Jan 162017
 

There is a lot of misinformation online about personal finance, especially from all those amateur blogs. This is why you should read everything on the internet like you would drink a shot of tequila – with a pinch of salt. 😀 Today I will try to debunk some of the most common financial myths out there.

Myth #1. Credit cards are bad.

Credit cards can make you a lot of money. Fellow blogger Tawcan generates thousands of dollars in passive income through the use of his credit cards. My no annual fee Tangerine Mastercard gives me 2% cash back on most of my credit card purchases. Promotional credit card rates can be used to pay down higher interest debt. There are so many benefits to using credit cards. 🙂

 

Myth #2. Renting gives you more freedom than owning.

One argument renters use to justify their decision to not buy property is that they can move around more freely. But don’t be fooled by this appeal to popular opinion. Throughout human history, power and financial freedom actually went to those who owned the most resources and assets. Modern day real estate is no different.

Sure, a renter in Vancouver can move to Toronto. But as homeowner, so can I. A renter has to give notice before moving out. But I can move any time I want. I can choose between selling my existing property, or rent it out to make extra income. There are even professional property management services to help me find a suitable tenant. I received this ad in my mailbox the other day.

Everyone has to live somewhere. Being a homeowner simply gives you dominion and veto power over a real piece of land. This gives you more opportunities in life, not less. Anyone who can afford a security deposit can be a renter, including me. So a homeowner has all the same freedoms as a renter. But not vice versa.

Homeowners are generally more financially free. Most can use their properties to secure a low cost loan (HELOC) for major purchases or other liquidity needs. Over 90% of millionaires own their own homes. Meanwhile, not many renters have become millionaires by investing the difference they’ve saved over the years in the financial markets.

 

Myth #3. You need an emergency fund.

An emergency fund is like an insurance policy. It insures against unexpected financial emergencies. But like any other insurance plan, there’s a cost to having one. In this case it’s the opportunity cost of not doing something more productive with your pile of money. Unless you live in a third world country, consider the probability that you don’t actually need an emergency fund (EF.) I have never created an EF for myself, and I have never run into a financial emergency in my entire life. Most western societies already have generous social safety nets. Frankly, I  can’t think of anything that could possibly happen to me right now that would require me to have 3 to 6 months of expenses saved up.

If we already have proper insurance for ourselves, and stress test our finances, then having a rainy day fund is nothing more than holding a redundant insurance policy. Oh, but wait. I actually do have something prepared for a rainy day!

It’s called an umbrella. 😄

 

Myth #4. As you get older you should reduce your investment risk.

Instead of simply asking at what age you want to retire. It would be better to ask yourself at what income you want to retire. 😉 It doesn’t matter if you’re 50 years old or 70. If you don’t have enough income to sustain your lifestyle then you can’t afford to retire. Once you know your retirement income you can begin to calculate your target retirement net worth, time frame, portfolio value, rates of return, etc.

Lining up your financial plan with your long term goals should be the main priority, not your age. If you’re getting old but plan to save money for your heir’s college education in 18 years, then allocating 100% of your portfolio to stocks, and 0% to bonds right now could be the best thing to do. It may sound risky to go 100% into equities as you get closer to retirement, but historical data from 1871 to 2016 show that the 4% withdrawal rate is most sustainable with a portfolio made of 100% stocks and no fixed income. This is likely because stocks have higher returns than bonds over the long run. Your child or grandchild will have a good chance to maximize that 18 years of growth in the stock market. And if they eventually end up not needing the money, then you can spend it all on yourself! 🙂

 

Myth #5. Raising the minimum wage will help the poor.

Raising the minimum wage will only hurt those who are most financially vulnerable. The government cannot force companies to pay their employees more money. All it can do is force companies to choose whether or not they want to continue paying their workers. Employers will end up choosing which workers to keep, and which to lay off.

If the minimum wage was raised from $10/hr to 15/hr then someone who was making $10/hr before may now be out of a job simply because he can’t compete with everyone else who’s productive enough to earn $15/hr or more. So now he’s forced to use social assistance programs. Instead of continuing to be a productive member of society serving people coffee, he’s going to raise the tax burden on everyone else. He can’t work anymore even if he wants to because the government has made it illegal to hire him for anything less than $15/hr. Eventually, even some of the workers who are earning $15/hr will lose their jobs to outsourcing or automation. So all a higher minimum wage will do in the long run is reduce the quality of life for those in the lowest quintile of household incomes. 🙁

 

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Random Useless Fact:

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26 Comments on "5 Myths People Still Believe About Personal Finance"

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SmokingIsCool
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SmokingIsCool

I’m sure you know that there is some push back coming so I’d might as well start 🙂

I get that you are trying to be contrarian here and go against the grain but I feel that there is a pretty big jump between yourself and the the target audience of your points. Of course CC’s aren’t bad if you aren’t carrying a balance. Renting can provide more freedom if the excess savings are put toward other growing assets (google price to rent ratio for more arguments there). Emergency funds are a STARTING point, meant for the guy who has 10 dollars and is googling how to buy Tesla stocks. Reducing risk ahead of when you start withdrawing money is what people do when they know they can’t withstand the gut punch of retiring when the market is down and they have no choice but live off their assets at 50 cents on the dollar. I don’t even know why number 5 is there as you’re talking about policy.

Like I said at the start, I get that you are intentionally being contrarian and looking to stir up some discussion so you’re welcome 😉

Purrfect
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Purrfect

Well said Smoking and I totally agree, although you sound too smart to be smoking..

Regarding credit cards, people tend to spend 17% more when using a card over cash. I don’t think all the reward programs can match a 17% premium. I doubt the author has tried to sell a house during a downturn or he would understand how illiquid real state can be. And he obviously hasn’t heard of Murphy’s Law when it comes to an emergency fund.

P C
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This site is for the people who actually understand the way money works or at least try to learn from it.

SmokingIsCool
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SmokingIsCool

Yes… but those “myths” are not. You must be GREAT at comparing apples to oranges 🙂

P C
Guest

I guess I’m sweet and you’re sour haha!

Bricks
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Bricks
Going against the grain is what separates those who’ll become financially free from those who won’t. If you follow the heard, you will end up like the herd, average, and needing to work until you’re 65, but I think Freedom’s target audience wants to be more than average by becoming financially free or rich at an early age. If these myths are surprising or thought provoking to you, then maybe the article did its job and opened your mind to allow you to break from the herd. Hopefully now you understand how the ideas really do make cents 😉 and you can choose to take the blue pill, or the red pill! While I agree with #2 for the most part, since real estate has been the reason for half of my net worth (1m at 35), I wouldn’t be in a rush to buy a house right now. I’ve owned 2 houses in the last 11 years and made fantastic profits from both of them when I sold. We’re in a 20 year housing boom and these increases are not sustainable. I am now a renter again because and I can do better with the proceeds in other investments… Read more »
SmokingIsCool
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SmokingIsCool

While that all may be true, you know what is even MORE important is being financially successful than zigging when everyone else zags? Being in a position to invest when a boom market comes along (aka luck). Your outlook strikes me as more reasonable than the author’s, who would tell anyone that buying is better than renting no matter when you are looking. Many people got absolutely crushed financially in the past and it can happen again but so far, that’s a risk that has ended up rewarding.

By the way congrats on having the balls to cash out and rent! If things change in the next few years, there will be many armchair quarterbacks who will say “I knew it!” with no skin in the game while you can sit back and smile 🙂

Scott - Two Investing
Guest

Good list of myths. I’m at a stage in life now where I’m getting close to settling down and actually buying a house and (hopefully) buying some land and designing a house! Regarding the myth about credit cards, I agree with you! Credit cards are a great tool. I try to use my reward cards for everything, even the $1 or $2 things I might pick up at the gas station or grocery store. You can’t blame the cards for people’s poor spending habits! If some people tend to overspend with credit cards doesn’t mean that everyone does.

Scott

Smart Provisions
Guest

Great list of myths.

I love credit cards and I would consider myself a collector of them. As long as people are financially responsible, they can have as many credit cards (and the sign-up bonuses available) as they want. The reason credit cards get a bad rap is because people use it to buy things that they can’t afford if they didn’t have a card.

Money Beagle
Guest

We love our cash back reward credit cards. Using them for most of our purchases gives us a few hundred dollars in free cash every year. The key is that we pay every one off each and every month.

bk
Guest
bk

Got tired of seeing my redundant insurance policy, so I recently cashed it in for a huge pile of umbrellas ☂️☂️☂️

Patrick
Guest
Patrick

Re: the Random useless fact, yeah, let me know when you find some modern music 1/10th as good, let alone better than Led Zeppelin, U2, Motown, James Brown.

Phil
Guest
Phil

Haha… Volbeat, Five Finger Death Punch, a little Billy Talent… Music is as diverse as the world of financial investments, choose wisely it/they provide us with the lives we enjoy – Cheers

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[…] 6. Freedom 35 Blog knows making fun of dumb personal finance myths is basically my kryptonite. Here are five of the worst offenders. […]

PinkFace
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PinkFace

#1 You can move out anytime you want provided you find a buyer willing to purchase at a price you deem worthy. In this market that might be easy, but there is no guarantee in the future. #2 You are bound to job opportunities in your area (unless you’re a rockstar software developer who successfully negotiated a permanent WFH policy).

PinkFace
Guest
PinkFace

“I have never created an EF for myself, and I have never run into a financial emergency in my entire life”

You’ve also never experienced a bear market 🙂

Leo T. Ly @isaved5k.com
Guest

I also think that you don’t need an emergency fund. If you are financially sound, you can use that pile of money to make more money. Instead of emergency funds, I believe in access to funds. I’ve build up access to a six figure fund that if I needed to use that money, I can. However, access to that fund is more likely to be used as an opportunity to invest when the market is down and to take advantage of buying opportunity.

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