Many common beliefs about money come from rules of thumb that have been passed down from previous generations. Some such as “pay yourself first” and “spend less than you earn”, have stood the test of time, while others don’t hold up as well today or were flat-out wrong to begin with. Nothing but money myths. Here’ a list:
Income and happiness: Many people think they’ll be happier with more money or with a higher salary. In many ways, the pursuit of “more” detracts from things that are far more important than money, like family and relationships.
Spending in retirement: Old thinking said you could retire on about 70% of your working wage. Today’s reality is that it’s more like 110% for those between age 65 and 75, and around 80% for age 75 to 85 around 80% after the death of the first spouse. Costs after age 85 can be lower or higher depending on health. But this doesn’t account for inflation!
Savings rates: The “save 10%” rule doesn’t work if you start your retirement savings plan at age 40, it’s more like 18%. If you begin in your 20s, saving 6% will get you to the same goal.
Housing and affordability: Mortgage rates at 3% or less won’t last forever, so understand what will happen if rates go up 2%! Comments such as “renting is a waste of money” is not necessarily true, as it’s a lifestyle choice. As long as the one’s doing so are happy and investing to build up their net worth, renting is just fine. I believe that it’s a myth that a house is your biggest investment; it’s an asset, not an investment.
Investing: The “Bonds should equal your age” rule no longer stands up, based on today’s record low interest rates and our increasing life expectancy. Plus market timing strategies usually don’t work as most people get it wrong. Staying invested for the long haul works better.
Safe withdrawal rates: The 4% withdrawal rule means little today, as bonds and fixed income options don’t even keep up with inflation before factoring in tax. People approaching or in retirement looking for 6% or better rates of return need to look at equities to have sufficient retirement income.
Life insurance and disability insurance: Many Canadians believe they don’t need personal life or disability insurance coverage because they have a company group plan. The truth is, most group coverage is inadequate, rarely covers all their income, may only pay for two years and they would lose it if they quit or got fired. Group coverage should be seen as an enhancement on top of whatever level of personal coverage one has.
Estate planning: A common practice is to put an adult child on title to the parents’ home to avoid taxes at death. There are numerous problems with this, such the risk to the parents should the child get divorced, sued or go bankrupt. There could also be a loss of the capital gains exemption, as it’s not the primary residence for the child.
The takeaway here is that, today most of us have a spending problem, starting with all levels of government and ending with us taxpayers. Somehow we all have to get back to spending less than we earn, and saving rather than borrowing money for our wants. If we could get back to this starting point we would all be so, so much better off!
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