The tenets of personal finance are simple enough to grasp: earn money, save money, track spending and invest wisely, but things can also get really complicated. That’s because “personal finance” encompasses literally hundreds of interrelated topics, each requiring significant study to even discuss intelligently. The topic of Tax itself is so complex that practitioners have to specialize in subsections of the tax code. To become an Enrolled Agent, I tested in all of the major areas of tax, but as a working EA, I typically only manage tax compliance and prepare obscure corporate returns.
Of course, that broad training allows me to efficiently navigate the tax code, and required continuing education reaffirms key subjects, but the incredible complexity of tax and other financial topics is a major reason why financial misinformation is so prevalent. That, and because financial products are so lucrative to sell, there is never a shortage of so-called “experts” willing to pitch them.
Think twice before subscribing to these money myths that could quench your F.I.R.E.
1. Money Myth: You should start a business
There is a large contingent, especially on social media, that talk endlessly about the benefits of starting a business and being liberated from “nine-to-five” careers. But no one seems to publicly acknowledge how hard that actually is. Statistically, start up failure rates are around 90%, and that’s when defining a “small business” as a company with up to 500 employees, over ten years. Couple that with the fact that most businesses are not profitable for 2-5 years and you have a pretty short-lived “liberation”.
So why do so many people think that they should run a business? Presumably because there are so many people selling the idea that you should. However, being successful as an entrepreneur demands organization, unbelievable work ethic, the ability to influence and motivate others and start-up capital. Not to mention a unique vision and market traction. Apparently, 60% of Americans can’t even weather an unexpected expense of $1,000, let alone complex business financials and tax planning. Even if you do possess all of these atypical attributes, big business is killing American innovation and those under the age of 35 are currently positioned to be the least entrepreneurial generation of all time.
Counterpoint: That said, if you have a vision and take a calculated risk in an area you are an expert in, starting a business can be a natural step in the course of your career. Doctors and lawyers commonly start practices and there are sole proprietors (tradesmen etc.) working for themselves all over the country. The key is that you learn the business inside and out before venturing out on your own.
2. Money Myth: You need life insurance
You know what I love thinking about when planning for the future? When I am expected to die in order to retain the years of payments I will make to a corporation. That’s what you’re forced to do when you sign up for term life insurance. For years you pay into a convoluted financial vehicle for an eventual (read: if you die timely) return, that is undoubtedly more profitable for insurance companies than the insured. Whole life insurance is no better, as our resident insurance expert, Scott Johnson wrote about here.
If you establish and maintain strong money habits, while avoiding costly mistakes, you will have plenty of money to leave your family. That’s not to say that there are no benefits to having life insurance, a whole life policy can be used in a number of interesting ways to defer tax and term life works well in some situations. However, those exceptions don’t prove that the majority of Americans should be getting life insurance. Also, as a general rule, I like to keep as few people as possible between my money and my investments, in order to reap the greatest returns.
3. Money Myth: You’re not savvy enough to invest in the stock market on your own
The myth that you need special qualifications to choose investments for your retirement portfolio is largely perpetuated by people who earn commissions selling equities. There are certainly some valid reasons to use professionals, namely for wealthy investors looking to diversify to different asset classes or institutional investing. But, with inexpensive, trustworthy, online platforms like Vanguard, and promising upstarts like Robinhood, reliance on chain brokerage houses should be fading. You can no longer claim that it’s too much work to manage your own stock portfolio. A “target retirement fund” can likely meet your retirement goals with virtually no account maintenance and at a fraction of the cost. Further, the vast majority of financial planners can’t beat a total stock market index fund over time. That means, that you’re usually better off just buying an inexpensive index fund tied to the S&P 500 or the total stock market.
When you consider the fees that most of the big name brick-and-mortar ‘McFirms’ charge, it’s no wonder why you can do so much better on your own, with a commissions-free, low-fee firm like Vanguard. With Edward Jones you pay a fee of 2% of the total dividends that you reinvest, and 2% of the amount that you “dollar cost average” (i.e. pay on a simple schedule). That, paired with other unnecessary fees usually adds up to thousands of dollars over the course of your investment horizon. Check out Edward Jones’ fee schedule for IRAs – you may want to be sitting while you read that. If you can justify those costs, you may also be able to justify paying “load fees,” apparently up to 5.75% up front!
How are they able to charge so much more in fees?
1. They are salespeople first. They come to your door like girl scouts and sell you on the idea that having a local advisor is superior to having only an online relationship with investment firm, despite the fact that most of your interactions will be over the phone anyways.
2. They rely on the myth that retirement investing is hard, time consuming or that you would be better off with a professional choosing your positions for you.
3. They rely on the fact that most people have no idea how to interpret the fee schedule, or what they should be comparing it to.
For those who manage their own investments and want to automatically track share price, cost per share, asset allocation etc., a robust, free, investment tracking spreadsheet like the one from Valuist.com is a life saver!
4. Money Myth: You are savvy enough to pick stocks, options or speculate in crypto
Even though you can easily manage your own investments with already well-diversified index funds, that doesn’t suggest you can pick stocks successfully. Almost no one can, at least not in the long term, and the long term is the only thing that matters for retirement investing. For most people, picking stocks and speculating in cryptocurrencies are akin to gambling. Whether or not you can justify gambling, it has no place in your investment portfolio, especially when picking stocks is so time consuming. For an idea of how incredibly time consuming stock picking can be, check out the factors that you should evaluate before picking a stock in the article below. Let me know whether it’s worth spending all that time for a most likely far lower return.
5. Money Myth: You need to make (or spend) more money
I often write about the value of time over money. Though money can buy happiness to an extent, time is a rapidly depleting, unrenewable resource. However, the idea that you should always try to make more money, even at the expense of your time, and even when your immediate needs are met, is prevalent and it’s destructive. When a friend buys a fancy new car, or you see your neighbor constantly upgrading their home, it often forces you to reconsider your own perceived status. The truth is though, that you have no idea what they really have to do to earn a living and the time they spend doing it, or how much debt they have or how much help they get from their family. If, for example, you and a colleague have the same income but his family paid for his education and you still pay $800 a month toward student loan repayments, he may be able to afford that BMW lease and the newest smart phone, but at least you have the pride of knowing you paid for your education.
So, choose what is most important to you and spend your time and money on that, while sticking to the basic principles of financial planning. Ignore the rest because it won’t matter in the long run anyways.