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. 🙁
Random Useless Fact: