Not everything we learned in school about money is right. Well, maybe it was true with regard to our allowances, but things are a lot more complex in real life.
Here are some money myths you’ll be financially healthier without:
Myth #1: Pay Off Your Home Loan as Soon as Possible
This is one of the most dangerous and yet common pieces of financial advice around. It is often made by people who don’t understand home loans or who have very limited experience with long-term financial planning.
Why is this a bad idea? Consider this:
Say you have saved up $100,000 after many hard years of work. Your house is almost paid up; there is just $110,000 of outstanding debt. Because you believe in paying the home loan as soon as possible, you decide to empty your savings into paying off the debt. After doing so, you will owe just $10,000 on the house. Good news, right?
But what happens if you get ill and need urgent medical care? Or what happens if you get retrenched and need a month or six to find a new job?
You will have NO savings to tide you over if you threw all of it into repaying the home loan. You will likely be forced to use a personal loan or a line of credit to get the money you need. This will drive you back into debt. However the difference is this: a personal loan or line of credit can have an interest rate from 6-8% per annum. A home loan, which is the cheapest loan you are ever likely to get, is around 1.9% interest from a bank or 2.6% from HDB.
Your eagerness to repay your home loan would have cost you more money as you would have been forced into a more expensive debt.
Myth #2: Gold is a Great Hedge against Inflation
This idea is an old one and is increasingly being questioned. Gold may be great as an alternative investment, in the sense that its price is not correlated to stocks or bonds. But the idea of gold “moving up or down with inflation”, as if it is a life buoy bobbing on the financial waters, has been proven unlikely.
A study by Financial Analysts Journal showed that gold’s relationship with inflation, when measured, forms a random pattern. Between 1985 and 2012, gold investors saw trailing annual returns as wide as negative 6% to almost 20%. Inflation had a range of 2.3% to 7.3%.
This does not mean gold is bad as an investment; it just means gold doesn’t have the clear relationship to inflation that we’ve been taught. Amateur investors might do better to stick to fixed-income securities for that purpose.
Myth #3: Credit Cards are the Opposite of Thrift
This is only true among credit card users who still think of it as a form of credit (i.e. people who roll over their debts and not pay in full every month). When credit cards are restricted to being a mode of repayment only, they can actually save you a bundle.
Consider what happens if you use a petrol credit card for its exact purpose and always pay it back in full. There will be no interest repayable, so it doesn’t matter how high the interest rate is (usually 24% per annum). The expenses on the card would have been incurred anyway, since the car needs petrol.
The difference is that, by using the petrol card as a mode of payment, you also rack up considerable discounts. 10% off every time you hit the pumps can come to a few hundred dollars every quarter. This isn’t including the rewards points on the card, which can sometimes be redeemed for free movie tickets, vouchers at other retailers, free car servicing, air miles, etc.
Before subscribing to a negative view of credit cards, try using them responsibly. You can find the best credit cards for saving money with comparison tools at SingSaver.com.sg.
Myth #4: Saving Money Will Make You Rich
Saving money helps in the event of emergencies — it means you won’t need to resort to expensive loans. However, it is not in itself a road to wealth. Think of savings as a first aid kit: You’ll need it when you’re injured, and you shouldn’t start exercising without one nearby. But it’s still useless for losing weight or gaining muscle.
Getting rich slowly is a combination of savings and investment (getting rich quickly is possible but that requires high amounts of talent and drive). If you hope for more than just financial security, you will have to put in the equivalent amount of work. That means learning how stocks and bonds work, understanding risk, and constantly finding ways to grow your income.
If you need money, your response must change from “What can I skimp on to afford that?” to “What can I do that grow my income and wealth?”
Getting rich requires an aggressive, hands-on approach. It will take up your time, it will get in the way of your lifestyle, it will result in painful lessons and losses, and it will subject you to copious amounts of stress. Just saving money might be comparatively easier.
Take your pick.
Myth #5: You Need a Lot of Money to Start Investing
How much do you need to start investing? S$5,000? S$10,000? Maybe in the old days, when you were buying stocks in lots of 1,000 and had to pay high commissions, that was true.
These days however, you can buy shares in small lots of 100. The cost to start investing in a blue-chip company, with decent dividends, doesn’t even have to come close to four digits. And if you’re really cash-strapped, you can even turn to blue-chip investment programmes from banks where you can get started for as low as S$100 a month.
Again, these are not risky penny stocks we’re talking about. These are blue-chip companies with high market caps, along with exchange traded funds (ETFs) that provide a consistent flow of dividend payouts. And while none of this will make you rich overnight, it will beat your savings account by a mile. A simple index fund like the SPDR® Straits Times Index ETF has returns as high as 8% per annum.
So don’t dawdle and start investing early.