Finance Myths: Debunked

By Joel Rybachuk

More Earnings Means More Wealth – In reality, for most people, their expenses will rise as their income rises; the more they earn, the more they will spend. We see this time and time again when people fail to establish proper saving, investing and spending habits as their income increases, so do their expenses, debt, and payments. It can be a vicious cycle for those who don’t have the discipline to see the big picture. 

Saving in My Bank Account is WiseWith inflation around 2% a year and interest rates hovering around .5%, it doesn’t take a mathematician to see you’re losing money holding your money in a savings account. Although it’s a given that saving in a bank account is better than not saving at all, you won’t be getting anywhere fast if you don’t intelligently invest that cash and let your money work for you. 

Cash is Safe – This is true and not true. Cash is safe in the sense that you can be sure you will lose around 2 % per year holding it (to inflation). Its ‘safe’ in the sense that it is predictable, but it’s still a risk. Your $10,000 after one year will be worth $9,800 in today’s purchasing power. Cash has a role in a portfolio but it’s not to maintain or grow your wealth. 

Money Can’t Buy Happiness – Try telling this to someone who is living pay check to pay check and actually can’t afford to do anything outside of paying rent, and putting food on the table. Money can absolutely buy happiness, up to a certain level. Diminishing marginal utility of income and wealth suggests that as income increases, individuals gain a correspondingly smaller increase in satisfaction and happiness. So the CEO who makes $300,000 a year won’t get much more happiness from his money than someone who makes $150,000 a year, but watch the difference it makes for someone who makes $30,000 a year compared to someone who makes $60,000 a year. Financial security for you and your family can no doubt breed happiness. 

I’m Too Young to Invest – FALSE! This is actually exactly the opposite of how we should think. The earlier you start, the more time and compound interest will be able to work on your side. Learning that saving and investing a portion of your income is not only easy,  you probably won’t even notice the money being gone from your account. Create those good habits when you’re young and PAY YOURSELF FIRST.  On a side note, we are investment managers but realize that investing isn’t limited to stocks, mutual funds, ETF’s, real estate etc… the most important thing to invest in is YOURSELF. 

It’s Always Better to Own than Rent – Buying a home will often be the largest single investment people will ever make, and a lot of people romanticize home ownership because that’s just what we have been bred to want. Committing to a 30-year mortgage is a big deal. If you don’t have the money you might be putting yourself in dire straits. Many people overextend their mortgage to keep up with the Joneses or fulfill the ‘American Dream’ of home ownership and end up completely house poor. People tell me “I bought my house for $500,000 and sold it for $600,000 - that’s a great investment”, but I know that’s not the whole story. I always wonder if those people know how much they are paying in interest on their mortgage, property tax, repairs, and realtor fees and calculate all that into their investment return. The answer is mostly no. Don’t get me wrong, I am not saying owning a house is bad; I am saying there is a time when renting will be better for you, and a time when buying will be better.  People need to take into consideration additional costs of a home instead of the buy and sell prices. I tend to look at personal homes as an asset, not an investment. 

Retirement is the Goal – I believe this to be terribly misleading. While retirement might be something you want, being financially free should be your main goal. This means having the money to do what you want and not having to worry about it from a financial perspective. This maybe quitting your current job to pursue a passion guilt free, or it may be retiring and moving to Mexico to read on the beach. Whatever you want to do, money is a tool that we use to shape our lives. Strive to be financially free and shape your life exactly how you envision it to be. 

If Something Happened to Me, My Family Would Know What My Wishes Would Be – NO! Go get a will now. End of story.

TFSA’s, RRSP’s, RESP’s Can Only Hold cash or Cash Equivalents – Registered Plans such as a TFSA cannot only hold cash equivalent products such as a GIC or a high interest savings product, but they can also hold mutual funds, stocks, ETF’s, some hedge funds and many more qualified investments. Don’t let your registered plan sit in cash, invest it, take advantage of the tax breaks these plans offer and watch your money grow!

It’s Okay Making The Minimum Monthly Payment On My Credit Card – I can’t believe the amount of times I have heard this. The only scenario that this would be a good idea would be if you owned the credit card company, other than that, pay your credit card off every month. Don’t believe me? Go to your online account for your credit card and find the spot that shows you how long it will take you to pay of your debt using only minimum payments. Most people will die before they pay it off. 

Risk is Bad – Risk is a bad word to most, but in the finance industry we have come to understand that RISK = Reward. We have been taught our whole lives to avoid risk at all costs, but in reality if you want the reward, you need to take the risk. Has Steve Jobs, Bill Gates, or Elon Musk avoided risk? No, quite the opposite actually. They embraced it and became some of the most successful people in the world. While we don’t recommend taking unnecessary risks, without some risk it will likely be very hard for you to reach a higher level of investing success. 

Low Fees Don’t Equal Low Costs – I have learned this the hard way over my life. Trying to be frugal and save has sometimes cost me more. For example: Portfolio Manager A has a fee of 1.5% and an average return on his portfolio of 15% while Portfolio Manage B has a fee of .75% and has an average return of 10%. If you were looking at fees, you would pick manager B, with the lower fee. Step back and look at the whole picture. Net return for manager A is 13.5% while net return for manager b is 9.25%. So by paying double the fee you are getting a total of 4.25% more per year. As with anything, you may have to pay more to get more.  This is understanding value.