
You at least have to budget for premiums, deductibles, and co-insurance (even with Medicare coverage), which can cost thousands of dollars per year. In the early years of retirement when you're relatively young and healthy, healthcare costs might be minimal.
But as you age and your health starts to decline, your expenses can increase quickly.
3. Long-term care isn't a priority
When you're excited about beginning a new adventure in retirement, the thought of spending your final years in a nursing home is probably the last thing on your mind.
But seven in 10 older adults will need long-term care at some point in their lives, according to the U.S.
Department of Health and Human Services (HHS), so it's important to think about how you'll cover these costs.
You may decide to put off worrying about that expense until the need arises. After all, why prepare for something you're not even sure you'll need? However, long-term care is incredibly costly, and not preparing for it could drain your retirement fund in a matter of months.
The average stay in a semiprivate room in a nursing home costs roughly $6,800 per month, according to HHS. That amounts to around $82,000 per year. Also, of those who need long-term care, 20% will require it for at least five years. With a price tag of $6,800 per month, that comes out to around $408,000.
The kicker is that Medicare usually won't cover long-term care, so the money will need to come straight from your savings. And considering that most people won't need nursing home care until their final years, there's a good chance your savings will have run dry by then.
Long-term care insurance can help cover some of these costs, but you'll need to enroll relatively early. This insurance is known for its sky-high premiums, so you can expect to pay a couple of thousand dollars per year for coverage. But if you wait until you're already retired or need long-term care, you'll face even higher rates or be denied coverage altogether.
Separating fact from fiction is crucial when preparing for retirement; even one seemingly harmless mistake could cost you thousands of dollars. But by doing your research ahead of time, you'll be able to enjoy your later years to the fullest.
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11 Money Myths Busted: Common Financial Advice You Should Ignore
All of us have heard different advice about money at one point or another in our lives.
But how much of that advice is worth listening to, let alone acting on?
In this article, I’ll break down some common money myths and personal finance advice you’d be better off ignoring.
Money Myth #1 – You Should Carry a Balance on Your Credit Card
I’m not sure where it originates, but I’ve heard the “carry a balance” money myth from several people, even some within the financial sector.
It seems to stem from the false belief that carrying a balance will improve your credit.
To understand why you don’t need to carry a balance and how it can actually hurt your credit, you need to know how your credit score is calculated.
There are several factors involved in your credit score, but the two most important are on-time payments and your debt-to-credit ratio.
Carrying a balance doesn’t mean you don’t pay your bill on time, it just means you don’t pay it in its entirety.
As long as you’re not delinquent in your payment, paying off your balance in full won’t affect your score.
But, your debt-to-credit ratio will definitely affect your score.
Any spending on your card gets reported as debt. But the credit card companies only report your balance at the end of your billing cycle.
Paying off your cards before the debt is reported is actually one of the best and easiest ways to raise your score.
Leaving a balance on your card will always make your debt-to-credit ratio higher than if you pay either the statement balance or in full. Not only will carrying a balance cost you money in interest, but it may also be harmful to your score.
Money Myth #2 – Renting is Throwing Away Money
This money myth may finally be losing steam after the housing bubble burst in the late 2000s.
Owning a house is a costly proposition and not the ideal scenario for many people anymore.
While real estate can be a very profitable investment, the house you live in isn’t an investment. It’s an expense.
Yes, you build home equity, and once you’ve paid off your mortgage, your home is a valuable asset. But you’ll always have the cost of maintenance, repairs, and taxes as ongoing expenses.
That’s not to say owning a house isn’t worth it. I’m only pointing out that renting isn’t really throwing your money away. You’re simply choosing to pay a different bill.
To buy or rent is a very personal and individual decision.
For a young family looking to settle into a quiet neighborhood for the next 20 years, it makes sense to buy.
But if you live in a high cost-of-living area or want to enjoy the ability to relocated whenever you want, it makes more sense to rent.
When you’re thinking about buying a house or renting something, the expense of either shouldn’t be your primary deciding factor.
Instead, consider your needs over the next 5-7 years and determine if owning a home suits your plans.
Money Myth #3 – Everyone Needs a College Degree
Since government and businesses began championing college for everyone, there’s been a massive spike in the cost of that education.
Nowadays, with a world of knowledge available at your fingertips, going to college has become less necessary.
College is still seen as a positive investment because of the cultural benefits that create more well-rounded citizens. But the expense doesn’t necessarily justify it anymore.
The need for a college degree really depends on what you want to do with your life.
If your goal is just to make money, you may be better off with a trade profession. These careers allow you to start working and earning right away with little to no debt incurred to learn your craft.
Consider the path a doctor takes versus a plumber or mechanic.
Because of all the school required, doctors may not be able to start earning until their late 20s. In the meantime, they’re amassing massive student loan debt along the way.
Trade professionals, however, usually start learning their skills on the job right high school. This allows them to begin growing their wealth at an early age.
Some jobs that used to require a college degree, programming, are starting to break away from the college mold. You can get a quality education with online programs at a fraction of the cost of going to college.
Plus, you can often start working as soon as you become proficient in one skillset.
Many programmers start out building websites to quickly start making money as they expand their knowledge and skills.
The one caveat is that many employers still require, or at least prefer, applicants with college degrees.
While it isn’t actually a valid measurement of ability, a college degree may still give you an advantage when looking for work.
It’s up to you to weigh the cost of a degree against the potential advantages.
Money Myth #4 – You Should Have “x” Amount Saved by a Certain Age
This money myth is actually a pet peeve of mine.
I really hate generalities and these kinds of blanket comparisons, especially when they can do more harm than good.
Take our example of the doctor above.
Telling a 30-year old resident they should have saved $300,000 by now fails to account for their unique circumstances. It can also demotivate them and cause further delays in saving for retirement. If they don’t think they’ll ever catch up, why bother starting at all.
While it is a good idea to begin saving as early as you can, you shouldn’t be comparing your savings rate to anyone else’s.
Plus, setting an arbitrary number on savings targets may actually undermine the success of your goal. If you think you’ve already saved enough, you may become less deliberate and actually start spending more.
These arbitrary savings guidelines also assume you’re going to work into your 60s.
If you’re 30 and managed to save double the advised amount, you may slack off on your savings, thinking you’re ahead.
Instead of retiring a decade early, you buy more stuff, increase your cost of living, and extend the time until, and the amount you’ll need in retirement.
Replace this financial rule of thumb with “save as much as you can as early as you can,” and you’ll be much better off.
Money Myth #5 – You Need a Budget
If you’ve been around these parts long, you’ll know I’m a huge budget nerd, and I genuinely believe most people would benefit from one.
But there are some cases where I may be swayed.
If you’re one of the few out there who is remarkably disciplined with their spending and aware of their goals without ever really defining them, you may be able to get by without a budget.
This person is characterized by saving for all their goals before they spend a penny. They pay themselves first, then spend what’s left.
If you can live below your means without even trying, you’re probably fine without a written plan.
If you’ve ever had credit card debt, this isn’t you.
Those of us who have a tendency to buy first and figure out how we’re going to pay for it later definitely need a budget.
Money Myth #6 – All Debt Is Bad
This is actually not a terrible rule of thumb to embrace if you’ve ever struggled with debt. But in general, there are certain times when taking on debt can be helpful.
The best example would be when you’re able to leverage that debt into income.
Using debt to buy rental properties, start a business, or advance your education are all valid reasons to leverage debt.
Be careful you’re not just talking yourself into debt, though.
Not all college degrees are worth the expense, and the most successful businesses are cash-flow positive.
Money Myth #7 – Cash is King
Making the switch to cash can definitely be helpful if you’re struggling with your spending. But if you’re disciplined enough to pay off your credit cards every month, there’s no real advantage to avoiding them.
Not only do credit cards offer protections that cash can’t, but most also provide some sort of incentive you can take advantage of.
Cashback and reward cards can provide sweet perks that can outweigh the benefits of cash.
One of the reasons people often prefer cash is because it’s been shown that you spend less when you pay in cash. The psychological barrier to purchasing helps you save.
But depending on your rewards, that savings may be dwarfed by the benefits of credit card rewards.
For example, I switched all our monthly bills to a Southwest credit card and have already earned the equivalent of hundreds of dollars worth of travel points.
I didn’t increase our spending. I just switched the method of payment from check to credit, and we’ve reaped the benefits.
Also, credit cards offer protection in case of loss or theft to guarantee you won’t lose out. If you lose a $20 bill in the grocery store parking lot, I’m afraid it’s gone forever.
Money Myth #8 – Only Wealthy People Can Afford to Invest
It used to be that you had to buy whole shares of stocks, which made it difficult for smaller investors to enter the stock market.
With the rise of Robo-investors, that’s all changed.
Companies M1 Finance and Betterment make it easy to invest by allowing you to buy fractional shares.
Instead of buying a certain number of whole shares with traditional trading, you deposit whatever money you can. Then these companies divide a percentage of shares to you instead.
If you’ve always wanted to invest in Amazon, but don’t have $1500 laying around to buy a single share, a Robo-investor is your answer.
Money Myth #9 – Stocks Are Too Risky
It’s understandable to worry that investing is akin to gambling your money on stocks.
What if you invest today and the market tanks tomorrow, leaving your savings a shadow of what they were?
If that’s your concern, take heart in the numbers.
Statistically, the market has returned averages well over 7%. Meanwhile, traditional bank accounts and savings accounts fail to keep up with inflation.
Do you ever think back to how cheap something was when you were a kid?
That price increase is due to inflation. If you’re putting all your savings into a regular savings account, your dollar won’t actually be worth a dollar when you’re ready to use it.
That’s because inflation averages 2-3%. As prices increase in the future, your dollars won’t go as far if they’re not earning at least the rate of inflation.
The market can be scary, but let the numbers guide you.
I opened my first investment, a Roth IRA, just before the crash of 2008/2009. My initial investment’s value was slashed in half.
But I knew it was a long-term investment, so I ignored all the doom and gloom, and now it’s more than quadrupled.
The key is to make sure you’re only investing money you don’t need right away. The stock market is not the place to put your emergency fund.
Money Myth #10 – You Can Save Later
This money myth may be the most costly one if you believe it.
It’s easy to think we have all the time in the world when we’re younger. The newfound freedom, financial and otherwise, makes us feel invincible. we can afford anything and deserve everything.
But this is the time when it’s most important to start saving.
So many of us older folks wish we’d started saving sooner.
Because now we know about the power of compound interest.
When you start saving young, compound interest will be working for you faster and sooner than those of us that started later.
The earlier you start, the more you’ll make, and the less you’ll have to contribute to get the same results you would if you start later in life.
Money Myth #11 – Use Your Credit Cards as an Emergency Fund
While I fully endorse using credit cards responsibly, you should never rely on them in place of proper planning.
Work to save up enough for unexpected emergencies so you can avoid putting those expenses on your credit card and going into debt.
There are always exceptions that make you turn to your cards. Maybe the emergency comes sooner than you can save or is more significant than expected.
But don’t consider your card a replacement for emergency savings.
That’s a sure-fire way to wind up in debt.
I’m sure, throughout all of history, people have been giving and receiving financial advice.
But as with any advice, it’s a smart practice to do a little research and decide for yourself if it’s worth taking.
The money myths above are a perfect example of how generalities and misunderstandings can lead to financial hardship.
Have you ever been on the receiving end of bad financial advice? Leave a comment and tell me about the worst money advice you’ve ever been given.
5 Myths We Believe About Women & Money
Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, has been writing about personal finance since 1996. But she’s not going to give you what you’ve come to expect from personal finance writers: advice. Actually, she believes that much of the advice we hear from today’s finance experts is, well, wrong.
Intrigued, I recently spoke with Olen about the myths surrounding women and money and what we as a society have been getting wrong about personal finance. Here’s what she had to share.
Myth #1: Women Need More Help Managing Their Money Than Men Do
Women are often told that they need more help or different advice about how to manage their money—just look at the books and websites marketed specifically to women, Citibank’s Women & Co. and Prudential’s Women & Money. But the truth is, studies show little difference between women and men’s financial knowledge and habits.
So, why does this myth persist?
“I think that myth persists because women themselves believe it. It’s the old joke: Men think they’re the expert if they just see something about something. Women have a PhD in a topic and they’re still concerned they don’t really know enough,” she explains. The financial services industry plays into this perceived lack of knowledge, and “that’s a large part of it.”
But there’s something else, too: Women still earn less money than men. “It’s not because women are asking for less: Women are offered less, and women are more ly to be turned down when they ask,” says Olen.
This—coupled with the fact that women tend to live longer than men—means that women need to save more money for retirement, and that’s another factor the financial services industry uses to convince women they need more help managing their money. But rather than treating the symptom, she explains, we need to look at the root cause. How can we close the gender pay gap in order to make real change?
Myth #2: Women are Naturally Risk Averse
Along similar lines, the financial services industry tells us that we need to be investing in higher yield, higher risk funds in order to have enough money for retirement. And when studies show that we have less money in those types of retirement accounts, women are chastised for being “risk averse.”
Olen has written extensively on this. Women don’t have less money in high-risk accounts because of an innate aversion of uncertainty: “It’s more of a symptom. People who have less money generally take less risk.”
This makes sense, given that we can’t predict the stock market to know whether those riskier investments will pay off. When we’re starting off with less, we know we can’t afford to lose what we’ve already saved.
Myth #3: We Can’t Save Because We’re Buying Too Many Lattes or Shoes
Olen comments that most of the personal finance advice given to women is, “You be a good girl and stop going to Barney’s.
” But the assumption that women are spending away their savings to a greater extent than men is another myth.
“Women do spend more on clothes than men,” she says, “But men spend a heck of a lot more on autos, liquor, and electronics than we do. Somehow, that doesn’t come in for criticism.”
Plus, though Americans are saving at lower rates than in the past, it’s not because we’re overspending on luxuries.
“We live in a world in which our salaries are falling and our costs are rising,” Olen comments. “That is obviously going to make it much harder to save money.
And it [would be] much more helpful to explain how that works to people than just give them 10 tips on how to cut their grocery bill.”
Myth #4: If We Follow All the Rules, We’ll Be OK
We’re often led to believe that if we set up our 401(k)s for our target retirement date, we’re saving all of what we’ll need later on. Not true. I’m embarrassed to admit that before reading Pound Foolish, I was unaware of just how recently Americans have turned to DIY retirement accounts—IRAs and 401(k)s—to meet all of their retirement finance needs.
I mentioned this to Olen, who added, “They’re completely new, and they were started as complements to the pension system. They were never intended to be the main source of retirement income. We’ve now seen them as a retirement savings vehicle for about 30 years, and we know how well they work, and the answer is, they haven’t.”
Why not? “People don’t put the right amount of money in them. They don’t invest the money properly. Even if they do invest the money properly, the financial services industry charges huge enormous amounts of money simply for managing these accounts.”
Plus, even if you’re on the right track, life is unpredictable.
In her book, Olen shares stories of individuals whose retirement savings plans were completely derailed by medical emergencies, unexpected unemployment (often leading to early retirement), or the simple fact that they outlived their savings.
One woman Olen spoke with had saved a seven-figure retirement plan—but had to drain it to cover a series of medical issues, including an accident that left her daughter paralyzed and treatment for her husband’s Parkinson’s diagnosis. She had followed all the rules—and was left with nearly nothing.
In response to these problems, other countries are beginning to look at alternatives, such as portable pensions that would be managed by the state, rather than the corporation; “the idea being that people can take them from job to job, and whoever their employer of the moment is would contribute to them.”
Myth #5: Personal Finance is Just Personal
When it comes to giving specific financial advice, “I feel that the best way to give advice is by me explaining the world and how it works, and in fact, this world does not work for very, very many people,” Olen says. “We can’t afford to save for work, save for college, save for emergencies, and all the rest, in an environment in which the cost of housing, education, and healthcare is soaring.”
Rather than more education (the numerous studies Olen cites in Pound Foolish show that financial literacy just doesn’t work), Olen thinks we need stronger legislation to make a real difference in the financial challenges we face today, including the pay gap, stagnating salaries, and the complicated paperwork and convoluted disclosures involved in getting a mortgage or setting up a retirement account. If the financial services industry is so concerned about our financial well-being, she asks, “Why would they try to educate 300 million people about how to avoid a 100-page, single-spaced, gotcha mortgage? [If they really wanted to make a difference,] they just wouldn’t offer it!”
Let’s start a conversation about these myths with the women—and men—in our lives. Which ones have you believed?
Photo of woman managing finances courtesy of Shutterstock