Throughout my career, I’ve found that one of the biggest obstacles that prevents someone from getting involved in their finances is the surplus of information that surrounds the complex world of finance and investing. Google anything about a financial topic and you’re sure to get a plethora of results from all types of sources. Too much information can lead to “analysis paralysis,” where there are so many choices that it prevents you from taking action. When it comes down to it, everyone’s financial situation is different and the decisions you make should be based on your entire picture and not based on a rule of thumb. Below, I’ve outlined seven myths that I commonly see when talking to folks about their finances.
Myth One: I don’t need to budget; I’m meeting my expenses every month.
False. In fact, budgeting can be even more important as your income grows. In our consumer-driven society, we’re constantly being hit in all directions with ads and clever marketing that demands our dollars. With more disposable income, it becomes more and more difficult to separate what we can afford from what we should afford. I encourage everyone to have a way to track their spending and sit down at least once a month to review your expenditures.
Myth Two: I’ll lose all my money in the stock market.
The stock market has had nothing but temporary declines (assuming we recover from the current one). Unfortunately, when someone loses money in the stock market it is almost always self-inflicted, either by putting all their money in one investment or reacting to market events and panic selling. Investing comes with risk, but you can increase your comfort level by investing appropriately based on your risk profile, understanding your strategy, and staying diversified.
Myth Three: I can buy one investment (stock) that will make me rich, and I can retire early.
In today’s media-driven world, it is very easy to get caught up in the next hot stock or next hot investment opportunity. There are so many “get rich quick” schemes that entice people to overexpose themselves to risk for the (slim) opportunity of making it big. We have a saying in our office: when an investment idea makes it to mainstream media, you’re already too late. Let’s use Bitcoin as an example. When everyone was talking about Bitcoin and cryptocurrencies, it was when they were at all-time highs, which is not the ideal time to invest. It was the folks who got in during the early days who really profited. Don’t get caught up the hype! Your retirement investing strategy should be boring.
Myth Four: I don’t need to save for retirement; I’ll work forever or can always catch up later.
Unfortunately, many people stop working early due to forced retirement or health and/or family issues. From 1998 to 2014, those who were forced, or partially forced, to retire increased from 33% to 55%. Even if you are in the camp of “working forever,” wouldn’t you want to have the option of retiring earlier? I encourage everyone to plan for an age 65 retirement, at a minimum.
For those delaying retirement savings to “catch up later,” think again. Thanks to compounded interest, the earlier you start saving for retirement, the less you’ll have to save over the long run. For those who started saving at age 20, you could have an extra $560,000 by age 65 versus someone who starts saving at age 45 (based on saving $3,000 per year and earning 6% in investment returns).
Myth Five: I should stop all other savings to pay down debt as quickly as possible.
This is a controversial topic. When it comes to paying down debt there is often a financial component and an emotional “peace of mind” component. On the financial side, there is a breakeven between what you’re paying in interest versus what you can earn elsewhere (i.e. by investing). On the emotional side, some people feel so burdened by debt that they would rather sacrifice the potential reward of investing to get debt paid off as soon as possible. For those more comfortable with risk, they may be more willing to hold debt and invest their extra cash due to the higher potential reward. I’ve heard of folks not contributing to their 401(k) to pay down debt. By not contributing to your 401(k), you could be giving up your company match. If your company matches 100% of your contributions (usually up to a certain percentage of your income), that is an immediate doubling of your investment. It can take 10 years of investing to double your investment!
Myth Six: I don’t have “wealth,” so I don’t need a will or legal documents.
Estate planning documents do much more than determine how your “wealth” is distributed. There are four basic documents: a Last Will, a Living Will, a Durable/General Power of Attorney (POA), and a Health Care POA. The first one—the Last Will—speaks to how your assets should be distributed at death, but that’s not all. It also names the person that you would want to settle your estate as well as a guardian for any minor children (and a trustee, if applicable). The other documents are used if you are still living but unable to make decisions on your own due to incapacity or disability. They speak to your wishes for health care decisions and name a person (agent) to act on your behalf and make decisions for you. The preferred method would be to hire an attorney to draft these documents for you, but you can also use an online service like LegalZoom.
Myth Seven: I don’t need (life or disability) insurance.
The need for life insurance comes down to three factors: (1) income replacement for a spouse or children, (2) paying off debt, and (3) funding specific goals (i.e., college, charitable endeavors, etc.). While you’re healthy, it is the best time to secure this valuable coverage. Since the cost goes up over time (as you get older), it is better to get the most coverage you might need early. It is easy to reduce coverage later, but much harder to add. I often recommend Term insurance because it’s the cheapest type of coverage and covers you for a specific period of time (i.e., until retirement).
Disability insurance is an important type of insurance that often gets overshadowed by life insurance; however, I would argue that disability insurance is as important, if not more so, than life. That’s because you cost more when you’re disabled than if you’re gone! Disability insurance is best purchased through an employer group plan (or it may be provided for you), but you can also purchase it individually.
Purchasing insurance is a personal decision and there’s not one answer that is right for everyone. I would encourage you to sit down with a financial planner who can help determine the correct amount for your goals and budget.
The world of financial planning and investments can be complicated, but you don’t have to walk the path alone. At Pathfinder Wealth Consulting, our team of CERTIFIED FINANCIAL PLANNER™ Professionals are experts at helping clients navigate the unchartered waters of financial planning and dispelling myths and confusion caused by mainstream media. If you would like to talk more about getting on the path to a confident financial future, give us a call at 910-793-0616 today. We are here to guide you forward.