Master These 5 Money Myths

There are an endless number of financial myths -- adages people widely believe, even though they are dead wrong. Here I've identified five money myths that struck me in some way as useful to dispel. (You tell me if I pegged it about right.)

There are an endless number of financial myths -- adages people widely believe, even though they are dead wrong. This means that we: a) are individually and severally misinformed; b) are vulnerable to the opinion of others about what is a fact; and/or, c) have a rich fantasy life. There’s no denying that people are drawn to anything that smacks of "secrets the insiders don't want you to know," whether those “secrets” are true or not. We love the security of somehow being on the inside looking out at our ignorant neighbors -- so we are all vulnerable.

Here I’ve identified five money myths that struck me in some way as useful to dispel. (You tell me if I pegged it about right.)

Myth No. 1: Save for College Before Retirement.

First is the myth that you should save for your children's college fund before you begin to save for your retirement. College bills generally come first and so, the thinking goes, you need to save that money first, correct? Well, yes and no. Yes, you do usually need college money before you need retirement money. And no, because even as expensive as college tuition has grown -- $50,000 year and counting for the priciest private schools -- it is only a fraction of the amount that you’ll need for retirement. And there are plenty of scholarships, loans, work-study and so on to help with the college bills. But there are no scholarships for retirement, and you can’t borrow your way into it. So, most of us need to start saving for retirement right away, to take advantage of the miracle of compound interest. Part of the challenge of financial-planning is eventually finding a way to save for both.

Myth No. 2: You'll Live on 80% of Your Current Income in Retirement.

Speaking of retirement, how about that old saw that you should plan on living on about 80% of your full-time working income? If forced to do so, you’ll find a way, of course, but these days many in retirement have discovered they underestimated the cost of things, particularly healthcare costs. To say nothing of a fudge factor for unexpected events, such as uninsured disasters, unexpected market crashes and the like.

Here’s another misguided belief: "Medicare will take care of all of our retirement healthcare costs." Aside from the question of whether any physicians will continue to accept Medicare patients in the future, non-covered items, co-pays, gap insurance and especially long-term-care costs can eat up your savings in no time.

If you have the ability, set a goal of saving so you have 100% of your level of income once you’re in retirement. You might have to delay retiring, work part-time, or defer taking Social Security to achieve that goal, but it’s better to play it safe. There is no reset button once you have reached "a certain age."

Myth No. 3: All Debt Is Bad Debt.

Another Depression-era adage that reared its head once again during the Great Recession is that "all debt is bad debt." We all feel the pain of the debt hangover, no matter our individual circumstances. That said, debt can still be a valuable tool if used prudently, even in this economy. The ideal use of debt is to use it for something that has the potential to increase in value, such as buying an affordable home or starting a business.

What you need to avoid is using debt to purchase items that will only depreciate in value, such as big-ticket electronics and flashy cars. Just because the pendulum swung too far recently in accruing debt, don't overreact like the herd and automatically assume that all debt is bad and to be avoided. Shunning debt can also have the unintended consequence of lowering your credit score, which could impede you from obtaining debt, or getting the best rates, should the time come that you need to borrow.

Myth No. 4: All Debt Is Bad Debt.

The next myth has to do with auto insurance: Many believe that, in the event of a wreck, your insurance will pay off the entire loan or lease balance on the car. In most cases, that’s simply not true. Insurance will only cover the depreciated value of the vehicle, regardless of your obligated total. So unless you pay for a car in cash -- always the cheapest way, if not the easiest -- you should insist upon "gap" insurance, which will pay the difference between what you owe and what standard insurance will cover. Remember that every new car suffers a big drop in value the moment you drive it off the dealer's lot, so please consider gap insurance the next time you go car shopping.

Myth No. 5: There’s a Right Time to Buy and Sell Stocks.

Maybe my favorite myth is that there is a right time to buy stocks and a right time to sell them. (Better known as: Buy low, sell high.) Belief that you can time the market sometimes leads us to fantasize about getting in on the ground floor of some hot new investment, or selling a stock right before bad news hits and its price implodes. This is the corollary to the myth that a good financial advisor is the one who can consistently beat the market for a higher rate of return. Good advisors are about prudent, informed planning, not higher returns. If there are any such folk who can consistently beat the markets, you can assume that we will never know about them because either: 1) they can’t be bothered with managing our meager 401(k)s; or 2) they’re already sailing off to Bora Bora or Monte Carlo on their mega-yachts.